Shareholders vs directors: Who is actually in charge of a private company?

In many private companies, the shareholders and directors are the same people. While the business is running smoothly, nobody pays much attention to the distinction. Decisions are made around a table, instructions are given, and everyone gets on with the work.

The distinction usually only becomes important when shareholders and directors start disagreeing.

A majority shareholder may believe that ownership gives them the final say over every aspect of the business. A director may believe that the shareholder who appointed them is entitled to tell them how to vote. A minority shareholder may demand access to every bank statement, contract and board discussion because they own part of the company. None of those assumptions is necessarily correct.

Shareholders and directors occupy different positions, exercise different powers and owe different duties. Understanding that division is one of the foundations of sound corporate governance.

Shareholders own shares, not the business or its assets

A company is a separate legal person. Its property, money, contracts and liabilities belong to the company itself.

Shareholders own shares in the company. Those shares give them the rights attached to their shares, which will usually include voting rights, rights to dividends declared by the company, and a right to participate in the remaining assets if the company is liquidated.

Shareholders are therefore the owners of the economic interest in the company, but they are not automatically responsible for managing its business.

The board is responsible for management

Section 66(1) of the Companies Act places the responsibility for managing the business and affairs of a company on its board of directors.

The board has the authority to exercise the company’s powers and perform its functions, except where the Companies Act or the company’s Memorandum of Incorporation (“MOI”) provides otherwise.

In practical terms, the board ordinarily decides the company’s strategy and business direction, approves material commercial agreements, appoints and supervises senior management, decides how company resources will be used and determines whether the company should incur debt or pursue legal proceedings. The board is also responsible for overseeing the risks facing the business.

The board does not need to make every operational decision itself. It may delegate parts of the day-to-day management of the business to a managing director, executive team or other employees. However, delegation does not make the board irrelevant. The board remains responsible for directing and overseeing the affairs of the company.

A shareholder, even a majority shareholder, cannot simply take over the board’s functions because they own most of the shares. If a shareholder wants greater control over particular decisions, those rights must be properly structured through the MOI, the composition of the board and, where appropriate, a shareholders’ agreement.

What decisions do shareholders make?

Shareholders do not manage the company, but they retain important governance and investment rights.

Their most important influence is usually exercised through the appointment and removal of directors. By determining who serves on the board, shareholders indirectly influence how the company is managed. That does not, however, entitle them to make the board’s decisions on its behalf.

The Companies Act also reserves certain important decisions for shareholders. For example, shareholders must generally approve amendments to the MOI and the remuneration paid to directors for their services as directors. Shareholder approval may also be required for certain issues or repurchases of shares, particular forms of financial assistance, the disposal of all or the greater part of the company’s assets or undertaking, an amalgamation or merger, and the voluntary winding-up of the company.

Some of these matters require an ordinary resolution, which generally means more than 50% of the voting rights exercised on the resolution. Others require a special resolution, which generally means at least 75%. The MOI may adjust these thresholds within the limits permitted by the Companies Act.

The MOI may also reserve additional matters for shareholder approval. Shareholders could, for example, agree that the company may not incur debt above a specified amount, dispose of material assets, materially change the nature of its business or enter into certain related-party transactions without shareholder approval.

These reserved matters can provide important protection, especially for minority investors. However, they must be drafted carefully.

A shareholders’ agreement cannot override the Companies Act or the MOI. If the intention is to restrict or qualify the board’s authority, the restriction should ordinarily also be reflected in the MOI. Simply inserting a list of reserved matters into a shareholders’ agreement does not necessarily achieve the intended corporate effect.

Wearing two different hats

A person may be both a shareholder and a director, but those positions must not be treated as interchangeable.

When voting as a shareholder, the person exercises the voting rights attached to their shares. When participating in a board decision, the same person acts as a director and must comply with the duties imposed on directors.

This distinction matters because a shareholder is allowed to vote protect their own investment interests. A director, by contrast, must act in good faith, for a proper purpose and in the best interests of the company.

A director appointed or nominated by a particular shareholder does not become that shareholder’s representative or messenger on the board. The director may consider the nominating shareholder’s views, but cannot blindly follow instructions if doing so would conflict with the director’s duties to the company.

This is particularly important in joint ventures and family businesses, where the board is often divided according to shareholding. A director is not there merely to defend “their shareholder’s side”. Every director must apply their own mind and act in the interests of the company.

Conflicts of interest

The distinction between the two roles becomes especially important when a decision involves a conflict of interest.

