Shareholders often assume that directors must follow their instructions when managing a company. In reality, the legal relationship between shareholders and directors is more nuanced. Directors are responsible for managing the company’s affairs, but shareholders retain a number of legal rights that allow them to challenge directors’ conduct in certain circumstances.
Understanding these rights is particularly important where concerns arise about mismanagement, conflicts of interest, or decisions that may damage the value of the company.
The legal relationship between shareholders and directors
Under the Companies Act 2006, a company operates through a division of roles. Shareholders own the company and hold voting rights attached to their shares, while directors are responsible for managing the company’s day-to-day affairs.
Directors owe statutory duties to the company itself, rather than directly to individual shareholders. These duties include promoting the success of the company, avoiding conflicts of interest, exercising independent judgment, and acting with reasonable care, skill and diligence.
As a result, shareholders cannot normally bring a claim against directors simply because they disagree with a business decision. However, where directors breach their duties or misuse their position, shareholders may have several legal remedies available.
The right to remove directors
One of the most important powers shareholders hold is the ability to remove directors from office.
Under section 168 of the Companies Act 2006, shareholders may remove a director by passing an ordinary resolution, which requires more than 50% of the votes cast. This statutory right applies even if the company’s articles of association contain provisions that attempt to restrict removal, although contractual consequences may arise if the director has a service agreement.
The removal process requires special notice to be given to the company and a properly convened shareholders’ meeting. The director concerned must be informed and has the right to make written representations and speak at the meeting before the vote takes place.
In practice, this means that majority shareholders can change the composition of the board if they lose confidence in a director.
Derivative claims against directors
Where directors breach their duties to the company, shareholders may bring what is known as a derivative claim.
A derivative claim is a legal action brought by a shareholder on behalf of the company against a director. It allows shareholders to pursue remedies where the company itself is unlikely to take action, often because the directors responsible remain in control of the board.
Derivative claims typically arise in situations involving:
• breach of directors’ duties
• negligence or mismanagement
• misuse of company property
• conflicts of interest or self-dealing
Derivative claims are governed by sections 260–269 of the Companies Act 2006 and require the court’s permission before the claim can proceed.
While derivative actions can be a powerful tool, they are procedurally complex and are generally used only in cases involving serious misconduct.
Unfair prejudice claims
Minority shareholders may also have protection where directors conduct the company’s affairs in a way that unfairly harms their interests as shareholders.
Under section 994 of the Companies Act 2006, a shareholder may petition the court where the company’s affairs are conducted in a manner that is unfairly prejudicial to their interests.
Common examples include:
• exclusion of a shareholder from management in an owner-managed company
• diversion of company business or opportunities
• excessive director remuneration reducing shareholder value
• misuse of company funds
• failure to provide financial information to shareholders
The court has wide powers to grant remedies in unfair prejudice cases. The most common outcome is an order requiring the majority shareholders to buy out the minority shareholder’s shares at a fair value.
Winding up the company on just and equitable grounds
In more serious situations, shareholders may petition the court to wind up the company on the “just and equitable” ground under section 122(1)(g) of the Insolvency Act 1986.
This remedy is typically used where the relationship between shareholders has broken down to such an extent that the company can no longer function effectively. Situations where this may arise include:
• deadlock between equal shareholders
• a breakdown of trust and confidence in quasi-partnership companies
• serious mismanagement or misconduct by those controlling the company
• exclusion from management where participation was expected
Because a winding-up order results in the company being dissolved, courts generally treat this remedy as a last resort, particularly where alternative remedies such as unfair prejudice claims are available.
Other rights available to shareholders
In addition to these remedies, shareholders have several statutory rights designed to promote transparency and accountability within the company.
These include the right to:
• receive annual accounts and financial reports
• attend and vote at general meetings
• inspect certain company records
• ask questions about company management at shareholder meetings
• requisition a general meeting if sufficient voting rights are held
These rights allow shareholders to monitor how directors are managing the company and raise concerns where necessary.
Practical considerations before taking action
Although shareholders have several legal remedies against directors, disputes within companies are often commercially sensitive and can escalate quickly.
Before taking formal action, shareholders should consider:
• the company’s articles of association
• any shareholders’ agreement in place
• the shareholding structure and voting rights
• the commercial impact of a dispute on the business
• whether negotiation or restructuring may resolve the issue
Early legal advice can often help clarify available options and reduce the risk of costly and disruptive litigation.
How we can help
At IMD Corporate, we regularly advise shareholders on their rights in relation to directors, including derivative claims, unfair prejudice petitions, and shareholder disputes. We act for both majority and minority shareholders in resolving conflicts efficiently and commercially, whether through negotiation, restructuring, or formal legal proceedings where necessary.
If you are concerned about the conduct of a director or believe your rights as a shareholder have been affected, obtaining legal advice at an early stage can help protect your position and the value of your investment.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
