How are Shareholders and Directors Different?

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How are Shareholders and Directors Different?

Both the shareholders and directors are extremely important for a company due to the roles played by them. Although many people have a vague idea about them, they often fail to understand the difference between shareholders and directors. 

If you’re confused about how the shareholders and directors are different from each other, going through this article will be helpful for you.

Who is a Shareholder?

A shareholder, also known as a stockholder or member, is an individual/business entity/organization that owns ‘shares’ in a company. In most multi-million dollar companies, the top shareholders are generally other business entities or organizations. 

As shares are units of ownership in a company, a party becomes a company’s shareholder by purchasing its shares and meeting its shareholder agreement requirements. The more shares a shareholder owns, the greater the percentage of the company he owns. 

For a company, having shareholders is of great value. Individuals and organizations invest in a company as shareholders without the requirement of becoming partners or putting them on payroll. This is a relief for the company.

From the perspective of a shareholder, having shares is advantageous for them as they come with the benefit of limited liability which means that the company’s debt doesn’t get passed onto them. However, the shareholders do have a financial risk since the shares can sometimes lose their value, leading to financial loss of the shareholders. On a brighter note, the shares can also double in their value, sometimes they may increase tenfold or even more. 

Who is a Director?

Having a distinct role than shareholders, directors of a company are responsible for the company’s day-to-day affairs’ management and ensuring the company’s compliance with legal, tax and regulatory frameworks. The initial and subsequent directors of a company are appointed by the shareholders and hold office as long as their performance is satisfactory in the eyes of the shareholders.

A director can be removed from the company by the shareholders. For this, the shareholders have to pass a resolution with a simple majority at an extraordinary general meeting (EGM). However, until an individual is removed from his position as a director, he has to fulfill his duties as he’s responsible for them.

The primary responsibility of a director lies in controlling, overseeing and managing the internal affairs of a company, including decision-making through resolutions during board meetings. A board meeting is a gathering which consists of all the directors of a company. Resolutions are passed by a simple majority in a board meeting, providing each director one vote. Every director has his own DIN, which is short for Director Identification Number.

Unique Roles and Responsibilities of Directors Based on Their Type

• Executive Directors: These directors are fully involved in the management and day-to-day affairs of a company to ensure the company’s legal compliance and avoid fines and penalties.
• Non-Executive Directors: The non-executive directors are not directly involved in the company’s daily management but may represent the stakeholders or serve the company professionally
• Independent/Professional Directors: Independent or professional directors, with their expertise, assist the Board of Directors in making important decisions for the company. 
• Additional Directors: These directors are appointed for unforeseen responsibilities, extending their tenure till the next AGM. 
• Nominee Directors: They are appointed to represent a particular stakeholder. The nominee directors safeguard the interests of the party they represent without being involved in day-to-day management.

Difference between Shareholders and Directors

Appointment or Induction in the Company

One of the key differences between shareholders and directors is related to the manner of their induction or appointment in a company. A company’s initial shareholders are admitted through shares’ fresh allotment. But the subsequent directors are admitted either by transfer of existing shares or allotment of new ones. The first directors of the company are nominated by the promoters in the company’s AoA subject to their express consent given in the Form DIR-C.

The extraordinary general meeting (EGM) is typically used by the shareholders to appoint new directors. the Board of Directors may choose to fill a casual vacancy due to resignation or death of an existing director, subject to the approval of the shareholders at the EGM. If needed, the NCLT, the Central government, or financial institutions may also designate a director of a firm in accordance with the terms of the funding or the law.

Eligible Entities

A shareholder can be an individual or any juristic person such as a firm or LLP or any other registered company, group of companies, etc. They can be Indian or foreign entities. A company shareholder can belong and reside in another state or country as there are no restrictions on nationality or residence for a shareholder. 

Only a non-minor individual can be a company’s director. There is no restriction on the director’s nationality either as he can be an Indian or foreign citizen. However, the Companies Act restricts the residential status of at least one company’s director. This Act makes it obligatory for the company to have at least one director in it who is a resident Indian, meaning the director should’ve resided or lived in the country for more than 120 days in the previous financial year.

Difference in Roles

Both shareholders and directors play important roles in the company they’re a part of. The shareholder is the company’s owner, so they are very much concerned about the company and make important decisions for it. However, the role of directors cannot be underestimated as they are responsible for controlling the internal affairs and management of the company, which includes compliance with tax and company laws. 

