What is the difference between a director, shareholder and employee? Many people do not know the distinction between them. These differences are important to understand. In many small to medium sized organisations the same person can play all three roles and they need to be treated separately. For example, someone who is all three, can resign as a director and sell their shares but continue to be an employee of the company. Another example, is that the company can terminate a person’s employment, but they remain a director or shareholder. Just because they cease to play one role doesn’t mean that they no longer play the other roles.
The role of director
Directors set the strategy for the company or direct how the company conducts its business. The role of director is governed by the Companies Act, the MOI or a shareholders agreement. Often the company appoints them with an appointment of director letter and they sometimes get paid a directors fee.
A director is defined in the Companies Act as a member of the Board of the company. The Board manages the day to day business activities of the company. Directors must run the company according to the standards and obligations set out in section 76 and the common law. The standards in section 76 require better transparency, corporate governance and accountability than the common law does. Directors can also be held liable for certain loss, damages or costs under section 77. There are different types of directors.
Directors are usually appointed and then the company secretary registers them with CIPC. If they cease to be a director, they must be removed from the CIPC records by following a process. Directors often resign but can also be removed as specified in the Companies Act, the MOI or a shareholders agreement. Often the shareholders will agree (or vote) on who will be directors from time to time.
The role of shareholder
A shareholder owns (or holds) shares issued by a company. The relationship between shareholders is governed by the Companies Act, the MOI or a shareholders agreement (and they prevail in that order).
Their name is also entered in the company’s securities register. They may have a hand in running the company at specific meetings, but they cannot do this generally or every day. For example, public companies have annual general meetings in which shareholders can vote on certain matters.
Shareholders often become a shareholder by buying shares or subscribing to shares that the company issues to them. They do not need to be registered with CIPC. They usually cease to be a shareholder by selling their shares through a sale of shares agreement.
The role of employee
An employee is employed by the company and works for the company. The relationship is typically regulated by an employment contract and labour laws. Managers of companies must manage employees lawfully and fairly.
Employees often resign and the company cannot just terminate the employment of an employee – it must be lawful and fair. The default position under the Companies Act is that the shareholders or directors can decide (resolve) that the company will terminate an employee’s employment by an ordinary resolution (more than 50%) at meetings.
Often when shareholders play all three roles in a smaller company, they agree that if one of them cease to be an employee, they will resign as a director and sell their shares to the others.
