Directors and shareholders are the controlling players in any company structure, impacting and making its decisions. They both share distinct duties and have their own roles to play. But is it possible for a person to be both a director and a shareholder?
Good question! Let’s consider this in a bit more detail.
What Does It Mean To Be A Shareholder?
A shareholder is anyone who holds a percentage share of a company. In other words, they ‘own’ part of the company by holding shares. The rights and responsibilities of a shareholder in a company are usually set out in a company’s Shareholders Agreement. Generally, however, shareholders have the right to:
- Vote on company matters.
- Oversee the company’s financial records
- Transfer or sell their shares
- Appoint or remove directors
The rights of a shareholder will generally be subject to the percentage of shares the shareholder owns in a company and the structure of the company itself. For example, a shareholder who holds 1% of the shares of a company will usually have less rights than a shareholder who owns 60% of the shares a company.
Shareholders can’t usually control the actions or decisions of the company. Rather, they have the role of being able to appoint or remove the company’s directors, who have authority to make decisions on behalf of the company.
Who Is A Director?
A director is a person who is responsible for overseeing the decisions and actions of a company. The Corporations Act 2001 summarises the duties of a director. A company’s Constitution and Shareholders Agreement will often also contains further duties and obligations of directors.
Companies usually have multiple directors, who together are referred to as the Board of Directors and who make decisions collectively. The Board is the source of most power and control in a business – with the rights to enter into contractual agreements, and pass resolutions concerning the affairs and management of a company. They can, for example, appoint or remove executives (including, for example, the CEO), set dividend policies, issue new shares and set the companies overarching goals and objectives.
So, Can A Person Be Both A Director And A Shareholder?
The short answer is yes. A director can be a shareholder, and in fact this is quite common in startup companies. When founders create a new company, they typically fulfill three corporate functions – they are the owners of the company (as they holder the shares), the controllers of the company (as they usually appoint themselves as directors), and they are the do-ers of the company (as they usually appoint themselves CEO or some other similar executive title).
Being a major shareholder and a director (as founders often are) can be a powerful combination, as you can control the director of the company as a director, and you can prevent yourself from ever being removed as a director by exercising your rights as a majority shareholder. For this reason, it is common as businesses grow, and take external investment, for independent directors to be appointed who do not hold any shares in the business, or who hold very few shares in the business. This can help ensure good governance by holding directors accountable to shareholders for their decision making in a business.
Shareholders and directors play a key role in any company and at times, these roles can overlap if a director is also a shareholder (as is often the case in startup companies, where founders are both directors and shareholders).
If you need more help understanding the difference between shareholders or directors, or have an unusual situation not covered by this article, our lawyers are always happy to chat. You can reach us at 1800 730 617 or firstname.lastname@example.org.
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