The roles and duties of shareholders

Who are shareholders?

The shareholders of a company are effectively the company’s financial supporters. They provide finance to a company by purchasing shares in the company, and thus become shareholders – and part owners of the company.

Shareholders have certain rights, roles and duties to perform as set out in the Companies Act 2006 and the company’s Articles of Association. As shareholders of a limited company, they are protected from liabilities save for the amount of the shares they own but have not paid for.

Shareholders can also be directors of the company. Whilst directors are responsible for the day to day management of the company and making decisions, the shareholders have specific roles and duties in relation to their control over the company.

Roles of the shareholders

Under the Companies Act 2006, major business decisions which would affect shareholders’ rights must be approved by the shareholders at a general meeting called by the directors of the company, by way of special resolution.

Certain decisions can only be made by the shareholders such as: removing a director from office, changing the name of the company, or authorising a service contract for a director which gives him job security for more than two years. In general, shareholders have little power over the directors and how they run the company. Their main role is to attend meetings and discuss whatever is on the agenda to ensure the directors do not go beyond their powers – and provide shareholders’ consent where required.

General meetings

General meetings are meetings of the company’s shareholders. Whilst the company directors may call a general meeting at any time for any reason, shareholders can also request a general meeting, subject to conditions (ie. those requesting the meeting must represent at least 5% of the company’s paid up share capital or, if there is no paid up capital, 5% of the voting rights).

The directors must call a general meeting within 21 days if the shareholders have a valid request. If they don’t, there are procedures enabling shareholders to call one themselves.

Annual general meetings

There is no longer a statutory requirement to hold an annual general meeting if the company is a private company, unless required by its Articles. However, the shareholders may request that one is held – or the directors may call an annual general meeting if desired. The date of such a meeting will be typically fixed from year to year.

Under section 336 of the Companies Act 2006 public companies must hold an annual general meeting six months after its accounting reference date.

In small companies, it is often appropriate to have an annual general meeting where the shareholders are not all directors. It provides the shareholders the opportunity to review the company accounts and ask the directors about decisions they have made.

Duties of shareholders

The main duty of shareholders is to pass resolutions at general meetings by voting in their shareholder capacity. This duty is particularly important as it allows the shareholders to exercise their ultimate control over the company and how it is managed. Shareholders can vote in one of two ways: on a show of hands or through a poll vote where each vote will be proportionate to the number of shares held by each shareholder. A show of hands is usually the preferred method of voting that takes place at general meetings.

There are two resolutions that can be voted on at a shareholders meeting: an ordinary resolution, and a special resolution.

Ordinary resolution

An ordinary resolution is passed by the shareholders if a simple majority of shareholders present at the meeting vote in favour of the proposal. Therefore, more than 50% of the votes cast must be in favour, usually displayed through a show of hands.

Special resolution

A special resolution is sometimes required by the Companies Act in certain cases; for instance, to change the Articles of Association, or for other important or sensitive matters. The Articles can also require a special resolution. For a special resolution to be passed, a 75% majority must vote in favour. If there is no specific mention of what type of resolution is required, the presumption is that there will be a vote on an ordinary resolution.

The chairman of the meeting

The chairman is appointed by the directors. The task of the chairman of the meeting is to supervise the meeting and keep the general structure of it in order. The chairman will declare whether a resolution has passed or failed after voting has taken place.

The chairman’s casting vote

The chairman does not have an automatic casting vote in addition to any other vote he may have. In the case of equality of votes, the chairman only has a casting vote if the Articles of Association provided that they should have one immediately before 1 October 2007.