Company personnel
This article is based on UK law as at 1st April 2007, unless
otherwise stated.
Shareholders
For all companies with a share capital, the terms 'shareholders'
and 'members' are interchangeable. But whichever term is used, it
will refer to the person who has the legal ownership of a share –
that is the person who is shown in the company’s register of
members as holding the share. That person may just be a nominee and
be quite different from the person who has beneficial
ownership.
Legally, a company has had no need to pay regard to the
beneficial owners of its shares and it may be quite unaware of who
they are (although it may, in certain circumstances, be able to
force disclosure of their identity); it has concerned itself only
with those persons its register shows as being members.
Keen, however, to 'enhance shareholder engagement', the
government has changed the rules. Under the Companies Act 2006,
beneficial owners of shares (including anyone who owns shares
through a PEP, ISA or similar vehicle) are, with effect from
October 2007, able to exercise many of the rights attaching to
their shares.
For the rights of beneficial owners to be recognised:
- a company must amend its articles accordingly;
- the registered shareholder must 'nominate' the beneficial owner
who is to enjoy these rights.
If these provisos are not met, it remains the case that only
shareholders named in the register can vote, receive dividends and
exercise other shareholder rights. And only they can enforce rights
against the company; the beneficial owner cannot bring a direct
claim.
The shareholders are the owners of the company. They ultimately
control what it does by virtue of their ability to remove and
appoint directors and to change the articles. Their rights and
obligations as shareholders will usually be set out in the
articles, backed up by the Companies Act and the law as developed
by judges in decided cases. (For more information on the articles,
see our OUT-LAW guide to The company
constitution.)
There may also be a shareholders’ agreement that sets out terms
agreed between the shareholders; or in a 50:50 company, a joint
venture agreement that sets out how deadlocks between shareholders
are to be settled. A company that has received private equity or
venture capital funding may have an investment agreement that also
deals with the rights between various groups of shareholders. But
unlike the articles, these agreements will only bind those
shareholders who sign up to them originally or who do so when they
become shareholders and put their name to some form of deed of
adherence. The articles, by contrast, apply to all who have
acquired shares at any time, whether they have specifically agreed
to them or not.
Directors
Who exactly are the directors? Is it just those given the name,
or can it include others? The Companies Act 2006 (s.250) says that
'director' includes “any person occupying the position of director,
by whatever name called”. So you might be called 'governor' or
'trustee' and actually be a director. (Conversely, a director of
sales or general director might not be a member of the board at
all.) So it is the role you perform, not the title you are given,
that determines whether you are a director or not.
In some circumstances, references to a director may include a
'shadow director', someone defined as a “person in accordance with
whose directions or instructions the directors of a company are
accustomed to act” (Companies Act 2006, s.251(1)). Note that the
shadow director’s influence has to be over the whole board, or at
least a majority of it, not just one or two directors; and there
has to be some history of influence, not just an isolated
occurrence. Professional advisers, such as lawyers and accountants,
are specifically excluded, as are parent companies in certain
circumstances. But dominant shareholders, company doctors sent in
to implement a corporate recovery plan, and even banks seeking to
protect their loans to a company, are potential shadow
directors.
Not every reference in companies legislation to a director
covers a shadow director as well: there must be specific wording to
include a shadow director. Most importantly, a shadow director can
be liable for wrongful trading when a company becomes
insolvent.
In many smaller companies, directors will continue in office
until they voluntarily resign or are forcibly removed. Larger
companies and all listed companies will require directors to
'retire by rotation' at the AGM (for example, a third of the
directors might retire each year), and directors newly appointed by
the board must retire at the following AGM. They then stand for
re-election, when shareholders usually vote them back in. (In
November 2004, one notable exception to this was seen in Malcolm
Glazer’s battle to take control of Manchester United – he held
enough shares to defeat the resolution to re-appoint three of the
retiring directors.)
The Combined Code on Corporate Governance, applicable to listed
companies, requires that all directors, executive and
non-executive, should stand for re-election at least once every
three years.
Company secretary
All companies must have a secretary and, if there is only one
director, he or she cannot also be the secretary. That remains the
rule until April 2008, when private companies will be able to drop
the role if they wish. But if there is a job to be done and you
want to call the person who does it company secretary, you can
carry on as before.
