In a company, the roles of director, officer and shareholder can sometimes overlap, creating areas of confusion as to who has the power to make which decisions. All the more so when these roles fall to the same person. Understanding these respective roles helps you to identify in which capacity or with which hat you are making a decision, and to answer the famous question: what happens if business partners disagree?
The directors form a body called the “Board of Directors”. Decisions taken by the directors are not taken individually, but collectively by this Board in the interests of the corporation. These decisions are taken during Board meetings (or by written resolutions acting as meetings). Essentially, the Board of Directors is the body through which the company acts and functions. Subject to a delegation of authority, a director has no separate individual rights or powers.
In contrast, shareholders represent their own interests. When they are called upon to vote, they do so individually and in the light of the information provided to them by the Board of Directors. It is therefore not strictly a decision-making body, but rather investors (owners of the corporation) who ensure the long-term viability of their investment.
For their part, officers often bear the title of president, vice-president, secretary or treasurer. They are appointed by the Board of Directors, which at the same time delegates certain powers to them. Officers’ duties may therefore vary according to this delegation or to the company’s by-laws. In general, they are entrusted with the day-to-day management of the company.
Decisions taken by directors or officers :
To determine whether a decision should be taken by your company’s directors and officers rather than by the shareholders, you can ask yourself the following question: is it an operational decision (management of the company’s business and affairs), a strategic decision affecting the company’s direction, such as the issue of shares or dividends, or an action committing the company to a third party? If the answer is yes, in most cases the decision will rest with your company’s directors or officers.
A second distinction must be made between decisions that must necessarily be taken by the Board of Directors, and those that are generally made by a single director or officer by virtue of his or her mandate and delegated powers. In other words, certain more significant decisions must be taken by the Board of Directors itself, and are not, or cannot be, delegated. This is the case, for example, with decisions to issue new shares, issue dividends, approve share transfers, shares redemption, appoint officers and approve financial statements.
In contrast, decisions relating to the management of the company’s internal affairs will in most cases be taken by a director or officer alone. Decisions that are more akin to those taken by a senior officer of a company are generally decisions that fall to officers or directors acting alone. For example, signing contracts with suppliers or customers, hiring employees, etc., are decisions which, provided they are within the limits of his or her mandate, derive from the power of representation of an officer or director acting alone.
An important distinction must be made, however, with banking decisions, notably the borrowing of funds and the granting of security by the corporation. Although ratified by a officer or director, these decisions will in most cases have been authorized in advance by the Board of Directors itself. This is notably the case for the initial opening of the corporation’s bank account, which is authorized in advance by the Board of Directors.
Decisions taken by shareholders:
Shareholders can appoint or dismiss directors. This is their main power, given the importance of the decisions that directors can make. Generally, this election takes place at the annual general meeting. However, these directors can be dismissed at any time by a shareholder vote. Similarly, shareholders may also approve and amend the company’s by-laws. These by-laws specifically outline the powers of the company’s officers.
Otherwise, in the vast majority of cases where shareholders are called upon to vote, this vote serves to confirm decisions made by the board of directors rather than to initiate such decisions. This mechanism enables shareholders to retain a degree of control over directors’ decisions, and to ensure that their rights are respected.
Let’s take the example of a company that wishes to make changes to its share capital, thereby affecting the rights attached to the company’s shares. In this case, the initial decision to proceed with such a modification will be taken by the Board of Directors, and the shareholders will be called upon to vote to approve the modification. Their vote is not intended to initiate the change, but simply to protect their own interests as shareholders of the corporation. In short, shareholders will be able to participate in the corporations’s most important decisions by approving them.
The number of shares held in a corporation by an individual is often automatically associated with his or her number of votes. Although this is generally true in most situations, exceptions to this principle may be written into the articles of the corporation, and certain classes of shares may not have voting rights.
Furthermore, even if a person has majority shareholder status and is the sole director of the company, certain decisions taken by the company must be approved by special majorities of shareholders (2/3 of shareholder votes). When these decisions affect the rights conferred by a class of shares, a separate vote of the shareholders of each class is also required. This means that a shareholder who is the only one in his or her class and who does not normally benefit from voting rights could block the Board’s decision, despite the approval of the majority shareholder owning shares in another voting class.
Secondly, as briefly explained, most decisions for the corporation do not rest on the shoulders of shareholders, but rather on those of directors. While a significant number of these decisions must be approved by the corporation’s shareholders, the fact remains that these decisions are initially made by the directors, not the shareholders. Thus, given that a person may be a shareholder without being a director, or a majority shareholder without being the sole director, holding a majority of shares in the corporation does not translate into control over the decisions made by the Board of Directors.
Therefore, it is important to keep in mind that, when the time comes to draft a shareholders’ agreement, some of the desired voting modalities do not pertain to decisions within the purview of shareholders but rather those of the directors or officers of the corporation. It is therefore crucial to clearly define these modalities, and to specify in what capacity they will apply.
In the event of disagreement between two business partners in a company, it is crucial to determine the type of decision in question, and who is responsible for it. For example, if one partner wishes to issue new shares or take out a loan in the name of the company and is the sole director, they can proceed despite the refusal of their partner who is only a shareholder. Indeed, since these decisions do not require shareholder approval, the Board of Directors can take them without shareholder approval. The same applies if a decision clearly falls within the remit of one of the corporation’s officers.
Conversely, if both shareholders are also directors of the corporation, the Board of Directors may find itself at an impasse. Such an impasse can also arise in terms of their status as shareholders when they disagree on the approval of decisions taken by the Board of Directors, provided that both shareholders benefit from voting shares (with voting rights).
In such cases, a shareholders’ agreement is very useful. It can provide for a dispute resolution mechanism, obliging shareholders to seek mediation or professional advice in the event of conflict.
It is also possible to stipulate in the agreement that, regardless of the capacity in which the decision is made (shareholder, director or manager), one of the shareholders has a casting vote on certain issues. For example, if a shareholder is primarily responsible for corporate image or business direction, the agreement could stipulate that he or she has a casting vote on matters relating to these areas.
Decision impasses vary according to the specific circumstances of each company. By clearly identifying the origin of the decision or the role of the person involved (shareholder, director or manager), these situations can be better managed or anticipated. A thorough understanding of the different roles and decision-making mechanisms can prevent deadlocks and facilitate conflict resolution.
For more information on shareholder agreements, please consult the article available on our blog.
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