Company formation - Directors, shareholders, and people with...

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. In addition, you should be able to identify when shareholder approval is required for transactions with directors, distinguish between decisions for the board and decisions reserved to members, apply written resolution and short‑notice rules, and recognise PSC thresholds and filing obligations.

SQE1 Syllabus

For SQE1, you are required to understand the governance framework of private limited companies under the Companies Act 2006, including the roles of directors, shareholders, and people with significant control, with a focus on the following syllabus points:

• 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
• authorisations required for transactions with directors (substantial property transactions, loans, long-term service contracts, payments for loss of office)
• the mechanics and limits of written resolutions and short notice for general meetings
• conflicts of interest under the Model Articles (including MA 14) and disclosure under ss 177/182 CA 2006
• key company registers and Companies House filings (directors, PSCs, appointments/terminations)

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.

1. Can a director of a private limited company be removed from office by a written resolution of the shareholders?
2. 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.
3. 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?
4. 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.

The company is a separate legal person. This separation underpins the director–member divide: directors manage (MA 3 of the Model Articles for private companies limited by shares (MAs)), while members set the constitution and decide significant matters by resolution (e.g. changing the name or amending the articles). For premium-listed companies, governance expectations are further shaped by the UK Corporate Governance Code; for large private companies, the Wates Corporate Governance Principles encourage good practice. Although these codes do not impose legal sanctions, they influence how boards and owners structure decision‑making, independence, and oversight.

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.

In practice, boards should also minute appointments (s 248 CA 2006), update any internal registers, issue an appointment letter/service contract where relevant, and consider board architecture (chair, committees) to support oversight. Under MA 12–13, directors may appoint a chair and the chair has a casting vote unless amended in the articles. MA 11 sets the default quorum for board meetings at two, but MA 7 allows decisions of directors without a meeting and enables a sole director to take decisions, ensuring functionality in companies with a single director.

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). Non‑executive directors (NEDs) are significant in governance: they challenge and monitor management, and independence from executives is key. The UK Corporate Governance Code encourages a balance of executives and independent NEDs, and disclosure in the annual report of which directors are considered independent. Although not statutory for private companies, these governance expectations often inform best practice.

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).

In addition to these general duties, the CA 2006 imposes controls requiring shareholder approval for particular transactions with directors:

• Substantial property transactions (SPTs) (ss 190–196): If the company buys from or sells to a director (or connected person) a non‑cash asset that is substantial, prior member approval by ordinary resolution is required. An asset is “substantial” if it is valued at over £100,000, or over £5,000 and more than 10% of the company’s net asset value (s 191). Transactions without approval are voidable, and those involved may be liable to account and indemnify the company.
• Loans to directors and related security (ss 197–214): Loans to a director of the company or its holding company, or guarantees/security in connection with such loans, generally require prior member approval by ordinary resolution. There are limited exceptions, including small loans (not exceeding £10,000), and loans up to £50,000 for expenditure on company business or enabling proper performance of duties (subject to conditions).
• Long-term service contracts (s 188): A director’s service contract guaranteeing employment for a term longer than two years requires member approval by ordinary resolution.
• Payments for loss of office (ss 217–222): A payment for loss of office (unless legally required or de minimis) generally requires member approval. A de minimis exception applies for small payments (not exceeding £200). Failure to obtain approval may render the payment recoverable.

Directors must ensure appropriate board and member procedures, including circulating explanatory memoranda for members where required (e.g. for loans and long‑term service contracts), maintaining minutes, and filing any consequent changes.

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.

Worked Example 1.2

Gamma Ltd plans to sell a warehouse (book value £80,000; current value £120,000) to Zoe, a director, at market value. The latest balance sheet shows net assets of £900,000. Is member approval required and what resolution type applies?

Answer:
Yes. This is a substantial property transaction under s 190 because the warehouse is a non‑cash asset and its value exceeds £100,000 (s 191). Members must approve the transaction by ordinary resolution before the sale, or the sale must be conditional upon later approval. Without approval, the transaction is voidable and Zoe may be ordered to account for any gain and indemnify the company for any loss resulting from the transaction (s 195).

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).

Directors should be aware of potential personal exposures beyond the CA 2006: for instance, wrongful trading under s 214 Insolvency Act 1986 (continuing to trade when there was no reasonable prospect of avoiding insolvent liquidation without taking every step to minimise creditor loss), and director disqualification under the Company Directors Disqualification Act 1986 for misconduct. These support the duty under s 172 to consider creditor interests where insolvency is likely (s 172(3)).

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).

Other important member rights include the power to amend the articles by special resolution (s 21), call a general meeting by requisition where statutory thresholds are met (e.g. shareholders holding at least 5% can require directors to call a meeting: s 303), consent to short notice for a general meeting (s 307(4)–(6)), and to approve transactions requiring member authority (e.g. SPTs, loans to directors). Power is proportionate to voting control: holders of more than 25% can block a special resolution; more than 50% can pass an ordinary resolution; 75% or more can pass a special resolution; 90% in number holding at least 90% of voting rights can consent to short notice for private company meetings.

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).

