Learning Outcomes
This article outlines the distinct roles and responsibilities of directors, shareholders (members), and people with significant control (PSCs) within private limited companies. It covers key aspects of their appointment, removal, duties, and rights as defined by the Companies Act 2006 and relevant model articles. Upon completion, you should understand the fundamental governance structure involving management by directors and ownership by shareholders, including shareholder decision-making processes and the transparency requirements related to PSCs, enabling application to SQE1 assessment questions.
SQE1 Syllabus
For SQE1, you are required to understand the practical implications of the roles and responsibilities within a company. You will need to apply your knowledge of directors' appointment, removal, and duties, shareholder rights and decision-making mechanisms, and the rules surrounding People with Significant Control (PSCs) to various scenarios.
As you work through this article, remember to pay particular attention in your revision to:
- the processes for appointing and removing directors
- the core statutory duties directors owe to the company
- the distinction between the roles of directors and shareholders
- shareholder resolution types (ordinary and special) and decision-making procedures
- the criteria for identifying PSCs and the associated registration duties.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- Can a director of a private limited company be removed from office by a written resolution of the shareholders?
- Identify the statutory duty under the Companies Act 2006 that requires a director to act in the way they consider, in good faith, would be most likely to advance the company's success for the benefit of its members as a whole.
- What is the minimum percentage shareholding required for an individual to be classified as a Person with Significant Control (PSC) based solely on share ownership?
- True or false? A company must have at least two directors at all times.
Introduction
Within a private limited company, specific roles carry distinct legal responsibilities and powers. The directors are entrusted with the management of the company's business. The shareholders (also known as members) are the owners of the company, exercising ultimate control through voting. Additionally, transparency regulations require companies to identify and maintain records of People with Significant Control (PSCs). Understanding the legal framework governing these roles, as primarily set out in the Companies Act 2006 (CA 2006) and often supplemented by the company’s articles of association, is essential for advising clients and managing corporate governance.
Directors
Directors are appointed to manage the company's business affairs. Collectively, they form the board of directors.
Key Term: Director
A person occupying the position of director, irrespective of the title used (s 250 CA 2006). This includes formally appointed directors (de jure), those acting as directors without formal appointment (de facto), and potentially shadow directors.
Appointment
The first directors are identified in the incorporation documents (Form IN01). Subsequent appointments are typically governed by the company's articles. The Model Articles for private companies limited by shares (MAs) permit appointment by either an ordinary resolution of the shareholders or by a decision of the existing directors (MA 17).
A private company needs at least one director (s 154(1) CA 2006), who must be a natural person (s 155 CA 2006) and at least 16 years old (s 157 CA 2006). Companies House must be notified of appointments using Form AP01 (for individuals) or AP02 (for corporate directors) within 14 days (s 167 CA 2006). The company must also maintain a register of directors (s 162 CA 2006) and a register of directors' residential addresses (s 165 CA 2006), though the latter is not public.
Types of Directors
While the CA 2006 primarily refers to 'directors', distinctions exist:
Key Term: De Facto Director
A person who acts as a director and assumes the responsibilities of the position without having been validly appointed. They are subject to the same duties and liabilities as a formally appointed director.Key Term: Shadow Director
A person in accordance with whose directions or instructions the directors of the company are accustomed to act (s 251(1) CA 2006). This does not typically include professional advisers acting in their professional capacity (s 251(2) CA 2006).
Other common descriptions include executive directors (involved in day-to-day management, often employees) and non-executive directors (providing oversight and independent judgment, not usually employees).
Directors' Duties
Directors owe statutory duties to the company (s 170 CA 2006). The main duties under ss 171–177 CA 2006 are:
- Duty to act within powers (s 171): Act in accordance with the company's constitution and exercise powers only for their intended purposes.
- Duty to advance the success of the company (s 172): Act in good faith to advance the company's success for the benefit of the members as a whole, considering various stakeholder factors.
- Duty to exercise independent judgment (s 173): Make decisions independently, not subordinating their judgment to others improperly.
- Duty to exercise reasonable care, skill, and diligence (s 174): Meet the standard of a reasonably diligent person with the general knowledge expected of a director and their own specific knowledge and experience.
- Duty to avoid conflicts of interest (s 175): Avoid situations where personal interests conflict, or could conflict, with the company's interests.
- Duty not to accept benefits from third parties (s 176): Prohibits accepting benefits conferred because of their directorship which might reasonably create a conflict.
- Duty to declare interest in proposed/existing transactions (s 177/s 182): Disclose any personal interest in transactions or arrangements with the company to the board.
Breach of these duties can lead to personal liability towards the company (e.g., damages, accounting for profits). Shareholders may ratify certain breaches by ordinary resolution (s 239 CA 2006).
