This article seeks to explain a seemingly simple area, which is, however, not understood by many people. With respect, many people tend to confuse the role and rights of directors and shareholders with some mistakenly interchanging the two stakeholders.
There appears to be confusion as to whether there is a distinction between a shareholder and a director of a company. This, in part, could be due to the fact that upon forming a company, shareholders (also called members) are the subscribers or first shareholders and usually the founding directors even though changes may be made later.
Shareholders and directors including their roles in a business are distinct. Ordinary shareholders own the business and have residual interest after preference shareholders and debt financing. On the other hand, directors are appointed by the shareholders and carry out an oversight role in the management of the affairs of the company.
In most cases, unless required by a company’s Articles of Association, a director does not need to be a shareholder nor does a shareholder necessarily become a director. In interpreting company law it is advisable to refer to the Companies and Other Business Entities Act (Chapter 24:31) or (“the Act”) and the company’s Articles of Association.
Ordinary shareholders invest in a company by purchasing shares. Each share represents part ownership of the company. Through owning shares, shareholders are entitled to make and vote on certain company decisions and to receive dividends. Shareholders appoint directors. The directors, acting collegially, appoint management to run the day-to-day affairs of the company.
Shareholders make decisions on the company by holding and voting at annual general meetings (“AGMs”) or extraordinary general meetings (“EGMs). According to section 167(5) of the Act, an AGM shall deal with items such as electing board of directors, directors’ compensation, directors’ responsibilities and activities, audited financial statements and audit reports, appointing external auditors and setting their fees for the ensuing year, dividends, borrowings, etc.
Traditionally, or as per company’s Articles of Association, shareholders may also deal with authorising substantial company transactions, changing nature of business, authorising directors to allot shares, etc.
Directors can be classified into executive and non- executive directors. Executive directors are employees of the company whereas non-executive directors are not. Executive directors may include the chief executive officer or managing director, with variations in titles, and his or her direct reports such as the chief operating officer, chief finance officer, operations director, with many variations.
As explained above the board of directors make decisions collectively. Ordinarily a board is known to play an oversight role by giving strategic and policy direction to management and reviewing implementation thereof. Executive directors are usually tasked with implementation of board decisions or resolutions. A companies’ directors are listed in its CR6, formerly CR14.
According to the Act directors have the duty:
Section 54, to act in good faith, in the best interests of the company and with care, skill and attention that a diligent business person would exercise in the circumstances.
Section 55, of loyalty to the company,
Section 57, to disclose conflict of interest.
Section 195(4), to exercise independent judgment and to act within the powers of the company in a way that he or she considers, in good faith, to promote the success of the company for the benefit of its shareholders as a whole.
The above is consistent with the common law fiduciary duties of directors.
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows Hofisi is a legal practitioner, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and tax. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]