Distribution of Power between Members, Shareholders and Directors in England Formation Company


Before setting up a company UK it is necessary to understand the distribution of authorities and the way a company is structured in relation to power allotment. The power of the company is given either to the members or to the directors. This article discusses the split of power in an England formation company.

Shareholders and Directors of a Company

Shareholders play a crucial role in company’s decision making process. They are given different rights by the Companies Act. Shareholders are generally the members of the company. However, the role of shareholders is assumed limited by the Companies Act 2006 and the articles of association of a company. Another integral part of Great Britain company register is the board of directors. The directors are generally responsible for managing the companies and taking decisions that are beneficial for the company.

Authorities of Shareholders over Directors

The Companies Act 2006 gives its members rights that are not given to the directors in certain important decisions. The purpose for acknowledging such right to the members is that, in situations where there is a high risk of directors misusing any power left with them, there is some security given to the company. So there are some types of contracts and agreements that can be approved only by the members and not by the directors. Additionally, members also possess the authority of making amendments in the articles of association of a company. Also, the rights that are linked with their shares can be changed by them. The members are given a benefit over the directors. They can remove any director. Also, in situations where the company has been wronged by someone and the directors are reluctant in pursuing the claim, the members are allowed to pursue a claim on behalf of their company.

Constitutional Rights of Members

Apart from all the above mentioned rights, the members also have the rights that are bestowed upon them by the company itself. The constitution of a company, that is also known as the articles of association is responsible for dividing the authorities between the directors and the members. According to subsection 17 and 18 of Companies Act 2006, for a Great Britain company register the main document of constitution are its articles. The framework of constitution is outlined by the articles. It is an open choice for the companies of how to devise their constitution. However, Model Articles in Companies Act 2006 provide an idea for the constitution of different kinds of companies. If a company has not registered its own constitution, the Model Articles will be applicable on the company as its replacement. They will remain applicable to an extent that the relevant rules in the Model Articles have not been modified or excluded by the registered articles of the company, as mentioned in Companies Act 2006 Section 20.

Model Articles for Private Companies limited by Shares

The private companies that are be limited by shares have Model Articles that focus more on the rulings regarding the arrangement of the members’ meetings. They include appointing directors or terminating them, the responsibilities bestowed upon the directors and their proceedings, the power delegated, issuing shares and paying the dividends, and utilising the seal of the company. It is assumed by these Model Articles that the company is rather managed by the directors than the members. However, this assumption may be subjected to any exceptional ruling given by the 2006 version of Companies Act. As in the case of Barron v Potter. These Model Articles of private limited companies may be considered as the typical Model Articles for the small companies.

Two Organ Concept

A company may be assumed to have two organs. One of them is the directors and the second one is the members. Although the distribution of powers between members and directors is quite unequal, yet, they form the most important part of the company. These two organs are authorised to act as the company rather than acting as the agents of the company. As mentioned in the case of Meridian by Lord Hoffman. The most significant authorities of the corporate body are distributed between these two organs. The single member companies, the subsidiaries that are wholly owned and the companies that only include one director are exceptions. The members constitute the organ in the form of general meetings. Whereas the organ of the directors is the board of directors.  Hence, these organs pay attention to meetings for any decision making. For best company formation UK the decisions that are made for a company matter a lot.

Meetings of Members

Meetings help to know the views and will of the members in terms of different matters of a company. In past, the meetings of the members were mostly attended by a good majority and there would be an active and healthy debate along with voting in the meetings. However, at present, the meetings of small scale companies if held, are carried out with no real interest. In case of large companies, the meetings held are not attended well.  It has been recognised by the Model Articles and the Companies Act 2006. They provide solutions such as alternative ways of making decisions to the meetings. However, the old concepts cannot be left behind that easily. The courts and the reformers of legislation have tried hard to maintain the ideal democratic legacy while dealing with the corporates.

Power Distribution of Corporation between Members and Directors

It is quite evident from the articles of association and the law that the authority to administer a company lies with the directors of the company. Similarly, the members have been given a smaller role to play in the governance of a company, which as mentioned above includes amending the articles, removing directors, declaring any dividend, demanding directors’ or auditors’ election or in certain scenarios re-election. It may be possible that the only role that they play is of rubberstamping the suggestions given by the directors.