At a general meeting, voting is typically on a show of hands (one vote per person) unless a poll is demanded, in which case votes are counted by share (s 321 CA 2006 and articles). Proxies may be appointed; notice of meetings to members is generally 14 clear days (s 307(1)), with short notice permitted in private companies if a majority in number holding at least 90% of the voting rights so agree (s 307(4)–(6)). Quorum requirements are set by the articles (commonly two qualifying persons; if the company has a single member, one qualifying person is sufficient).

Written resolutions are available to private companies (ss 288–297 CA 2006). They must be circulated to all eligible members, specify how to signify agreement, and include a lapse date (28 days unless the articles specify otherwise). The required majority is determined by reference to the total votes of eligible members: more than 50% for an ordinary resolution and not less than 75% for a special resolution (ss 282(2), 283(2)). Certain resolutions cannot be passed by written resolution, notably removal of a director (s 168) or auditor (s 511) (s 288(2)).

Worked Example 1.3

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.

Worked Example 1.4

Delta Ltd (a private company) wishes to hold a general meeting on short notice to approve a share buyback. There are five shareholders, each with voting rights as follows: A 60%, B 25%, C 10%, D 3%, E 2%. A, B and C consent to short notice. Is short‑notice consent effective?

Answer:
Yes. For a private company, short notice requires the consent of a majority in number of the shareholders who together hold at least 90% of the voting rights (s 307(5)–(6)). Three of five shareholders (a majority in number) have consented, and they together hold 95% of the voting rights. The statutory threshold is satisfied, so the meeting can be held on short notice.

Worked Example 1.5

Epsilon Ltd has three shareholders with one class of voting shares: F 60%, G 15%, H 25%. A written special resolution is circulated to amend the articles. F returns their agreement; G and H do not respond before the lapse date. Has the written special resolution passed?

Answer:
No. For written resolutions, the threshold is calculated across all eligible members’ votes, not just those who respond (ss 282(2), 283(2)). Only 60% of the eligible votes have been signified in favour; a special resolution requires not less than 75% of all eligible votes. The resolution has not passed.

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):

1. Directly or indirectly holds more than 25% of the shares.
2. Directly or indirectly holds more than 25% of the voting rights.
3. Directly or indirectly holds the right to appoint or remove a majority of the board of directors.
4. Has the right to exercise, or actually exercises, significant influence or control over the company.
5. 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.

“Significant influence or control” is fact‑sensitive. It can include rights that are not day‑to‑day management, such as a veto over budgets or business plans, or rights under a shareholders’ agreement enabling decisive influence over board composition or strategic direction. In group structures, a UK company that itself meets a condition (and is a registrable RLE) is entered on the PSC register rather than the individual controllers further up the chain.

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.

In practice:

• The company must update its internal PSC register within 14 days of becoming aware of a change, and deliver the relevant information to Companies House within a further 14 days. Information typically includes the PSC’s name, date of birth, nationality, country of residence, service address, usual residential address (not publicly available), date they became a PSC, and the nature of control.
• Companies subject to the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR5) have different obligations and may be exempt from maintaining a PSC register in the same way; always check the current exemptions.
• A company should issue statutory notices to suspected PSCs or other relevant persons if information is incomplete or unconfirmed. Persistent non‑compliance can lead to the company placing restrictions on the relevant shares (e.g. suspending voting or transfer) and may constitute a criminal offence for the company and the person failing to respond.

Worked Example 1.6

Zeta Ltd has four shareholders: A 30%, B 20%, C 25%, D 25%. A also has a contractual right to appoint two of three directors. Who must be entered on the PSC register?

Answer:
A must be entered as a PSC twice (nature of control covering conditions 1 and 3). A holds more than 25% of the shares and has the right to appoint/remove a majority of the board. B, C and D each have 25% or less, so they do not meet conditions 1 or 2. Unless they have other rights amounting to significant influence or control, they would not be PSCs on these facts.

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; removal cannot be effected by written resolution (s 288(2)).
• Board decisions are subject to the Model Articles (e.g. MA 3, MA 7, MA 11, MA 12–14); interested directors must not vote on transactions in which they are interested (MA 14).
• Transactions with directors may require prior member approval (SPTs under ss 190–196; loans under ss 197–214; long‑term service contracts under s 188; payments for loss of office under ss 217–222).
• 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, subject to statutory exclusions.
• Meeting mechanics matter: 14 clear days’ notice, short notice thresholds, quorum, proxies, show of hands versus poll, and written resolution lapse dates.
• Core shareholder rights include voting, dividends, information access, and statutory pre‑emption rights on cash issues (subject to exceptions or disapplication).
• 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; typical timelines are 14 days to update the register and a further 14 days to deliver changes to the registrar. Non‑compliance can attract sanctions and share restrictions.
• Companies must notify Companies House of director appointments and terminations (AP01/AP02/TM01) within 14 days and maintain statutory registers (including directors, members, and PSCs).

Key Terms and Concepts

• Director
• De Facto Director
• Shadow Director
• Shareholder
• Ordinary Resolution
• Special Resolution
• Person with Significant Control (PSC)