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Directors' Obligations & Shareholder Rights in respect of Distribution of Profits

Use of Resources - Directors' Obligations and Shareholder Rights

In devising a strategy for the use of surplus revenue it is important to remember how the legal characteristics of a company define and limit your freedom of action - in particular when it comes to using corporate resources. Whether you are considering ploughing the money back into the business, rewarding shareholders or staff, or putting it to other uses, there are legal and tax considerations which should be borne in mind.

Surplus Revenue: Directors' Obligations & Shareholder Rights

When you use a company as a business vehicle, that company has a separate legal personality which means that business assets and profits belong primarily to the company, as do the business liabilities. Directors formulate the company's policy and direction and control the cash needed to achieve its objectives. In the broadest terms, directors use capital resources and the cash generated by the business to develop the company and to provide a financial return to its shareholders. Specific controls include the following:

Statutory Duties: The Companies Act 2006 introduced statutory directors duties on 1st October 2007.  Directors must act within their powers, promote the success of the company, exercise independent judgment and exercise reasonable care, skill and diligence. Directors' discretion in applying company monies or assets is always to be exercised in line with their duties.

Memorandum of Association: Prior to 1st October 2009, these set out the objects and powers of the company. Since 1st October 2009, any objects clauses in the memorandum are automatically transferred into a company's articles. New companies, and companies which amend their articles of association, can have unrestricted objects. If assets, including surplus resources, are used other than in accordance with the objects, the directors can be made personally liable.

Articles of Association: These contain the company's internal procedural regulations. Unconnected third parties do not need to be concerned as to whether the formalities relating to their transaction with the company have been observed. Directors, particularly when making decisions about the use of surplus revenue, must abide by them. Failure to do so can negate decisions and can again render directors personally liable to the company for any resulting loss.

Direct Shareholder Control: Directors are obliged to hold an Annual General Meeting if required by the company's articles or if the company is a PLC. Directors must also obtain the approval of shareholders in general meeting for matters specified in the Articles of Association or by law. Individual shareholders, however, have no direct rights over the Board, or any general right to be informed of company activities. It is only when they form the necessary majority and vote accordingly that shareholders in general have powers over the Board and then their primary power is to change the composition of the Board.

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