There are three crucial stakeholder groups in a typical business structure; these are powers of shareholders, directors, and workers. Now learn whether shareholders have more power than directors?
In a company, only shareholders and the very first directors should take part in the startup of a business. The powers of shareholders are the ones who possess the firm. They will get a share of the company’s profits based on the ratio of their ownership. Directors will be in charge of company operations and compliance.
Who Is a Director of a Company?
The roles and responsibilities of various stakeholders are well-defined, but shareholder contract are primarily focused on investing or capitalising on the business and giving vision and direction for it, while directors are responsible for implementing the company’s policies and maintaining shareholder wealth. Directors are also responsible for complying with all applicable laws. In today’s heavily regulated economy, directors are responsible for ensuring compliance with all applicable laws as well.
The directors are appointed by the address of shareholder contract with the first directors of the company in the AOA. The directors are elected for a term of one year and can be removed at the powers of shareholders’ meeting with a simple majority vote. Every director, from the moment he is elected until he leaves office, is bound by the law and must respect it. The board of directors meets daily to make decisions.
Every director has one vote, which is a simple majority. Non-compliance is the director’s charge, and we think of each director as responsible for compliance. The directors of a company, also known as the board of directors, are the individuals elected to oversee day-to-day operations. All decisions of the board of directors are made with a simple majority and are made by a majority vote. The duties and responsibilities of a director include ensuring compliance with legal requirements
Who Is the Shareholder of a Company
The most important decision-making authority in a company is the shareholder. Powers of Shareholders meet at the annual general meeting to vote on matters that the board has failed to resolve. Majority rule, rather than parliamentary democracy, usually operates in business decisions, but there are exceptions to this rule.
To ensure that important decisions are reached, a firm must be able to obtain the agreement of at least 3/4 of its shareholders. Every year a corporation is required to hold an Annual General Meeting (AGM) as a legal obligation. The AGM is a shareholder meeting that has to take place each year as mandated by law. The four matters to be discussed at the AGM are as follows:
- Approve the audited accounts of the company
- Declare a dividend to the shareholder
- Proceed to the next step if you decide to elect directors
- Approve the appointment of auditors of the company
- Consider and approve the rotation of directors’ seats.
Do Shareholders Have More Power Than Directors?
Under the Companies Act of 2013, only certain actions have to be approved by the powers of shareholders for them to occur, for example:
- Changing the firm’s name
- Amending the firm’s articles of incorporation
- Liquidating the firm.
In this case, the firm’s directors are responsible for all of the firm’s day-to-day activities and decisions, which means that the shareholders are generally unable to reach them. However, shareholders with at least 5% of the voting rights can force the firm to hold a general meeting of shareholders to propose resolutions that address the business’s earlier decisions.
The company’s articles of incorporation (or shareholders’ agreement) might grant the powers of shareholders and rights to make decisions, but most decisions are made by the board of directors and cannot simply be undone by the shareholders. A resolution proposed by the shareholders may require the board to reconsider or overturn an earlier decision.
Note: Experts at Vakilsearch suggest that the shareholder’s agreement should be drafted with utmost caution. A shareholder must verify whether all the shareholders agree to the important aspects including the rights and obligations.
Shareholder’s Power Depends on the Percentage of Ownership
The importance of a powers of shareholders is proportional to the number of shares and portion of the vote that they hold, and to the influence they have over other shareholders. Because company rules, which are binding decisions made by members, require specific voting thresholds to be reached to ‘pass’, the influence of a shareholder depends on the number of shares and percentage of the vote. A simple majority (more than 50%) is required for ordinary resolutions, but special resolutions require at least 75% of votes in favour.
Even though directors are prohibited from favouring some shareholders over others, in practice a majority shareholder’s influence over the firm can be significant and decisions can be made by the directors. To defend their interests, minority shareholders can agree on a shareholders’ agreement, which specifically restricts a majority shareholder’s influence. This is particularly the case when articles of association or directors and employees are fired and/or hired.
In theory, a majority shareholder may ask the board to reconsider a decision and ultimately remove any director they dislike. However, if a shareholders’ agreement does not contain this clause, a majority shareholder may, theoretically, pass a resolution asking the board to reconsider and ultimately remove any director they dislike.
To sum it up, the director and shareholder in a private limited company should work in unison for development. However, the board of directors stand liable for day to day activities and compliance with all the rules and regulations. It is a fine balance of power evenly distributed between the powers of shareholders and directors of the Company.
How Vakilsearch Can Help You in Drafting the Best Shareholder Agreement
You may establish a company through our private limited company registration process without leaving your house. We, at Vakilsearch, may handle the entire process in less than 14 days. Along with this, experts at Vakilsearch can also easily create a shareholder’s document encompassing all the rules and regulations. Initially, our expert provides all the required insights about shareholders’ agreements and helps you draft the same within 5 to 6 business days.
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