Out-Law / Your Daily Need-To-Know

Company personnel

Out-Law Guide | 04 Jul 2007 | 11:45 am | 9 min. read

This guide is based on UK law as at 1st February 2010, unless otherwise stated. For all companies with a share capital, the terms 'shareholder' and 'member' are interchangeable. But whichever term ...

This guide is based on UK law as at 1st February 2010, unless otherwise stated.

Shareholders

For all companies with a share capital, the terms 'shareholder' and 'member' are interchangeable. But whichever term is used, it will refer to the person who has the legal ownership of a share – that is the person who is shown in the company’s register of members as holding the share. That registered shareholder may be the only person with an interest in the share, or may just be a nominee who holds the share for someone else. In the latter case, that someone else is the beneficial owner, who may enjoy the income from the share, decide how the share is voted and receive the sale proceeds when the share is disposed of.

The general rule is that a company has no need to take note of the beneficial owners of its shares or even who they are (although it may, in certain circumstances, be able to force disclosure of their identity); the company concerns itself only with those persons its register shows as being members.

Keen, however, to ‘enhance shareholder engagement’, in October 2007 the government gave beneficial owners (including anyone who owns shares through a PEP, ISA or similar vehicle) new rights. Under the Companies Act 2006, they are able to exercise many of the rights attaching to their shares themselves. These include the calling of a shareholder meeting, the receipt of notice of a meeting and the appointment of a proxy (which can be the beneficial owner himself) to cast a vote.

For the rights of beneficial owners to be recognised, there are two provisos:

  • a company's articles must allow it;
  • the registered shareholder must 'nominate' the beneficial owner who is to enjoy these rights.

If these provisos are not met, it remains the case that only shareholders named in the register can vote, receive dividends and exercise other shareholder rights. And only they can enforce rights against the company; the beneficial owner cannot bring a direct claim.

The shareholders are the owners of the company. They ultimately control what it does by virtue of their ability to remove and appoint directors and to change the articles. Their rights and obligations as shareholders will usually be set out in the articles, backed up by the Companies Act and the law as developed by judges in decided cases.

There may also be a shareholders’ agreement that sets out terms agreed between the shareholders; or in a 50:50 company, a joint venture agreement that sets out how deadlocks between shareholders are to be settled. A company that has received private equity or venture capital funding may have an investment agreement that also deals with the rights between various groups of shareholders. But unlike the articles, these agreements will only bind those shareholders who sign up to them originally or who do so when they become shareholders and put their name to some form of deed of adherence. The articles, by contrast, apply to all who have acquired shares at any time, whether they have specifically agreed to them or not.

Directors

See also: OUT-LAW's menu of guides on Directors' duties

The directors are the individuals to whom the management of the company is delegated by shareholders. But who exactly are the directors? Is it just those given the name, or can it include others? There are three categories, as explained below:

Companies House or registered director – most directors are clearly appointed by the board or by shareholders, and their details are registered at Companies House. They may be executive or non-executive:

  • An executive director is a director who is also an employee of the company. Their contract of employment will impose specific duties: for example, a finance director will be responsible for the day-to-day management of the company’s finances.
  • Non-executive directors, by contrast, are not employees of the company. They will usually have a non-executive appointment letter rather than a contract of employment. That means they are paid fees, not salaries. (See: Corporate governance, an OUT-LAW guide.) They will usually be part-time and will not be expected to be involved in the day-to-day running of the company. Despite this, there is no legal distinction between them and executive directors. Many of the duties placed on them will be the same.

De facto director – the Companies Act 2006 says that ‘director’ includes ‘any person occupying the position of director, by whatever name called’. So you might be called ‘governor’ or ‘trustee’ and actually be a director. Conversely, a director of sales or HR director might not be a member of the board at all. It’s the role you perform, not the title you’re given, that determines whether you’re a director or not. If you turn up to directors’ meetings and speak, and vote, as if you were a director, you run the risk that the courts will treat you as having all the duties and liabilities described in this book.

Shadow director – defined as a ‘person in accordance with whose directions or instructions the directors of a company are accustomed to act’. Note that the shadow director’s influence has to be over the whole board, or at least a majority of it, not just one or two directors; and there has to be some history of influence, not just an isolated occurrence. Professional advisers, such as lawyers and accountants, are specifically excluded, as are parent companies in certain circumstances. But a dominant individual at the parent, company doctors sent in to implement a corporate recovery plan, and even banks seeking to protect their loans to a company, are potential shadow directors.

In contrast with the first two categories, not every reference in companies legislation to a director covers a shadow director as well: there must be specific wording to include a shadow director. Most significantly, a shadow director can, like the others, be liable for wrongful trading when a company becomes insolvent. (See: Personal liabilities, an OUT-LAW guide.)

In many smaller companies, directors will continue in office until they voluntarily resign or are forcibly removed. Larger companies and all listed companies will require directors to retire at the AGM (for example, a third or even all of the directors might retire each year), and directors newly appointed by the board must retire at the following AGM. They then stand for re-election, when shareholders usually vote them back in.

