Business Law: Who is the boss in limited firms?

Max Harnden of Gotelee Solicitors

Max Harnden of Gotelee Solicitors - Credit: Archant

Gotelee’s Max Harnden on corporate separation of powers in private limited companies

It is the shareholders that delegate the running of the company to its directors, and that authority is enshrined in the articles. If the powers of management are vested in those directors, they alone can exercise those powers. Shareholders cannot usurp the powers vested in the directors, so it is not open for shareholders at a general meeting to make a decision inconsistent with the delegation of management.

Shareholders will nevertheless be concerned with assessing the profitability of their investment and it is important to the company’s stability that shareholders continue to hold shares. Decisions made by directors determine what shareholders can expect in terms of dividends, profits and capital growth reflected through the price of their shares. Shareholders are entitled to evaluate their investment and make a judgement on the competence of directors. Although difficult to inhibit the powers of directors, shareholders do have an ultimate power to remove any director under the Companies Act 2006. In the absence of a sole director being vested with the power to run the company on a day to day basis, the delegation of power is made to the directors acting collegiately at a valid board meeting.

In practice, the board will usually delegate its powers to a managing director. Still, that delegation is limited to commercial decisions and would not, say, include the power to suspend a fellow director. All directors must be given notice of the meeting and should disclose the time and place of the meeting. Reasonable notice of board meetings should be given to directors. In the case of emergency, short notice can suffice. If the number of directors is less than the quorum required, the directors are not at liberty to take any decision other than one to appoint further directors or call a general meeting for the shareholders to appoint further directors. The directors may be the boss but they must act for the benefit of the company. There lies the separation of powers and with it the importance attached to accountability.

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