DIRECTORS AND SHAREHOLDERS POWERS AND RIGHTS

Presentation Outline

1. Introduction on Directors

2. Duties of Directors

3. Directors Liability Insurance

4. Fair dealing

5. Legal responsibilities

6. Restraining Measures

7. Other types of directors

8. Shareholders power and rights

 1. INTRODUCTION

• Companies are incorporated to create a separate legal entity, but they cannot act on their
own; they need people to make the decisions and manage the company. These people are
the directors

• A company is a legal fiction but the law permits it to do things which natural persons can
do. Hence, a company acts through natural persons.

• Shareholders are the ones who elect directors to mange their stake or the shares in the
company hence there is a agency relationship between them and the directors.

• According to the Companies Act, a director, “includes any person occupying the position
of a director by whatever name called”.

• Basically, a director is an ‘officer of the company’ and is an agent of the company.

Qualifications for Directors

There is no formal qualifications for one to be a director but it most cases a director is not
required to be a member (shareholder) of the company unless the constitutes requires it.

However they certainly are not eligible to hold the position of a director, such as:

• A body corporate or an unincorporated body of persons

• A person who is under the age of 18

• An undercharged bankrupt

• A statutory auditor of the company

• A person disqualified acting as a director by the Courts

 2. DUTIES OF DIRECTORS

FIDUCIARY DUTIES OF DIRECTORS

 A fiduciary duty is a legal responsibility to act sorely in the best interests of another
party.

 A fiduciary duty indicates a relationship of trust, assurance or confidence between two or

more parties.

 It is a requirement for directors to act in good faith, act honestly and responsibly and
according to the company’s constitution.

 Below are some of the fiduciary duties directors hold in an entity set up :

a) . Directors must exercise reasonable care, skill and diligence

• A director should exercise the care, skill and diligence that would be expected from
someone doing the job to a professional standard.

• Duty of care means that board directors must give the same care and concern to their
board responsibilities Zoom for online meetings

b) Duty of Loyalty

• The directors must always put the interests of the corporation and shareholders above
their own self-interest. Duty of care means that board directors must give the same care
and concern to their board responsibilities.

• Conflicts of interest or making secret profits from the company’s business dealings are
unacceptable
c) Duty of Good Faith

 Good faith is a sincere intention to be fair, open, and honest, regardless of the outcome of
the interaction
d) Duty of obedience/Duty to act within their powers

 Directors must carry out their duties within the scope of their delegated authority under
the law and the applicable corporate governance documents.

e) Duty of disclosure

 Full and fair disclosure of material facts is essential before seeking board or stockholder
approval of major corporate business transactions, such as mergers with or acquisitions of
other companies.

f) Directors must exercise independent judgement

 A director is required to make any decisions independently and not to favour any single
shareholder or section of a business.

g) Directors must not accept benefits from third parties

• A director may not accept a benefit from a third party where it was offered because of the
director’s position in the company especially if the third party is in a commercial
relationship with the company. For example gifts, holidays, tickets to events, or even
cash payments

3. DIRECTORS LIABILITY INSURANCE

• It’s a type of coverage that provides financial protection to directors of a company in the
event they are sued for alleged wrongful acts or omissions committed in their capacity as
directors.

Coverage

• The directors liability insurance covers the legal defence cost ,settlements and
judgements arising from claims made against directors for alleged fiduciary
duty ,negligence ,errors or omissions ,misstatements and other wrongful acts committed
in their role
 Protection for Directors

• the insurance policy helps to protect the personal assets of directors to mitigate the
financial risks

Entity coverage

• Some director’s liability insurance policies also provides coverage for the company
itself in situations where; the company may be legally required to indemnify its directors.

Policy exclusions

 The director’s liability insurance policies have exclusions for certain types of claims such
as intentional illegal acts, property damage claims and claims related to professional
services outside the scope of directors.

4. FAIR DEALING

• Fair dealing is a legal and ethical principle that requires individuals and organisation to
act honestly, transparently and in good faith when conducting business or engaging in
transactions. It encompasses fair treatment of others including customers, suppliers,
employees, shareholders, and other stake holders. Fair dealing involves:

• Ethical conduct

• Compliance with Contacts and Agreements

• Customer’s satisfaction

• Legal and regulatory compliance

5. LEGAL RESPONSIBILITIES
a) Duties as a Company Officer
• It’s a private network similar to an intranet but open to external parties such as suppliers,
customers and other business.

• Hence it’s an extension of the organization’s intranet. Access is provided to the third parties
and is tightly controlled.
 b) Duty to Keep Adequate Accounting Records

• It promotes systems such JIT with customers and suppliers.

• Collaborate with other companies on joint development efforts.

