One of the most common questions asked by business owners and investors is whether directors or shareholders have more control over a company. The answer is not always straightforward. Under English company law, both roles carry different types of authority, and misunderstandings about this distinction are a frequent source of commercial disputes.
Understanding how control works in practice is essential for directors, minority shareholders, and investors alike, particularly in owner-managed businesses where individuals often hold both roles.
The legal structure of control in a UK company
In a company incorporated under the Companies Act 2006, control is divided between shareholders and directors.
Shareholders own the company. They invest capital and hold shares that give them economic rights, such as dividends and a share in the value of the company. Directors, on the other hand, manage the company’s day-to-day affairs and make operational decisions.
This division exists because a company is a separate legal entity. Ownership and management are deliberately separated to allow businesses to function efficiently.
What powers do directors have?
Directors are responsible for running the company. Their powers usually come from the company’s articles of association, commonly based on the Model Articles.
In practice, directors typically control:
- day-to-day management and commercial decisions
- entering into contracts on behalf of the company
- hiring employees and managing operations
- strategic and financial decisions within board authority
Directors also owe statutory duties under the Companies Act 2006, including duties to promote the success of the company, avoid conflicts of interest, and exercise reasonable care, skill and diligence.
Because directors make operational decisions, they often appear to have greater control in everyday business.
What powers do shareholders have?
Shareholders exercise control in a different way. Their power is structural rather than operational.
Shareholders generally control:
- appointment and removal of directors
- approval of certain major decisions
- changes to the company’s constitution
- approval of dividends
- fundamental corporate changes such as share issues or winding up
Most shareholder decisions are made by ordinary resolution (more than 50%) or special resolution (at least 75%).
This means that a majority shareholder can ultimately exert significant influence over the company, even if they are not involved in daily management.
Control versus liability: an important distinction
Control and legal responsibility are not the same thing. Directors often exercise greater day-to-day control, but this also exposes them to greater legal liability.
As a general rule, contracts are entered into by the company rather than by the individuals who manage it. The principle of separate legal personality means that directors are not usually personally liable for company contracts. However, liability can arise in certain circumstances, for example, where a director provides personal guarantees, acts outside their authority, or assumes personal responsibility in negotiations.
This distinction is explored in more detail in our article Can a Company Director Be Personally Sued for a Business Contract?, which explains how confusion between personal and corporate roles can lead to unnecessary disputes and cost exposure.
For shareholders, by contrast, liability is generally limited to the amount invested in the company, unless specific personal obligations have been assumed.
Who has more control in practice?
In most companies, directors control daily operations while shareholders retain ultimate control over the company’s direction.
The balance depends on several factors:
- the shareholding structure
- whether directors are also shareholders
- the wording of the articles of association
- any shareholders’ agreement in place
- reserved matters requiring shareholder approval
In owner-managed companies, the same individuals often serve as both directors and shareholders, blurring the distinction until disagreements arise.
What happens when directors and shareholders disagree?
Disputes typically arise where:
- a director refuses to follow shareholder wishes
- minority shareholders feel excluded from decision-making
- a majority shareholder seeks to remove a director
- management decisions affect shareholder value
English law provides mechanisms to address these situations, including shareholder resolutions, requisitioned meetings, derivative claims, and unfair prejudice petitions under section 994 of the Companies Act 2006.
However, disputes can quickly become disruptive and expensive if governance arrangements are unclear.
Preventing control disputes
The most effective way to avoid conflict is to define control clearly at the outset. Businesses should consider a comprehensive shareholders’ agreement, clear allocation of decision-making authority, reserved matters requiring shareholder consent, deadlock resolution mechanisms, and clear exit provisions.
We discuss deadlock situations in more detail here.
Many disputes arise not from misconduct, but from documents that fail to anticipate future disagreement as the business grows.
How we can help
At IMD Corporate, we regularly advise directors, shareholders, and investors on corporate governance, shareholder disputes, and director duties. We act for both majority and minority shareholders in resolving control disputes efficiently and commercially, whether through negotiation, litigation, or arbitration where appropriate.
If you are unsure about your rights or responsibilities as a director or shareholder, early advice can often prevent disputes from escalating and protect the long-term value of the business.
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.