Section 75 of the Companies Act regulates a director’s personal financial interests. If a director, or certain persons related to that director, has a personal financial interest in a matter to be considered by the board, the director must disclose the interest and any material information relating to it before the matter is considered.

After making the required disclosure, the director must ordinarily leave the meeting. The director may not participate in the board’s consideration of the matter, vote on it or sign documents relating to it unless specifically requested or directed to do so by the board.

Where the company has only one director, but that director is not also the sole shareholder, a matter involving the director’s personal financial interest must generally be approved by an ordinary resolution of the shareholders after full disclosure.

Failure to follow the conflict procedure can place the validity of the board’s decision or transaction at risk. In appropriate circumstances, shareholders may ratify a decision after full disclosure, or a court may declare it valid, but neither outcome should be treated as a substitute for proper governance.

Disclosure also does not give a director permission to disregard their broader duties. Directors must still act honestly, for a proper purpose and in the best interests of the company.

The position of a shareholder is different. Section 75 does not generally require a shareholder to abstain from an ordinary shareholder vote merely because they have a personal interest in its outcome.

However, the Companies Act, the MOI or the shareholders’ agreement may impose specific restrictions, and shareholder power cannot be exercised unlawfully or in a manner that is oppressive or unfairly prejudicial to other shareholders.

The practical question should therefore always be: Is this person presently making the decision as a shareholder or as a director?

What information may shareholders access?

Shareholders have important information rights, but those rights are not unlimited.

Under the Companies Act, a shareholder is generally entitled to inspect or obtain copies of the company’s MOI, its rules, the prescribed record of its directors, annual financial statements, shareholder meeting notices and minutes, shareholder resolutions, communications sent generally to holders of securities, and the company’s securities register.

This does not automatically give a shareholder unrestricted access to all operational information. Merely owning shares does not necessarily entitle a person to inspect board minutes, management accounts, bank statements, accounting records, every contract concluded by the company, internal correspondence or legally privileged communications.

This often causes frustration for shareholders who believe that the board is withholding information. The answer depends on the nature of the information requested and the source of the shareholder’s rights.

Additional information rights may be created in the MOI or shareholders’ agreement. Investors may, for example, negotiate rights to receive monthly management accounts, budgets, cash-flow forecasts or compliance reports. These rights are especially important for minority shareholders who are not represented on the board and are therefore removed from the company’s daily operations.

A person who is both a shareholder and a director will ordinarily require much broader access to company information to perform their duties properly. However, that access arises from their office as a director, not merely from their shareholding.

Additional records may also be requested through the Promotion of Access to Information Act, but that is a separate process with its own requirements and possible grounds of refusal.

Shareholders are not powerless

The fact that shareholders do not manage the company does not mean that they have no remedies when the board acts improperly. Shareholders exercise oversight primarily through their voting rights, their ability to elect and remove directors, and their power to approve or reject matters that the Companies Act or MOI reserves for them.

Qualifying shareholders may also demand that a shareholders’ meeting be convened or propose resolutions for consideration. Where the conduct of the company or its directors is oppressive or unfairly prejudicial, shareholders may seek appropriate relief from a court. The Companies Act also provides mechanisms through which shareholders can seek to restrain unlawful conduct or require the company to pursue a legal claim.

These rights are mechanisms of oversight and accountability. They do not convert shareholders into an alternative board.

Create clarity before there is a dispute

In small and growing businesses, people often move between shareholder, director, executive and employee roles without clearly identifying which authority they are exercising. That may work while everyone agrees. Once relationships deteriorate, the lack of structure becomes a source of conflict.

Good governance requires more than recording who owns which percentage of the shares. The company’s documents should clearly establish how the board is constituted, which matters belong to the board, which decisions require shareholder approval, what information shareholders must receive, and what authority has been delegated to executives and employees.

The documents should also regulate conflicts of interest, voting thresholds, deadlocks and the process to be followed when shareholders can no longer work together.

The Companies Act provides the framework, but the MOI, shareholders’ agreement and delegation of authority policy must turn that framework into something that works for the particular business.

Ownership, management and oversight are connected, but they are not the same thing. Draw the lines clearly while relationships are still good. If you wait until the shareholders are fighting, every uncertainty becomes another battlefield.

If your company’s governance structure does not clearly distinguish between shareholder, board and management powers, book a consultation with Van Zyl Scheepers Attorneys. We design and implement governance documents that work legally and practically, allowing business owners to focus on building sustainable companies that can withstand internal disputes.