With the increasing focus in recent years on corporate
governance, the role of the company secretary has grown in
importance. In many ways, the secretary is now seen as the guardian
of the company’s proper compliance with both the law and best
practice.
In a public company, the directors must take all reasonable
steps to have a secretary with particular previous experience or a
particular qualification or, as a catch all, one who appears “to
the directors to be capable of discharging” the functions of a
secretary because of previous experience or qualifications
(Companies Act 2006, s.273). In practice, secretaries of most
listed and AIM companies will have an appropriate formal
qualification. Private company secretaries (where they continue)
are not required to have any particular qualification or
experience.
The secretary can be appointed and removed by the directors,
though any related employment rights he or she might have should
not be forgotten. The Combined Code for listed companies makes it
clear that the dismissal of a company secretary should be a
question for the whole board, not just the chairman or chief
executive. That is consistent with today’s view that the secretary
is the servant of the entire board and, as such, might sometimes be
in the position of giving advice that is unpalatable to the
executive directors. In addition, all directors should have access
to the advice of the company secretary.
The secretary is an officer of the company and his or her duties
can be wide ranging. They are not all set out in companies
legislation and will differ from company to company. Useful
guidance notes on the duties of the secretary, however, can be
found on the website of the Institute of Chartered Secretaries and
Administrators (ICSA). As an officer of the company, the
secretary can bind the company in the same way as a director. Like
a director, he or she owes fiduciary duties to the company, must
act in good faith and avoid any conflict of interest.
Auditors
It used to be a requirement for every company to have auditors
who, each year, would examine and report on the company’s accounts
and confirm whether they complied with companies legislation and
whether they gave a 'true and fair view' of the company. More
recently, many smaller companies have been relieved of this
requirement, though they must still prepare and file accounts.
A detailed description of the duties of an auditor is beyond the
scope of this article, but it is worth noting that, if the auditor
fails in its duties, it may be liable for any loss the failure has
caused, both to the company and to its shareholders. In some cases,
it may also be liable to third parties who have relied on the audit
report – though recent case law has provided some limit on
auditors’ exposure.
Not surprisingly, since the collapse of Arthur Andersen as part
of the Enron scandal, and Equitable Life’s multi-million pound
claim against Ernst and Young (albeit unsuccessful), auditors have
been looking at ways to limit their liability. Until the Companies
Act 2006, any limitation in respect of an audit was void and
unenforceable. From April 2008, that changes, and an auditor will
be able to agree with a company each year a cap on its liability
for the audit. Not only must the finance director agree, but the
shareholders must approve the limitation at the AGM. Even then,
when any claim against the auditors comes to court, the judge can
substitute a higher amount if that would be 'fair and
reasonable'.
Auditors will always rightly point out that they do not prepare
the accounts on which they report: that is the job of the
directors. In practice, though, they may help smaller companies put
the accounts together – as a general rule, the smaller the
business, the greater the level of assistance.
The accountancy firms provide numerous services to their clients
above and beyond the basic audit. Governance principles suggest
that the auditor might have a conflict of interest in doing
commercial work in addition to its audit duties, and statute
requires that details of non-audit services are disclosed in the
annual report. At the same time, however, the involvement of
auditors has been extended with the requirement for them to check
some of the factual information in the directors’ remuneration
report (see the section on Directors'
remuneration issues).
Who hires and fires auditors? The directors appoint the first
auditors of a company and can fill any vacancy that arises between
general meetings. Apart from that, the auditors are appointed by a
resolution of shareholders at each annual general meeting, and
there are special notice provisions (see the OUT-LAW guide to
Company meetings) where the auditor to
be appointed is not the same firm appointed at the previous
AGM.
An auditor can be removed by ordinary resolution of the
shareholders but, again, there are special safeguards in the
legislation that have to be observed.
A resigning auditor must produce a statement setting out any
circumstances connected with the resignation that should be brought
to shareholders’ attention. Alternatively, if there are no such
circumstances, that fact must be stated. This is designed to
prevent auditors who are unhappy with any aspect of the accounts
departing quietly and keeping the problems to themselves. Concerns
must be stated frankly. Additional safeguards aim to protect the
company from the risk of defamatory material being circulated.