At the time of writing, the Financial Reporting Council was seeking views as to whether the UK Corporate Governance Code should recommend the annual election of the entire board or of just the chairman. (Re-election is addressed in: Appointment of directors, an OUT-LAW guide.)

A number of people are barred from being directors:

  • Undischarged bankrupts;
  • Individuals under the age of 16;
  • Those disqualified from acting as a director under the Company Directors Disqualification Act 1986 for persistent breaches of company law, following a conviction for fraud or for committing other offences. Most orders under the Act result from a company insolvency, or a director’s obvious ‘unfitness’ to be concerned in the management of a company. Ignoring a disqualification order is a criminal offence carrying a two-year prison sentence.

Further restrictions may be imposed by the articles of association; it used, for example, to be common for the articles to require a director to hold shares in the company.

The 2006 Companies Act removed the rule that directors of a public company had to stand down when they reached 70; from April 2007, there has been no upper age limit.

Corporate directors

A director does not have to be an individual. A company can serve as a director on the board of another company. The use of ‘corporate directors’ is, however, curtailed under the Companies Act 2006, which requires every company to have at least one individual or, in legal parlance, ‘natural person’ on the board.

Corporate directors can be represented at board meetings by different people at different times. They can also be used to distance individuals from liability (though it’s questionable how effective a device that is). In any event, the Act requires at least one individual as a director, so there will always be one person of flesh and blood on the board who is personally accountable for its
failings.

See also: OUT-LAW's menu of guides on Directors' duties

Company secretary

As stated in The different types of company, an OUT-LAW guide, all companies must have a secretary.  Private companies have been able to drop the role since April 2008, but too many choose to retain the post where there is a real job to be done.

The increasing focus in recent years on corporate governance, the role of the company secretary has grown in importance. In many ways, the secretary is now seen as the guardian of the company’s proper compliance with both the law and best practice. (See: The company secretary, an OUT-LAW guide.)

Auditors

Companies above a certain minimum size are required to have auditors who, each year, examine and report on the company’s accounts and confirm whether they comply with companies legislation and whether they give a ‘true and fair view’ of the company. Many smaller companies are relieved of this requirement, though they must still prepare and file accounts.

A detailed description of the duties of an auditor is beyond the scope of this article, but it is worth noting that, if the auditor fails in its duties, it may be liable for any loss the failure has caused, both to the company and to its shareholders. In some cases, it may also be liable to third parties who have relied on the audit report – though recent case law has provided some limit on auditors’ exposure.

When companies fail and investors are looking for someone with deep pockets to compensate them for their losses, it’s often the auditors who are in the firing line. The 2008 banking crisis, the collapse of Arthur Andersen after the Enron scandal, and Equitable Life’s multi-million pound claim against Ernst and Young (albeit unsuccessful), are all good examples of auditors under pressure for their perceived failures.

The potential claims are now so big, and the risks of losing one of the remaining ‘Big Four’ firms so catastrophic, that from April 2008 auditors have been able to agree with a company each year a cap on their liability for the audit. But there are several hurdles to be overcome – not only must the finance director agree, but the shareholders must also approve the limitation at the AGM. Even then, when any claim against the auditors comes to court, the judge can substitute a higher amount if that would be ‘fair and reasonable’.

Despite pressure from the auditing profession and from government, companies and their investors have proved unenthusiastic for the change. Indeed, at the time of writing, no major listed company has yet even asked shareholders to vote on such a limitation. Opposition from US regulators has also been significant in the case of companies with dual listings in New York.

Given the importance of their role, the hiring and firing of auditors is also closely regulated. The directors appoint the first auditors of a company and can fill any vacancy that arises between general meetings. Apart from that, the auditors are appointed by a resolution of shareholders at each annual general meeting, and there are special notice provisions (see: Company meetings, an OUT-LAW guide) where a new auditor is to be appointed in place of the firm appointed at the previous AGM.

An auditor can be removed by ordinary resolution of the shareholders, but, again, there are special safeguards in the legislation that have to be observed.

A resigning auditor must produce a statement setting out any circumstances connected with the resignation that should be brought to shareholders’ attention. Alternatively, if there are no such circumstances, that fact must be stated. This is designed to prevent auditors who are unhappy with any aspect of the accounts departing quietly and keeping the problems to themselves. Concerns must be stated frankly. Additional safeguards aim to protect the company from the risk of defamatory material being circulated.

Auditors will always rightly point out that they do not prepare the accounts on which they report: that is the job of the directors. In practice, though, they may help smaller companies put the accounts together – as a general rule, the smaller the business, the greater their assistance.

The accountancy firms provide numerous services to their clients above and beyond the basic audit. Governance principles suggest that the auditor might have a conflict of interest in doing commercial work in addition to its audit duties (see: The audit committee, an OUT-LAW guide), and statute requires that details of non-audit services are disclosed in the annual report. At the same time, however, the involvement of auditors has been extended with the requirement for them to check some of the factual information in the directors’ remuneration report. (See: Remuneration issues, an OUT-LAW guide.)