Role of Member as a Passive Investor

It is an unfortunate fact that the role of members is rather turning into an investor who acts passively in the matters of the company. The directors in general and executive directors in particular are being given most of the powers of the company.  The more dispersed the memberships or the shareholdings are in a company, the more likely it is to have a difference between the hold of the company and the ownership. The developing institutional members, for instance, the funding via pensions, trusts, companies offering insurances and buy-out funds have reversed this tradition. However, such development has brought in problems as well.

Split of Ownership and Control

There is a separation between the ownership and control. It has led to numerous discussions in literature on questions like:

  • How will the members make sure that the company is run by the executive as per the will of the members?

But, if the majority authorities are given to the members, this will have its own negative consequences as well. Hence, concentrating most of the powers in the hands of the company has resulted in greater efficiency and hiring of people who are more devoted and have expertise in managing the business.

Reformer of Legislation and Shareholder Authorities

Lobbies have been formed by the reformers, who are encouraged by both the ideal concept of democracy of shareholders and the fact that giving the authority to directors makes them too controlling over the finance of other people, which is sometimes subjected to misuse, to formulate a new law that carefully tries to give the members a greater share in the authorities of a company. Since the Act of 1948, it has been made mandatory to acquire the approval of the members regarding some decisions. The procedural requirements are specified and if anyone fails to abide by these, he has to face severe penalties. Complying with these procedural requirements becomes costly both in terms of time and finance. In North-America, the reformers have given some leniency and allowed to reduce the consents of members required to make the business run more efficiently.

Solution of Concentrated Power in European Companies

In relation to the matters of European Companies, especially in the case of German companies, the problems related to the unequal division of power and power concentration with the directors, have been provided different solutions. The structure of such companies have its basis on the two tier formation of the company. The first tier is the management which includes the board of directors and the second tier is the board of supervision, of which, the former has to take care of the routine matters of the company and the latter tier is responsible for administering the executive board. The second tier is also authorised to make appointments and remove the personnel of the first tier. In Germany, these boards of supervision also have the charge to make an assurance about the participation of workers in the administration or codetermination. In most of the public companies of Germany, the selection of one third of the members of the board of supervision is done by the employees, where as the rest are chosen by the members. 

5th Directive of EU Company Law

The original form of the fifth EU directive of company law, had proposed that all the public companies belonging to the members of the EU must incorporate this two tier structure. If the United Kingdom had embraced this structure, it would have added another organ in the former structure of the companies registered in the United Kingdom. Moreover, it would have required to recheck the rules that are given by the cases which are currently relied upon. As a consequence of the proposal, the idea was rejected by many governments. A compromise was finally made regarding the SEs which permitted the Great Britain to maintain their former system.

Concerns related to the Interests of the Employees 

The interests of the employees have been given a limited attention by the Companies Acts. Some provisions of this act relate to the interests of the employees, for instance, Section 172 of Companies Act 2006 which presents the idea that directors should give some regard to the interests of the employees via the responsibilities assigned to them so that the company becomes successful. Also Section 247 of Companies Act 2006 and Section 187 Insolvency Act 1986, states about the authorisation of the employees to make over the belongings of the company at the time of winding up the company or in case of ending the business. The annual report given by the directors must include the basic information about the extent the employees were involved in the matters of the company and the policies that the company maintains about hiring. The laws for taxation have incentives for establishing the schemes for ownership of shares for the employees. These are quite common now.

Conclusion

The overall view of the distribution of power between directors and members shows that the directors are fortunate in terms of authorities. Their reign of power is stronger than the members. However, it may seem unjust at the first sight, but if the problems raised by authorising the members is analysed in detail, one may become more inclined towards giving more authorities to the board of directors. The correct distribution of the powers of a company help in governing the conduct of the company. For a sound and systematic working of the company it is important to divide the powers wisely while designing the constitution of the company. Any company will be given the status of best company formation UK if the owners take good care of the power distribution in the company.

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