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.
Get a free legal document when you sign up to Lawpath
Sign up for one of our legal plans or get started for free today.
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.
Get a fixed-fee quote from Australia's largest lawyer marketplace.
