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 the company Directors’
powers and remunerations.
- The levels of company investment.
- Authorising dividend structure.
- Appointing and removing directors.
- Authorising the transfer and/or 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 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, in which the majority votes in favour of a proposal at
the meeting. Usually, more than 50% of the votes cast must be in favour.
- Special: The Companies Act, for example,
may require a special resolution to change the Articles of Association.
The Articles can also require a majority of more than 50% 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 Director's contract.
Some Directors' breaches of
duty may be considered criminal offences, 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 the partners. They are individually responsible for
paying their share of any tax liabilities and retaining liability for their
share of any losses and the business’s debts.
A Limited Liability
Partnership (LLP) 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 it. A Limited Liability
Partnership (LLP) agreement determines the Partners' 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, the corporate law of the European Union
introduced in 2004 allows EU public companies to incorporate as “Societas
Europaea (SE)” organisations, 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 with 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 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 for the financial benefit of all parties without
creating bottlenecks to free trade.
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