Directors, shareholders, company secretaries and persons of significant control (PSCs) have roles within a company that are dealt with in the Companies Act. It should be noted that either a person or a corporation (a corporation being a legal person, such as a company or a partnership, in contrast to a natural person who is seen as an individual) can have one or more of these roles.
Directors are employed by a limited company and are responsible for its management and ensuring that it meets its legal obligations. Each company must have at least one director. Directors are appointed by the shareholders of a company who exercise control over the company (appointment of directors are usually delegated to the board of directors by the shareholders, but shareholders have ultimate control). The directors have a fiduciary duty to a company and its shareholders.
UK company law makes the following eligible to be a director of a UK-registered company:
- Any person aged 16 or more, even if they are not a UK resident;
- A corporation, whether they are registered in the UK or overseas, providing there is at least one other director who is a natural person.
However, the following are not eligible to become directors of a UK-registered company:
- A person who is an undischarged bankrupt;
- A person who is disqualified from being a director.
The functions of a director have been explained below:
- To manage the day-to-day operations of a company on behalf of its owners (the shareholders);
- To ensure that a company meets its statutory obligations, including updating its public records at Companies House, preparing its accounts and filing annual confirmation statements;
- To ensure that the company complies with the law.
Shareholders are the collective owners of a company. A shareholder can be an individual, an employee or another corporate body. Quite often, shareholders of large companies are trustees acting on behalf of a group of employees or their pension funds. Individual employees are often rewarded with shares in their employer as a bonus; this aligns the interests of the company with the interests of its employees.
A shareholder’s stake is represented by the number of shares they hold in a company. For example, if a company has issued 1000 shares and Shareholder A has 100 shares, then Shareholder A owns 10% of that company.
It should be noted that shareholders are not involved in the management of a company. They are responsible for appointing a board of directors for that purpose or, if the company is very small, just one director. However, shareholders can also be appointed as directors of a company and, in such a case, will be responsible for managing the company in their capacity as directors.
Shareholders exercise their authority over the board of directors by passing resolutions. Ordinary resolutions are passed by a simple majority of shareholders, i.e. by shareholders who own more than 50% of the company. Special resolutions, however, require a 75% majority to be passed. For this reason, careful consideration should be given to the shares that are issued when a company is formed and how these shares are distributed if there is more than one shareholder. Only shareholdings of over 75% of the issued capital can guarantee complete control of a company.
Shares in a company are assets that can be sold in part or in full, provided that the Articles of Association or shareholders’ agreements don’t restrict the sale of shares. The profits of a company are given to the shareholders when the directors declare and pay dividends.
Limited companies are no longer legally required to appoint a company secretary unless the company is a PLC ( a company whose shares can be sold to members of the public and whose allotted share capital is at least £50,000, of which 25% has been paid up).
The company secretary is the compliance officer of a company and is assigned various duties according to the Companies Act.
It should be noted that the Companies Act does not set out the work of a company secretary, but their duties usually include the following:
- Maintaining the statutory books (usually in electronic format these days). These include the following:
- A register of past and present directors and company secretaries
- A register of shareholders and their holdings.
- A register of debenture holders and other charges on the assets of the company
- Minutes of general meetings of shareholders
- Minutes of directors’ meetings.
- Filing annual confirmation statements with Companies House;
- Filing the required financial statements with Companies House;
- Arranging and recording meetings of directors and shareholders;
- Updating Companies House regarding any changes to the company and its statutory records.
Persons of Significant Control (PSC) and Registrable Relevant Legal Entity (RLE)
A PSC is an individual and must be entered on a company’s register as a “registrable person”.
An RLE, on the other hand, is a corporate body that meets the criteria of a PSC. This body must be registered with the company. However, a corporate body can only be entered on the PSC register if it is subject to its own disclosure requirements due to the following:
- It is required to maintain its own PSC register;
- It is subject to the Financial Conduct Authority’s disclosure and transparency regime (a “DTR5 issuer”); or
- It possesses voting shares admitted to trading on a regulated market in the UK or another EEA state or in a specific market in the USA, Japan, Switzerland or Israel.
A PSC or an RLE (whether an individual or company or any other legal entity) that exercises control over a company by virtue of their direct or indirect shareholding in that company, not by virtue of their directorship.
LLPs and all companies that are not listed companies (i.e., companies whose shares are traded on an official stock exchange) need to include information about their PSCs in their annual confirmation statements. These institutions must also include a register of PSCs in their statutory books.
For an individual, company or other legal entity to be classified as a PSC, they must meet the following conditions:
- They must own more than 25% of a company’s issued share capital, either directly or indirectly;
- They must own more than 25% of a company’s voting rights, either directly or indirectly;
- They must have the right to appoint the majority of the board of directors, either directly or indirectly;
- They must have the right to exercise significant influence or control over the company;
- They must have the right to exercise significant influence or control over the activities of a trust or firm that is not a legal entity but would itself satisfy the first four conditions if it were an individual.
The PSC rules were introduced to increase corporate transparency so that the true owners of a company could be identified. Prior to introducing these rules, it was very easy for the true owners of a company to hide behind nominee shareholders and offshore companies. It should be noted that failure to declare PSCs is considered a criminal offence.
Companies House has provided the following examples of how control and influence can be exercised:
- A person can direct the activities of a company, trust or firm;
- A person can ensure that a company, trust or firm generally adopts the activities they desire;
- A person can possess absolute rights over decisions pertaining to the operations of a company; for example, these decisions can relate to the following:
- Adopting or amending the company’s business plan,
- Changing the nature of the company’s business,
- Making additional borrowings from lenders,
- Appointing or removing the CEO,
- Establishing or amending any profit-sharing, bonus or other incentive scheme of any nature for directors or employees,
- Granting options under a share option or other share-based incentive scheme
- A person can have absolute veto rights over decisions about operating the business of a company, such as adopting or amending the company’s business plan or making additional borrowings from lenders;
- A person can hold absolute veto rights pertaining to appointing the majority of directors, i.e. those directors who hold a majority of the voting rights at a board meeting on all or substantially all matters;
- A person who is not a member of the board of directors can regularly or consistently direct or influence a significant section of the board and can be regularly consulted on board decisions; their views can also influence decisions made by the board;
- A company founder who no longer has a significant shareholding in the company they started can recommend other shareholders on how to vote, and those recommendations are always or almost always followed.