In many businesses, especially small owner-managed or family business, the roles of employees, directors and shareholders are often unclear, as are the rights and responsibilities of each.

Directors

Directors are responsible for running the business on a day to day basis and most decisions about general management (including spending money, hiring and firing, and plans for growth and development) are made by the directors in regular board meetings.  Directors have obligations to the company, as set out in the Companies Act 2006, and to the shareholders e.g. to act in the best interests of the company.

Many directors are also an employee of the company, and earn a salary for carrying out their role.  However directors do not have to be an employee and may earn a ‘directors fee’.

Shareholders

Shareholders own shares in a company and the relationship of shareholders to their fellow shareholders is governed by the Companies Act and the shareholders agreement.  In publicly listed companies (who sell shares on the stock market) there may be thousands of shareholders and many different classes of share, with different rights attached to them.

Shareholders do not have to be an employee, director or work for the business any way.  They are investors in the company.  Shareholders are not usually responsible for the day-to-day management of the business but some decisions require shareholder approval including appointing or removing directors, appointing auditors, winding up the company, issuing shares and certain property transactions.  Shareholders will usually vote on such decisions at an annual general meeting or AGM.

Employees

Employees are the ‘workers’ of the company.  They enter into a contract with the company to provide services.  Employees have rights including the right not to be unfairly dismissed, as well as obligations owing to the company under their contract, and in common law (e.g. an obligation to do their job and not to steal from their employer).

Why it matters

Often in companies, particularly small companies, one or more of the business owners will be a director, employee and shareholder.  It is usually the case that those in management do not distinguish the ‘hat’  they are wearing when making decisions or carrying out their role, but it does matter.  When deciding, for example, to issue new shares or increase share capital, that must be done by the shareholders with the appropriate documentation in place, or the issue of shares will not be valid.

More often, the distinction between the roles becomes an issue in disputes.  For example, a disgruntled director/employee may terminate their employment but refuse to resign as a director, or vice versa.  This may mean that the parties have fallen out, the director is no longer carrying out their work, but still has a say in the day-to-day management of the company.  If you only have two directors and one is refusing to co-operate, it would make it virtually impossible to make any decisions at all and any decisions which are made by either director would be invalid.

The decisions made as directors and shareholders often become an issue where minority shareholders feel the decisions being taken by the directors (who may also be fellow shareholders) are unfairly impacting the value of their shares, or if a majority shareholder/director is using their influence as the majority shareholder to make decisions about management of the business without consulting other directors.  This is known as ‘unfair prejudice’.

In such cases, there may be a number of claims which arise in employment, under the Companies Act, or in contract law if the employment contract, directors service agreement or shareholders agreement has been breached.  In those circumstances, all involved must be clear who made the decisions or undertook the acts which led to the dispute and the capacity in which they did so.

At Allan Janes, we have expertise in company law, employment law and in resolving disputes and work collaboratively to assist with these sorts of difficult and complex business relationships.

Should you have any queries about the issues raised in this article, or on any employment related matter, please contact our expert Arvin Sandhu by email or on 01494 893 542.