In a large number of SMEs, the roles of the directors and shareholders are assumed by the same people. This often results in a common misconception that the roles are automatically linked, and that upon a director’s exit from the company, they will also have to transfer any shares that they hold in the company.

The reality is, that under company law, a director who resigns or has their appointment terminated is not automatically obliged to transfer their shares in the company. The two roles are entirely separate unless linked under the company’s articles of association or a shareholders’ agreement.

When trying to understand the roles of a shareholder and a director, it’s easier to consider a large company, such as Vodafone. The directors will be in the boardroom, making the key day-to-day decisions relating to the business. The shareholders will generally have very little involvement in the business, other than receiving a dividend from time to time, and from being invited to the annual general meeting.

When a director exits the company, there is generally no obligation on that individual to also transfer any of the shares that they hold in the company. This can result in an awkward scenario where, for example, a director has been dismissed for gross misconduct, but still holds shares in the company, which may entitle them to a dividend and may also give them the ability to block certain shareholder resolutions (depending on the percentage of shares that they hold)

As a result, I generally advise my clients to make the roles of directors and shareholders conditional on each other. This means that, if a director resigns or has their appointment terminated, then they are automatically obliged to transfer their shares as well (generally to the continuing shareholders, or back to the company itself). Similarly, if a shareholder sells their shares, then they would be forced to resign as a director of the company.

(It should be noted that there may be valid reasons why this arrangement wouldn’t be appropriate, so each company should be considered on a case by case basis.)

To adopt this position, the shareholders / directors will either need to:

  1. amend the company’s articles of association; and / or
  2. enter into a bespoke shareholders’ agreement.

To discuss this in more detail please get in touch with Farleys’ corporate solicitors on 0845 287 0939 or email us.