A single person can assume the role of a director and a shareholder unless it is prohibited in the AoA of the company.

Difference in Responsibilities 

Shareholders and directors are required to fulfill separate responsibilities in a company as per the roles assigned to them. A shareholder is required to invest capital and subscribe to the shares of the company. 

Additionally, they are also required to partake in the annual and extraordinary general meetings in order to contribute to the approval of important decisions of the company that may require ordinary and special resolutions.

Difference in Decision-Making Powers

The daily decisions about the operation of the corporation are made by the Board of Directors of the company. Important decisions such as investing, declaring a dividend, changing the company's memorandum of agreement or articles of association, and appointing directors based on the board of directors' proposal are all made by the shareholders of the company. In order to make these decisions, resolutions are passed at both the board meeting and general meeting.

Each shareholder's power to vote or make decisions is associated with their shareholding ratio, which means that major shareholders have more votes than others. However, directors have the same authority to make decisions as shareholders do as everybody in the board meeting has been given one vote when it comes to approving a resolution.

Difference in Liability

Both shareholders and directors have different liabilities towards the company. The liability of the shareholders in a company is with respect to the dues and debts of the company. 

These dues and debts must be paid off by the shareholders in events such as winding up of a company suddenly if the company faces major losses or becomes insolvent or bankrupt. However, this liability is restricted to the share capital’s unpaid amount and the shareholders’ personal assets aren’t at risk under any circumstances. 

When we talk about the liability of a company’s director, it pertains to their duty to ensure the company’s compliance with the legislations such as Income Tax Act, GST Act, Companies Act, etc. Although the shareholders are the owners, directors are also required to play their part well. In severe cases of non-compliance actions, directors can be imprisoned after prosecution by the government.

Minimum and Maximum Number of Shareholders and Directors Needed

The minimum and maximum numbers of directors and shareholders depends on the kind of companies. Different types of companies have different requirements. For example, a one person company can’t have more than 1 shareholder and needs at least 1 director but the  maximum number of directors is 15. In case of a private limited company, a minimum of two shareholders and 2 directors are needed. Maximum limit of shareholders for this company are 200 and 15 respectively. 

Now, when we talk about a public limited company, it needs at least shareholders and 3 directors before such a company can be incorporated. Unlike in the case of a private company, the public limited company doesn’t put any restrictions in regards to the maximum number of shareholders. However, there is a limit for the maximum number of directors i.e., they can only be 15 in total. 

It is necessary to mention that for the appointment of more than 15 directors in any of these companies, the shareholders must first pass a special resolution in its general meeting.

Removal from Company

Just like the induction process, the process of removal also marks a major difference between shareholder and director of a company. A company’s shareholder is its owner, so you can imagine that removing a shareholder isn’t an easy process. 

For the removal of the company’s shareholder, an order has to be passed by the National Company Law Tribunal (NCLT) or any other appropriate and relevant court of law. However, if a shareholder wants to leave the company on their own as per their own will, they can do so by transferring the shares to a new or existing shareholder. 

A director can be removed from his position once the shareholders pass a resolution during the EGM and a majority of votes favors such removal. Also, it is important to mention that the section 164 of the Companies Act prescribes the various grounds on which a director can be disqualified. 

Once the director is declared as disqualified on the grounds of section 164, he has to vacate his office immediately and is no longer considered a part of the Board of Directors of the company. If a board meeting consists of a disqualified director, his decisions will be considered invalid. 

Unlike directors, the shareholders aren’t entitled to any salary, compensation or wages from the company and get their profit through dividends or increase in their company’s stock value. Directors are entitled to remuneration as per the limits set under the Companies Act’s section 197, and sitting fees provided they are serving the company with their best efforts professionally.

Who is more powerful between shareholders and directors?

If you’re wondering who is more powerful between shareholders and directors, then it’s certainly the shareholders. The shareholders are the owners of the company and they’re the ones to select the company’s directors. The ultimate authority to make decisions about company-related matters lies with shareholders.

Conclusion

For any company, both shareholders and directors are crucial. Both of them have a distinct and complementary role to play. While the shareholders are responsible for providing capital and decision-making for the company, the directors are responsible for overseeing the daily operations and ensuring that the company meets all the relevant legal requirements and compliances. 

To put it in a nutshell, the shareholders are the owners of the company and the directors are those who ensure that the company moves towards the path of success through proper management of operations. If you need assistance in setting up a company, you can get in touch with Registrationwala for Company Registration.

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