09/03/2015

By Mireille Turner, Cripps' Solicitor


When you own a company, as a shareholder you are for the most part free to act in your own interests when making decisions relating to the company. However, there are some important limitations on this to bear in mind.

Owner-Managers

As is common in SME’s, you may also be a director and so involved in the day-to-day running of the company, either on your own or with one or more business partners who are also directors. Whilst you may naturally view your role and duties as an owner-manager in the whole, in law there is a distinction between how you can act as a shareholder and what you need to do as a director.

As a director you have to put the good of the company first. Although usually the interests of the company will be the same as the interests of the owners of the company, this is not always one and the same thing. If you have business partners, when making decisions whilst wearing your “director hat” you need to consider their interests as shareholders along with your own. Directors need to act fairly as between all the shareholders.

Another consideration is the interests of any creditors of the company, which as a director you need to put above the interests of the shareholders (so potentially your own) if your company is in an insolvency situation.

Investors/"sleeping partners"

If you have not been, and do not intend to be, appointed as a director then you need to take care that your involvement in the running of the company does not cross the boundary between taking a legitimate interest and concern in the way your company is run, and acting in such a way as to make you a “shadow director” because you are exerting influence over the board. If you are found to be a shadow director you will be held to owe largely the same duties to the company as a properly appointed director, and the chances are that if you are being held by a court to be a shadow director, it is because you are being sued for wrongful or fraudulent trading, with potential criminal liability for the latter.

Unfair prejudice

You should not use your votes as a shareholder in a way which is unfair to other shareholders. For example on matters like changing rights to dividends or, as in the case Re Woven Rugs Ltd, where a company director, who was also the majority shareholder, made the company borrow money in order to finance paying back the loans which that director had made to the company, ahead of paying back loans made to the company by its minority shareholders. A court may order you to buy out a “prejudiced” shareholder, at a price which is unlikely to be favourable to you.

Good Faith

If you are in a long-term business relationship with your fellow shareholders creating an expectation of communication, mutual trust and confidence, you may be obliged to act in good-faith in the exercise of your votes and powers as a shareholder rather than simply being able to act as you see fit in your own best interests.

Conclusion

All shareholders need to be aware that there are some circumstances where they do need to consider the interests of other stakeholders when exercising their voting rights. However, owner-managers of SME’s in particular need to be aware of the different considerations that apply depending on whether they are taking decisions as a shareholder or as a director.