• Jointly develop and use training programs with other companies.

c) Duty to Prepare Financial Statements.(Annual Accounts)

• Information is subject to insecurity because of third parties.

• It’s costly to implement and maintain within an organization.

d) Obligation to have statutory Financial Statements audited

e) Duty to ensure Certain Registers and Other Documents

• Every company has a legal obligation to maintain certain registers with the registrar.

• Duty to ensure company documents are filed with the Registrar of Companies .

6. OTHER RESTRAINING MEASURES AGAINST DIRECTORS

There are several restraining measures that can be imposed on directors to ensure accountability
and protect the interests of stakeholders

• Board Oversight

Boards of directors typically have oversight responsibilities, including monitoring the actions of
company executives and ensuring compliance with laws and regulations. Board members can
provide checks and balances on the actions of individual directors

• Shareholder Activism

Shareholders can exert pressure on directors through activism, such as voting against their re-
election or proposing resolutions at shareholder meetings
 • Disclosure and Transparency

Directors are required to disclose relevant information to shareholders and the public, including
their qualifications, compensation, and potential conflicts of interest

• Legal Remedies

Shareholders and other stakeholders may have legal remedies available if they believe directors
have breached their duties or acted improperly. This can include lawsuits seeking damages or
injunctions to prevent further harm.

• Independent Directors

Many jurisdictions require companies to have independent directors on their boards. Independent
directors are not affiliated with the company or its management, which helps ensure objectivity
and prevent conflicts of interest.

7. OTHER TYPES OF DIRECTORS

There are different terms given to the various types of company directors that can sit on a board.
The most recognizable terms are executive directors and non-executive directors.

However, there are also de facto directors, shadow directors, nominee directors and alternate
directors.

a) De Facto directors

• This is a person who, although not formally appointed as a director, actually acts like one
by making key decisions or influencing company affairs.

• They carry the same responsibilities as directors

b) Shadow Directors

• Any individual appointed by the company (aside from professional advisors) whose
directions must be followed by the other directors.
 c) Nominee director

• They represent the interests of stakeholders or stakeholder groups (nominators) on a

company’s board.

• Appointed by nominators

• These directors may be appointed under the Articles of Association

• In some cases, statutes may have a provision to appoint a nominee director

8. SHAREHOLDERS POWERS AND RIGHTS

Generally, members of a company are the shareholders.

The subscribers to the company’s Memorandum of Association who become members when the
company is incorporated; and every other person who agrees to become a member and whose
name is entered on the register of members.

While the board of directors "exercises all the powers necessary to manage the business and
affairs of the corporation or to supervise its management" shareholders have much more limited
but still fundamental decision-making powers. The following is the list of powers, shareholders
posses:

• Election of directors

The influence in the company will be primarily through the election of the directors.

• Appointment of Auditor

At AGM, the shareholders may appoint an auditor, whose mandate will include auditing the
financial statements and preparing an annual report to the shareholders.
 • Amendment of the statutes

Any amendment to the Articles must generally be authorized by special resolution of the
shareholders. The special resolution must be passed by a two-thirds vote e.g. change of name,
share capital

• Approve a share conversion

Any conversion of shares enacted by the board of directors must be approved by special
resolution of the shareholders

• Unanimous shareholder agreement

By unanimous shareholder agreement, the shareholders of a corporation may decide that certain
powers of the board of directors shall be taken not by the directors, but by the shareholders
themselves

• Dissolution of the company

The dissolution of a corporation terminates the legal existence of the corporation. Such a
decision to dissolve the corporation is made by consent of the shareholders, by special resolution,
unless there are no shareholders.

• Voting power on major issues

Voting power includes electing directors and proposals for fundamental changes affecting the
company such as mergers or liquidation. Voting takes place at the company’s annual meeting. If
the shareholder cannot attend, they can do so by proxy and mail in their vote

• Ownership in a portion of the company

When a business thrives, common shareholders own a piece of something that has value.

A stake in a company that keeps growing profits, your slice of ownership should grow in value
and be worth more than what you initial
 • The right to transfer ownership

The right to transfer ownership means shareholders are allowed to trade their stock on an
exchange.

• Entitlement to dividends

Capital appreciation isn't the only way common shareholders make money.

Profits can be reinvested back into the firm or paid out in the form of a dividend. However,
whenever dividends are declared, common shareholders are entitled to receive their share.

• Opportunity to inspect corporate books and records

Shareholders have the right to examine basic documents such as company bylaws and minutes of
board meetings and disclosure of financials.

• The right to sue for wrongful acts

Suing a company typically takes the form of a shareholder class-action lawsuit. For example,
WorldCom faced a firestorm of shareholder class-action suits in 2002 when it was discovered
that the company had grossly overstated earnings and given shareholders and investors an
erroneous view of its financial health.
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