Can Shareholders Overrule Directors?
To answer this question we first need to take a look at the respective roles each has within a company.
The shareholders of a company are its owners – each literally owns a “share” of it. Shareholders do not owe any particular duty to the company and are not generally expected to get involved in how the company is managed. However, owning shares could allow them to exercise certain shareholder rights and to vote on decisions which affect the company. As we shall see, these shareholder rights could be decisive in influencing the way in which the company is run.
By contrast, the company’s directors, together as the board, do not own the company themselves (unless of course they are also shareholders, which is common). Their role is the management of the company, both in its day-to-day operations, as well as deciding the company’s overall direction. Alongside their, usually wide, discretion, the directors also owe duties to the company, as proscribed by statute. Examples of these duties include to act independently and to promote the success of the company. Breach of these duties can have serious consequences for an individual director.
So, to return to our question, what if the company’s directors make a decision which a shareholder, or group of them, do not like? What shareholder rights are available to them?
The first option open to the shareholders could be to call a general meeting of the company, to request the board to rethink their decision. It does not take that many shares, proportionally, to require the board to call such a meeting – only 5%. However, as you can probably guess, the meeting would only require that the decision is reconsidered, it does not necessarily mean the board will change their mind. If the original board decision could be justified and shown to be in the company’s interests, the directors can stand by it and would not likely have breached their duties in doing so.
Should that not work, more severe courses of action could be available as part of their shareholder rights. If their combined shareholding could pass an ordinary resolution (50% plus one of the voting shares in the company), they could request a general meeting on special notice and vote for directors to be removed. They could also then replace those directors with ones who are more amenable to their way of thinking. An even higher proportion of the voting shares, 75%, would enable them to pass special resolutions. Amongst other available options, a special resolution could be passed to change the company’s constitution, such as its articles of association, and therefore the controlling mechanisms of the company itself, which could ultimately help them achieve the influence they desire. These courses of action would be subject anything set out in the company’s constitution, such as in its articles, and agreements made with the company, such as in shareholders agreements or service agreements.
It is also worth adding as a final point that the majority shareholders should be careful not to use their shareholder rights in such a way as to unfairly prejudice a minority shareholder, since this could potentially leave them open to legal proceedings brought by the minority on that basis.
If you are in the midst of a business dispute and need professional legal advice or would like to understand your shareholder rights, then contact me directly on 01752 513572 or email ieuan.jones@GAsolicitors.com.