Difference between Directors and Shareholders

24 November 2024 in Business Law | 6 min read | skip to FAQs

This article examines the differences between directors and shareholders in a company. These differences include their respective duties and responsibilities for company insolvency, breaches of legislation and unpaid taxes. There are also differences in their ability to make various decisions pertaining to financial, employment and marketing issues.

Company Structure: Directors & Shareholders

Company structure, whilst efficient and robust, can be complexly layered and potentially confusing to those that are not experienced in corporate activity or have not been exposed to the management of a company. Two of the main parties to a company, are directors and shareholders. Widespread confusion exists as to the  distinction between them: What is the role of a director and a shareholder? What is the difference? Can there be crossover? These questions may seem simple in theory, but are not necessarily simple in reality.

Individuals within a company may assume the role of both director and shareholder, and in some cases, particularly a proprietary limited company, also fulfil a role as an employee. It is important for anyone contemplating accepting one of these roles to be aware of the rights and responsibilities that exist in each role to ensure that no duties are breached and no actions are taken beyond the scope of the role. The business lawyers at BSM Sydney Lawyers have decades of experience in company law and provide a premium and personalised legal service, without the fees of a big city law firm.

The management of a company and the role of directors and shareholders is in part set out in the replaceable rules in the Corporations Act 2001 (Cth), section 135  .This section of the Act sets out the replaceable rules, which may be modified by a company constitution or shareholders agreement.  For further information, please refer to our article on shareholders agreement and companies constitution.

The Role of Directors

The term director is defined in section 9AC of the Corporations Act 2001 (Cth). Section 198A of the Corporations Act 2001 (Cth) states that, “The business of a company is to be managed by or under the direction of the directors”.

The duties and powers of officers and employees is set out in Part 2D.1 of the Corporations Act 2001 (Cth). In simple terms, directors ‘direct’. It is the directors’ role to oversee the strategic and day-to-day management of the company, including:

1. Operational decisions, either individually or with the agreement of the other directors. Each company is different in terms of how many directors it has and how they co-operate, some companies are overseen by a board of directors, and some operate with a sole director.
2. Financial and investment related decisions, such as the issuing of shares or the obtaining of finance.
3. Growth and marketing decisions, such as the opening of new outlets, entering new markets.
4. Employment and remuneration decisions.
5. Operate within the bounds of directors’ duties as stipulated in the Corporations Act 2001 (Cth). Failure to uphold directors’ duties can result in significant penalties, including fines, employment cessation, or imprisonment. The primary duties of a director are to:
6. Exercise care and diligence;
7. Act in good faith;
8. Avoid improper use of position;
9. Avoid improper use of information.

Insolvency

One very important duty of directors is to pass an annual solvency resolution as set out in section 347A of the Corporations Act 2001 (Cth). This is an essential duty of any director.  Section 588G of the Corporations Act 2001 (Cth) provides that a director may be personally liable for insolvent trading. In the event that a director allows the company to trade while insolvent the director may be personally liable for any unpaid debts incurred by the company while insolvent.

Appointment by a Vote

Directors are typically (subject to the replaceable rules, company constitution and shareholders agreement, as applicable) appointed by a vote of the shareholders, and can on occasion be subject to removal by a vote of shareholders.

The function and administration of directors’ meetings are set out in Part 2G.1 of the Corporations Act 2001 (Cth).

The Role of Shareholders

The definition of a member (the Corporations Act 2001 (Cth) refers to a shareholder as a member) of a company is set out in section 231 of the Corporations Act 2001 (Cth)

Shareholders are quite literally the owners of the company. Publicly listed companies issue shares on the market (stock exchange) as a funding mechanism, known as equity financing. When those shares are bought, the company acquires funds, the buyer acquires part-ownership in the company, and the shareholder can then vote at company meetings on certain key subject matters. As well as voting and ownership rights, the shareholder is also entitled to remuneration in the form of a dividend, and potentially profit upon sale of their share. Any dividend distribution is subject to the agreement of directors who are responsible for the company’s dividend policy and the decision to distribute any dividends from the company’s profit.

Subject to the shareholders agreement specific to that company, shareholders can vote on:

1. Appointing or removing a director;
2. Approving major transactions;
3. Placing the company into liquidation.

Alongside their key role in influencing company decision making, shareholders act as a crucial balancing mechanism in holding the company accountable. When the company acts in the best interests of the shareholders, individual share prices may rise, stimulating further investment and greater mutual success.

Shareholders also have rights to various legal remedies to protect the rights of the shareholders, such as to ensure that each shareholder is not oppressed, section 233 of the Corporations Act 2001 (Cth), and to commence legal proceedings on behalf of the company, known as a derivative action, (pursuant to section 236 of the Corporations Act 2001 (Cth)).

Shareholders can vote to place the company into liquidation by seeking an order of the court to wind up the company, (pursuant to section 461 of the Corporations Act 2001 (Cth)).

The function and administration of shareholders’ meetings are set out in Part 2G.2 of the Corporations Act 2001 (Cth).

Summary of the Differences between Directors and Shareholders

Fundamentally, shareholders are owners and directors are managers. Shareholders appoint the director to manage and direct the business of the company. Directors are employed and paid a salary by the company, whereas shareholders are not considered employees, even though they are remunerated in the form of dividends. The primary difference in their respective roles dis that directors are charged with actual decision making and oversight at a wide, all-encompassing level, whereas shareholders are primarily charged with voting, as opposed to actually deciding.

A further and important difference between the roles is, as mentioned above, is that directors can be held personally liable for a breach of their duties, including insolvent trading, breaches of various legislation including safety legislation and unpaid PAYG tax and unpaid superannuation. For further information regarding this see our article on company directors duties. However, shareholders are protected by limited liability, and the maximum size of their loss will be the capital they have invested in the purchase of their shares.

Both shareholders and directors are irreplaceable in the company structure. Understanding the role and responsibilities of each is essential for all stakeholders, and any shareholder or director of a company. The highly experienced business legal team at BSM Sydney Lawyers are happy to answer your questions regarding the respective role and responsibilities of directors and shareholders.

How can BSM Sydney Lawyers assist you?

The expert business lawyers at BSM Lawyer Sydney have decades of experience in company structure and constitution, and the roles and responsibilities of directors and shareholders. It can be a confusing area and our business lawyers are able to succinctly advise you and give practical advice. The business lawyers at BSM Sydney Lawyer provide a 20-minute free consultation by phone or in person to discuss your individual matter.

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