A common question people ask is whether you need to hold shares in a company in order to be its director? A director’s role is to manage and oversight the affairs of a company. They can choose to hold shares in a company. However, does this mean they need to in order to be its director? Read our guide to find out if you need to hold shares in order to be a director.
Who Can Be a Director?
As mentioned previously, a director is responsible for decision-making in a company. The Corporations Act 2001 (Cth) governs this area. It defines a director as a person who has been appointed in the position of a director. Specifically, section 201B states a director must be the following:
- Over the age of 18
- Be an individual, not a corporate body
- Not be disqualified from managing corporations
As a director, you have a number of duties and responsibilities you must fulfil under law. For instance, the duties of care and diligence hold that a director must exercise a duty of care to prevent the company from insolvency. Moreover, directors also have a duty of good faith and loyalty. This means they are tasked with the responsibility of acting in the bests interests of their company and for a proper purpose. Finally, a director must not have a conflict of interest.
Does a Director Need to Hold Shares?
As a director, you can own shares in your company. However, there is no requirement for a director to hold shares. Nevertheless, a company constitution may state that the director must hold a specified amount of shares. This amount may be a requirement before they are appointed. Alternatively, it may specify the director has to buy shares within a certain time frame from appointment. You can customise our Constitution for free.
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Difference Between Director and Shareholder
It is important to note the difference between a director and shareholder. As discussed previously, a director is responsible for the management of the company affairs. In contrast, a shareholder (member) owns a portion of the company by owning shares in it. Therefore, a director essentially manages the company on behalf of the shareholders.
However, a shareholder does not have an inherent right to be a director. With the same token, a director is not required to be a shareholder, unless it is stated in the constitution. To clarify the relationship between shareholders of your company, you can customise our Shareholders Agreement for free.
Final Thoughts
In conclusion, a director does not have to hold shares in a company in order to be its director. Rather, a director can choose to become a shareholder. However, this is dependent on the company’s constitution. This is because it can be common for a constitution to require a director to hold a specified amount of shares. If you are unsure about whether you need to hold shares in your company, consult a Company Lawyer.
