The Principles of Directors, Shareholders and Sole Traders

It is often the case within small to medium enterprises that a company's Directors and Shareholders are the same people. This is only sometimes the case, as the two may differ, especially in larger companies. Generally, a company is owned by its Shareholders but run by its Directors, who have the power to:

• Control the company.

• Deal with customers and suppliers.

• Act in a legal capacity to deal with various laws and regulations.

Director Obligations

A Director’s obligations are described in the Companies Act 2006 and are, in principle to:

• Act within their powers.

• Promote the success of the company.

• Exercise independent judgment.

• Exercise reasonable skill, care, and diligence.

• Avoid conflicts of business interest.

• Not accept benefits from third parties.

• Declare personal interests in arrangements or transactions with the company.

The Role of Shareholders

Shareholders have limited powers derived from the Companies Act 2006 and the company's Memorandum of Association, Shareholders' Agreement, Articles of Association, or other Resolutions that a company's Board of Directors may have passed. Different classes or types of shares may define shareholders' rights. However, Shareholders' rights are principally concentrated on the following within private limited companies:

• Attend general meetings and vote.

• Receive a share of the company's profits.

• Receive specific documents from the company.

• Inspect statutory books and constitutional documents.

• Any final distribution on the winding up of the company.

Shareholders within public limited companies have duties that extend to include the following:

• Deciding company Directors’ powers and remunerations.

• The levels of company investment.

• Authorising dividend structure.

• Appointing and removing directors.

• Authorising the transfer and/or the allotment of shares.

The principal duty of shareholders is to exercise their ultimate control over the company and how it is managed by passing resolutions on a show of hands or through a poll vote that is proportionate to the number of shares held at company general meetings by voting in their shareholder capacity. Two resolutions can be voted on at a shareholder’s meeting:

• Ordinary: An ordinary resolution is passed by shareholders where the majority votes in favour of a proposal at the meeting. Usually, more than 50% of the votes cast must be in favour.

• Special: A special resolution may be required by the Companies Act, for example, to change the Articles of Association. The Articles can also require more than 50% majority to vote in favour of a special resolution for it to be passed.

Obligatory Director Duties

Suppose a director of a company breaches their obligatory duties. In that case, the company can take legal action against the Director, an act usually instigated by the stakeholders seeking restitution for financial loss or damage. The company has a variety of legal options available, such as requesting the Director to:

• To account for any profits.

• Pay compensation.

• Return company property.

• Rescind the Directors contract.

Some of a Director’s breaches of duty may be considered a criminal offence, resulting in disqualification, fines, or even imprisonment for the more severe cases. Other company Directors may claim for a breach of directors’ duties, or an individual Director can bring a claim against a board of directors if the claim is in the company’s name to recoup company losses.
 
A company has a legal entity separate from its Directors, so usually, a Director cannot be personally sued for a company’s debts. But if Directors have mismanaged a company that becomes insolvent, they can be personally responsible in certain situations:

• Wrongful trading occurs when directors continue trading after there is no reasonable prospect of a company avoiding liquidation. A court can order a Director committing illegal trading activities to be personally responsible for a company’s debts.

• Fraudulent trading occurs when directors manage an insolvent company to defraud creditors, which is a criminal offence. A court can order a Director to repay any fraudulently obtained monies to the company.

• Directors who breach any duties they owe can be personally liable for misfeasance, which covers unauthorised loans or payments to directors. In this case, a court may order a director to repay the company for the misused money.

The Self Employed and Sole Traders

Any person can trade as a self-employed Sole Trader. They run their business as an individual but may employ staff. A Sole Trader is solely responsible for their business, its tax liabilities, and debts. Any financial loss in the business's profitability is the total liability of the Sole Trader.
 
A Partnership is a business venture formed by two or more people who retain total liability for their share of the business. However, this may not be in equal shares. The business’s profits are split between each Partner. They are individually responsible for paying their share of any tax liabilities and retain liability for their share of any losses and the business’s debts.
 
A Limited Liability Partnership is a business run by two or more people who are not personally liable for the business’s debts. Their liability to the company is limited to the amount of money they invest in the business. A Limited Liability Partnership (LLP) agreement determines the Partner's profit, shares, and responsibilities.
 
Limited Companies and Public Limited Company Entities

A Limited Company is an organisation set up to run a business where the business’s finances are the sole liability of the Limited Company, in which the Limited Company acts as a separate legal entity from the company’s owners. Once tax liabilities have been fulfilled, the profits can be distributed to Shareholders as dividends. There are two types of Limited Companies:

• Private Limited Company (Ltd) whose shares cannot be traded through a stock exchange.

• Public Limited Company (PLC) – whose shares can be traded through a stock exchange.

Private Limited Companies, Limited Liability Partnerships, and Public Limited Companies operating within the UK must be registered with Companies House, which is legislated under the Companies Act 2006.
 
The EU has similar business laws that legislate and control business operations throughout the EU to protect shareholders and parties with legitimate interests. EU legislation requires EU company reporting, auditing, and transparency rules to complement the UK's business legal framework.
 
EU countries operate under separate legislation, which is amended to comply with EU Directives and Regulations as required. However, EU public companies can incorporate as “Societas Europaea (SE)” organisations by the corporate law of the European Union introduced in 2004, allowing the business to operate across the EU.

Market Abuse and Insider Trading

Market Abuse is when a person or group of people act to the disadvantage of other market investors using confidential private company information that is not publicly known. There are three types of market abuse:

• Insider dealing is trading company stock or other securities by people internal to the company or who have access to confidential and private company information.

• Market manipulation occurs when there is a premeditated attempt to influence the pricing of company stock or other securities or with the operation of a stock market to create a false or misleading impression of market pricing.

• Unlawful disclosure occurs when a person possesses private company information and passes it to someone not authorised to receive it.

Insider Dealing is a civil offence under the UK Market Abuse Regulation (UK MAR) in the UK. Under the Criminal Justice Act 1993, it is also a criminal offence under part V. In the EU, Regulation (EU) No 596/2014 on market abuse (the EU Market Abuse Regulation) prohibits:

• Insider Dealing.

• Unlawful Disclosure of Inside Information.

• Market Manipulation.

The EU Market Abuse Regulation legislation has been maintained in the UK post-Brexit. However, it applies to stocks traded across all EU venues if not listed or traded in the UK to support the pre-Brexit scope to deal with market abuse across both UK and EU markets. The challenge for the UK and EU post-Brexit is to ensure that Market Abuse legislation is seamlessly incorporated to protect the interests of the public, companies, and trade to the financial benefit of all parties without creating bottlenecks to free trade.

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