In a private limited company, two distinct roles define how the business is owned and run: shareholders, who own the company, and directors, who manage it. While their roles are separate in law, in practice they often overlap – especially in smaller companies or joint ventures, where individuals may wear both hats. Understanding the distinction between the rights and responsibilities of each group is essential to avoid confusion, conflict and legal risk.
This article explores the difference between a director and a shareholder, highlights where tensions may arise and considers the impact of reserved matters and good faith obligations in joint venture arrangements.
1. Who are the shareholders?
Shareholders (or members) are the owners of the company. Their main role is to invest capital and exercise their rights as owners through votes and agreements. Unlike directors, shareholders do not manage the company’s day-to-day operations.
Key rights of shareholders include:
- appointing and removing directors
- approving significant decisions, such as changes to the company’s articles, approving a sale of the company or issuing new shares
- receiving dividends, when declared
- accessing certain company records (such as the statutory registers)
- voting on key matters (depending on share class and voting rights)
In most private companies, shareholders have limited involvement in the business unless they also serve as directors. Their power is usually exercised through ordinary or special resolutions, depending on the nature of the decision.
2. Who are the Directors?
Directors are appointed by shareholders to manage the company. They are responsible for the strategic and operational decisions of the business. In law, they owe a range of duties under the Companies Act 2006, which guide their conduct and decision-making.
Key duties of directors include:
- acting within their powers (i.e. as set out in the company’s articles of association)
- promoting the success of the company for the benefit of its members as a whole
- exercising independent judgment
- avoiding conflicts of interest
- not accepting benefits from third parties
- declaring interests in transactions or arrangements
These duties are owed to the company itself – not to individual shareholders, employees, or other stakeholders.
Accountability and enforcement of directors’ duties
Because these duties are owed to the company, it is generally the company itself – acting through the board or by shareholder resolution – that must bring any legal action for breach. Individual shareholders do not normally have the right to sue directors directly. However, in some situations, a shareholder may bring a derivative claim under the Companies Act 2006. This allows them to bring a claim on behalf of the company where the board is unwilling or unable to act – typically because the alleged wrongdoing involves the directors themselves. These claims are subject to strict court controls and must be shown to be in the company’s best interests.
3. Where roles can overlap (and why that matters)
In many private companies, particularly SMEs and family businesses, it is common for individuals to be both shareholders and directors. This can create practical efficiency but also legal risk, especially when the interests of the individual as an owner differ from their duties as a director.
Example: Conflict of interest
Suppose a director/shareholder wants to approve a transaction that benefits them personally but is not in the best interest of the company. As a director, they are legally required to act in the company’s interests, even if this conflicts with their position as a shareholder.
Example: Withdrawing profits
Shareholders are entitled to dividends, but only if properly declared. A director/shareholder cannot simply decide to extract funds from the business. Any such decision must comply with the Companies Act 2006 and their directors’ duties, including ensuring the company has sufficient distributable profits.
To manage these issues, companies often adopt shareholders’ agreements, which clarify rights, obligations, and procedures – especially where roles overlap.
4. Reserved matters and joint ventures
In joint ventures, where two or more parties collaborate through a limited company, the separation of powers between shareholders and directors becomes even more important. The parties will often negotiate a shareholders that sets out clear governance rules.
Reserved matters
Reserved matters are decisions that require shareholder approval, even though day-to-day management is delegated to the directors. These typically include:
- appointing or removing directors
- issuing new shares or changing share rights
- approving business plans or budgets
- making acquisitions or disposals over a certain value
- entering into significant contracts or loans
This structure helps ensure that key strategic or structural decisions remain under the control of the shareholders – the owners of the business. Crucially, reserved matters should require shareholder (not director) approval because directors are legally obliged to act in the best interests of the company as a whole, not individual shareholders. Where a matter involves commercial negotiation or a shift in shareholder rights or value, directors may not be best placed – legally or commercially – to decide. Requiring shareholder approval gives the owners direct control over issues that affect their investment and relationship.
Good faith obligations
In many joint venture agreements, the parties also agree to act in good faith towards each other. While this phrase has no fixed definition in English law, it usually implies a duty to:
- be honest in dealings
- avoid taking unfair advantage
- co-operate where required to achieve the purpose of the joint venture
Where a shareholder is also a director, this duty of good faith can overlap with directors’ fiduciary duties. If one party acts in bad faith (e.g. by withholding information, stalling key decisions, or acting opportunistically), this can undermine trust and lead to disputes.
5. Common areas of dispute
(i) shareholder deadlock
Where shareholders have equal voting rights and cannot agree on key decisions, the business can become paralysed. This is common in 50:50 joint ventures, especially where no mechanism exists to resolve a deadlock.
(ii) misuse of director powers
A director may act unilaterally on matters that require shareholder input – either out of ignorance or deliberately. This may lead to claims of breach of duty or invalid decision-making.
(iii) exclusion of minority shareholders
Majority shareholders (especially if they are also directors) may sideline minority shareholders, ignoring their rights or acting oppressively. This may give rise to an unfair prejudice claim under s994 of the Companies Act 2006.
(iv) personal interest vs company interest
Where individuals hold both roles, they may blur the line between personal gain and company interest. Without proper governance controls, this can erode trust and expose the business to risk.
6. How to manage the relationship
To reduce the risk of confusion or conflict between shareholders and directors, consider:
(a) clear company articles
Ensure the articles of association clearly set out the powers of directors and what matters require shareholder approval.
(b) shareholders’ agreements
Use a well-drafted shareholders’ agreement to define:
- reserved matters
- decision-making processes
- exit provisions and share transfers
- good faith obligations
- dispute resolution mechanisms
This is especially important in joint ventures or businesses with multiple founders.
(c) director training and awareness
Make sure directors understand their legal duties under the Companies Act. Even if someone has a financial stake in the business, their decisions as a director must put the company’s interests first.
(d) conflict of interest procedures
Use board resolutions, declarations of interest, and independent decision-making to manage conflicts transparently.
Final thoughts
While the legal roles of shareholders and directors are distinct, they often sit with the same people – particularly in private companies and joint ventures. This overlap can be productive but also problematic if not properly managed. Understanding where the duties diverge, and using tools like shareholders’ agreements and reserved matters, helps to keep the business legally sound and operationally effective.
At PaperRock Documents, we offer expertly drafted templates covering shareholders’ agreements, joint venture agreements, director appointment letters, and more – all written by English solicitors. Each template comes with clear guidance to help you get the detail right.
