Compliances

What is the Difference in Power of Shareholder and Director of a Company?

calendar16 May, 2023
timeReading Time: 8 Minutes
shareholder and Director

In most cases, the operation of a company is carried out with the participation of three primary parties: the shareholders, the board of directors, and the staff. The initial shareholder and director of a company are the only people who can hold the position of promoter for the company when it is first established. The owners of a company are referred to as its proprietors. They will receive a portion of the company’s earnings that is proportional to the amount of their shareholding in the company. On the other hand, it is the duty of the board of directors to make certain that the firm carries out its daily operations in accordance with applicable laws and in an efficient manner. Scroll down to check the difference in power between Shareholder and Director of a Company

Who is a Company Promoter?

Because you are a new firm, it is important that you be aware with the definitions of words such as “Promoter” and “Promoters” when they are used to describe a business. The individual(s) or entity(s) responsible for conceiving the concept of the enterprise, determining its intended line of business, and calculating the required initial capital outlay based on an evaluation of the company’s anticipated working capital requirements and capital expenditures for physical assets are known as the promoter(s) of the company.

Any individual who has direct or indirect influence on the company’s activity or whose orders are normally followed by the company’s Board of Directors is referred to as a “promoter” under Section 2 (69) of the Indian Companies Act, 2013. The promoters may be identified either as directors or owners, or both, according on their preferences. Any person who is named as a promoter in the company’s prospectus or annual report that is submitted in accordance with Section 92 is considered to be a promoter and is thus included in the definition of promoter.

Importance of Shareholders in a Company and the Value They Provide

In most cases, businesses have more than two proprietors, but in the case of a one-person business, there is only one owner. Companies typically have more than two proprietors. A private limited corporation may have as few as two shareholders or as many as 200 owners in total. The minimum number of shareholders is two. On the other hand, a limited liability company’s number of shareholders might range anywhere from seven to an infinite number of people. Prior to the official establishment of a company, the persons who sign a business’s Memorandum of Association and Articles of Association are referred to as subscribers. The MOA and AOA will continue to be binding on both parties even after they have left the firm. Because dividends are directly proportionate to the amount of company ownership in a corporation, shareholding is an extremely important aspect of the structure of a corporation. Only equity share capital is meant to be referred to as a “share” within the scope of this conversation.

The shareholders possess the highest level of power in the corporation and are in charge of choosing members to the board of directors. At the annual shareholders’ meeting, decisions are made by the shareholders themselves via the adoption of resolutions. The bulk of corporate decisions may be decided with a basic majority vote at shareholder meetings. However, the backing of three-quarters of the shareholders is necessary in order to make some choices that are very important. One hundred percent is the ratio that exists between a company’s voting power and its shareholding proportion.

An annual general meeting, often known as an AGM (also shortened AGM), is required to be called and held by a company at least once every year. At the annual general meeting (AGM), which is a statutory assembly of shareholders, shareholders are obligated to make at least these four choices.

Take into consideration, and you could even sign off on, the selection of auditors for the organisation. Consider and perhaps approve the rotating election of directors, Adopt (Grant Approval To) the Audited Records of Account for the Company, Make a public announcement of the dividend amount that will be distributed to shareholders.

The capacity to deliberate about anything and give it one’s blessing also includes the power to reject anything. The Annual General Meeting (AGM) could be postponed if there are problems that haven’t been settled during it. It is very necessary to ensure that a record of all shareholder decisions and resolutions is included in the minutes of the shareholder meeting. ROC is informed of the passing of shareholder resolutions that need the approval of at least 3/4 of the company’s shareholders when a copy of the shareholder resolution is filed on form MGT-14.

What Does It Mean to Serve on a Company’s Board of Directors?

As was said before, there is a distinct separation between the roles and duties of the different stakeholders. The majority of the responsibility for organising the firm’s investment or capital, as well as giving vision and direction, including important policy choices, falls on the shareholders. Nevertheless, it is the responsibility of the directors to ensure that the company’s goals are carried out and that the wealth of the investors and shareholders is increased. In today’s highly regulated economy, it is also the responsibility of the board of directors to ensure that the firm complies with any and all legislation that may be relevant.

The AOA stipulates that the shareholders are the ones who formally designate the company’s initial directors. A simple majority vote at a shareholders’ meeting is all that is required to remove a director from office. The directors will continue to serve in their positions until the shareholders are satisfied. A person is accountable for the rules and regulations that they must follow up to the point when they are promoted to the position of director.

Often referred to as the Board of Directors, the directors of a corporation assemble frequently to make operational decisions that affect the organisation as a whole. Every member of the board of directors is given one vote, and decisions are taken based on the outcome of the majority vote. As a company that specialises in compliance management, we are of the opinion that each director has a personal responsibility for ensuring that the company complies with all relevant rules and regulations due to the fact that their position entails a duty of care. Now let’s discuss the difference between the power of Shareholder and Director of a Company.