Worked Example 1.1
Alpha Ltd has adopted the Model Articles. Its board consists of three directors: Ben, Chloe, and David. Ben proposes that Alpha Ltd enter into a contract to purchase IT equipment from IT Solutions Ltd, a company in which Ben's spouse holds all the shares. Ben declares his indirect interest to Chloe and David at the board meeting. Can Ben vote on the resolution to approve the contract?
Answer: No. Under MA 14(1), Ben is interested in the proposed transaction with the company. Therefore, he cannot vote on the resolution nor count towards the quorum for that specific resolution. For the resolution to pass, both Chloe and David would need to be present (to meet the quorum requirement of two under MA 11(2)) and vote in favour.
Removal
Shareholders can remove a director by ordinary resolution at a general meeting (s 168 CA 2006), regardless of any provision in the articles or the director's service contract. Special notice (28 clear days) is required for such a resolution (s 312 CA 2006). The director has the right to make representations and speak at the meeting (s 169 CA 2006). The written resolution procedure cannot be used (s 288(2)(a) CA 2006). Companies House must be notified of the removal (Form TM01) within 14 days (s 167 CA 2006).
Shareholders (Members)
Shareholders are the owners of the company, holding shares that represent their stake.
Key Term: Shareholder
A person whose name is entered in the company's register of members (s 112 CA 2006). They own shares in the company. Also referred to as a member.
Rights
Shareholders have rights conferred by the CA 2006 and the company's articles. These typically include:
- The right to vote on shareholder resolutions.
- The right to receive dividends if declared.
- The right to receive information, such as notices of general meetings and annual accounts.
- The right to inspect certain company records (e.g., register of members).
- Statutory pre-emption rights on the issue of new shares for cash (subject to exceptions/disapplication).
Decision-Making
Shareholders make key decisions through resolutions, either at general meetings (GMs) or, for private companies, via written resolutions.
Key Term: Ordinary Resolution
Requires a simple majority (more than 50%) of votes cast (s 282 CA 2006).Key Term: Special Resolution
Requires a majority of not less than 75% of votes cast (s 283 CA 2006).
Special resolutions are needed for more significant matters like amending the articles (s 21 CA 2006) or changing the company name (s 77 CA 2006). Ordinary resolutions suffice for matters like removing a director (s 168 CA 2006).
Worked Example 1.2
Beta Ltd needs shareholder approval for a decision requiring an ordinary resolution. At a general meeting, 60% of the shareholders (by voting rights) attend. Of those attending, 55% vote in favour. Has the resolution passed?
Answer: Yes. An ordinary resolution requires a simple majority (more than 50%) of the votes cast by those attending and voting at the meeting. Since 55% of those voting were in favour, the resolution has passed. The percentage of total shareholders attending is irrelevant for this calculation.
People with Significant Control (PSCs)
The PSC regime aims to strengthen corporate transparency by requiring companies to identify and record information about individuals and certain legal entities who own or control them.
Key Term: Person with Significant Control (PSC)
An individual or registrable relevant legal entity (RLE) meeting one or more specified conditions under Part 21A CA 2006 concerning share ownership, voting rights, control over the board, or significant influence or control.
PSC Conditions
An individual or RLE is a PSC if they meet any of the following conditions (s 790C CA 2006):
- Directly or indirectly holds more than 25% of the shares.
- Directly or indirectly holds more than 25% of the voting rights.
- Directly or indirectly holds the right to appoint or remove a majority of the board of directors.
- Has the right to exercise, or actually exercises, significant influence or control over the company.
- Has the right to exercise, or actually exercises, significant influence or control over a trust or firm which itself meets one of the first four conditions.
Registration and Disclosure
Companies (unless exempt) must take reasonable steps to identify their PSCs and RLEs, obtain the required information, and maintain a PSC register (s 790M CA 2006). This information must also be confirmed annually via the confirmation statement filed at Companies House. Changes must be notified to Companies House using the relevant PSC forms (PSC01-PSC09) within specified time limits.
Exam Warning
The thresholds for PSC status are precise. Holding exactly 25% of shares or voting rights is not sufficient to meet conditions 1 or 2; it must be more than 25%. Carefully analyse shareholding and voting percentages in exam scenarios.
Key Point Checklist
This article has covered the following key knowledge points:
- Directors are responsible for managing the company's business and owe statutory duties (ss 171-177 CA 2006) to the company.
- Directors can be appointed by shareholders or the board (MA 17) and removed by shareholders via ordinary resolution (s 168 CA 2006), requiring special notice.
- Shareholders own the company and make key decisions by passing ordinary or special resolutions, either at general meetings or (for private companies) by written resolution.
- Core shareholder rights include voting, dividends, and information access.
- Companies must identify and keep a register of their People with Significant Control (PSCs), based on thresholds relating to shares, voting rights, director appointments, or significant influence/control.
- PSC information must be filed and kept up-to-date at Companies House.
Key Terms and Concepts
- Director
- De Facto Director
- Shadow Director
- Shareholder
- Ordinary Resolution
- Special Resolution
- Person with Significant Control (PSC)