Difference between Shareholder and Director; Rights, Duties and Powers

The shareholder and director of a company are the parts of its organisational structure that bear the greatest weight and importance. They are dependent on one another to carry out their respective tasks in an effective and timely manner. Meetings are held to make choices, and resolutions and decisions share a strong and complex connection. It is crucial for the success of any organisation that its members get along well and work towards a similar aim. The following is the difference between shareholder and director of a Company.

  1. Appointment: the initial shareholders are the signatories of the company’s MOA and AOA, while the shareholders themselves are responsible for appointing the directors of the company. The issue of new shares in the company in return for monetary consideration allows the firm to acquire new owners. Subsequent appointments of directors are typically made by the shareholders at the company’s Extra-Ordinary General Meeting (EGM), following initial nominations by the company’s promoters in the company’s Articles of Association (AOA), which require the express consent of the proposed directors in Form DIR-2. This is typically the case following initial nominations by the company’s promoters in the company’s Articles of Association (AOA). Nevertheless, the Board of Directors has the authority to replace an interim vacancy caused by a director’s death or resignation without first obtaining agreement from the shareholders at an EGM. It is possible that the National Company Law Tribunal (NCLT)[1], the Central government, or financial institutions would be necessary to fill the role of business director in some circumstances.
  2. An Analytical Comparison of Individuals and Groups: A person, a limited liability partnership (LLP), another company, a collection of firms or conglomerate, a society, a trust, a section 8 corporation, the government, or any other artificial or legal organisation might be a shareholder. In contrast, a person’s presence is required to hold the position of director in a company.Significant obligations for the success of the company lie with each individual shareholder as well as each member of the board of directors. Shareholders are the company’s owners, whilst directors serve as the company’s administrators. It is possible for the same person to hold both jobs, provided that the rules of the firm do not stipulate otherwise.
  3. Responsibilities: The directors of a corporation are under no duty to invest their own money in the firm or to attend shareholder meetings like the annual general meeting (AGM) and the extraordinary general meeting (EGM). It is the duty of the company’s board of directors to ensure that the organisation complies with all laws and regulations that are relevant to the business.
  4. The Board of Directors is in charge of making decisions on the organization’s day-to-day operations and management. The shareholders of a business decide all of the important choices, such as whether or not to invest, whether or not to declare dividends, whether or not to alter the firm’s MOA or AOA, and who will serve on the board of directors.
  5. Shareholders are protected from personal responsibility for the obligations of the firm by the concept of limited liability. In spite of this, they are nonetheless accountable for paying any delinquent sums that are owing to the company’s subscribed share capital if the board of directors so decides. The board of directors is an important body that is tasked with determining the overall operations strategy for the organisation.
  6. The directors of a company are individually responsible for any breaches of relevant laws that are committed by the firm. If the government chooses to prosecute the filmmaker, the filmmaker will almost always be responsible for a significant fine; nevertheless, in some circumstances, the filmmaker may be sentenced to jail.
  7. According to the Companies Act, the maximum number of directors that may serve a company is 15, however the shareholders of the company have the ability to expand this number if they deem it essential. In contrast, the lowest number of shareholders required for a private limited corporation is 2, while the maximum number of stockholders is 200. The minimum number of shareholders that must be present in order to create a public limited company is set at seven, and there is no cap on the maximum number of shareholders that may be present. Even though an OPC only needs one shareholder/director, a total of fifteen (viii) directors may be chosen to serve on the board of directors. In line with the Articles of Association, company shareholders have the ability to remove an officer from office by selling or otherwise transferring the firm shares that they own. However, it is not possible to coerce them into leaving the company. This regulation is broken if a court order or the recommendations of the national company law board (NCLT) lead to the removal of a shareholder from the business’s ownership.
  8. On the other hand, directors are only permitted to continue serving in their roles for as long as shareholders are happy with the results of their work. The shareholders have the ability to summon an extraordinary general meeting (EGM) and remove a director from office with a simple majority vote if they so choose.

The reasons that may lead to a director being removed from their position are laid out in detail in Section 164 of the Companies Act. If a director is found to be ineligible to serve as a director under Section 164, they will be removed from the board as well as the directorship that they previously held. A board meeting is considered illegitimate and any decisions made by the board are null and void if it is discovered that a disqualified director was counted towards the quorum at the meeting.

  1. Remuneration, extra incentives, and a cut of the profits: Shareholders have no right to any other kind of remuneration or income; the only interest they have in the firm is the dividend or rise in value of the stock they own. Directors are entitled for pay, including sitting costs, to the amount that is provided by Section 197 of the Companies Act.

Conclusion

After discussing the difference between the Shareholder and Director of a Company, it is clear that a Company’s Board of Director is an essential component of a successful business, particularly when it comes to maintaining open lines of communication with shareholders. The organisation suffers when there is a lack of trust between these two groups, as well as when there are power battles between them. It is necessary that differences over important decisions be handled as quickly as is practically possible in order to eliminate the risk of a legal fight that might eventually result in the dissolution of the organisation. The vast majority of shareholder disputes may be completely sidestepped with the use of a shareholders’ agreement that is professionally designed.

Read our Article:Process Optimisation For EMP Compliance – How Does It Work?

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