Who's Really in Control? Company Structures
Corporate structures determine who makes decisions, who holds liability, and who actually benefits. Yet many founders and business owners operate with only a vague sense of how control really works in their company.
Shareholders vs Directors: Who Actually Runs the Business?
The legal distinction between ownership and management is basic company law, but it is often misunderstood in practice.
Shareholders own the company. Their main powers include appointing or removing directors, approving major decisions, and winding up the company. They do not get to run the business day to day.
Directors manage the business. They are responsible for operational decisions and owe fiduciary duties to the company, not to individual shareholders.
The board holds the decision-making power. Even a majority shareholder cannot directly overrule the board or give instructions to staff.
What Control Looks Like in Practice
Control is more than just who holds shares or sits on the board. It operates at several levels.
Legal control is about formal voting rights under the constitution and shareholders’ agreement.
Practical control often tells a different story. A minority shareholder with deep client relationships, or a founder CEO who still calls the shots, may hold more influence than the legal structure suggests.
To truly understand who is in control, look at:
Shareholder voting rights
Board composition and voting blocks
Management authority
Access to financial data
Control over key external relationships
Also consider shadow and de facto directors. These are individuals who are not formally appointed but act like directors or influence decisions. They can be personally liable without having the usual legal protections of a formal appointment.
Common Traps in Structure and Control
Avoidable Risks That Undermine Good Governance
Business structures are meant to provide clarity and protect against internal disputes. But in practice, many structures introduce hidden risks — especially when legal form doesn’t match commercial reality. Below are common traps that expose founders, directors, and shareholders to unnecessary tension and liability.
1. Nominee Directors and Shadow Control
It is a breach of directors’ duties for a nominee to simply follow orders from someone else, whether that person is a founder, shareholder, or overseas controller. Directors are personally liable for exercising independent judgment under the Corporations Act.
When decisions are made behind the scenes by someone without a formal role, that person may be considered a shadow director and held liable for breaches, even if their name appears nowhere in ASIC records. This is especially risky where there is foreign influence or offshore control in the background.
Risk:
Legal liability for both the nominee and the controller. Governance breakdown. Regulatory penalties.
Best Practice:
Ensure directors are briefed, independent, and actively engaged. Avoid side agreements that undermine formal authority.
2. Trust-Owned Shares and Separation of Power
Where shares are held by a discretionary trust or family trust, the legal owner (trustee) may not be the person with the real economic interest (the beneficiary). This often leads to confusion over who controls the company and who ultimately benefits.
If the trust deed is poorly drafted or silent on voting rights, trustees may act without real accountability to the beneficiaries. Worse still, the arrangement may be used to obscure control from regulators, partners, or investors.
Risk:
Unclear control. Disputes over direction or dividends. Exposure under anti-avoidance or FIRB regimes.
Best Practice:
Clearly document the alignment between economic interest and voting rights. Where necessary, issue control shares or appoint corporate trustees with board oversight.
3. Family Businesses and Legacy Friction
Many family-run or multigenerational businesses carry structural baggage. Equal shareholdings between active and inactive family members are a classic problem. Founders often retain legal control but step back operationally, while the next generation takes on day-to-day management.
Without a clear governance framework, this leads to resentment, role confusion, and decisions made without consensus. Dividends, exit opportunities, and succession are flashpoints.
Common Scenarios:
Passive siblings holding equal voting rights
No formal board or dispute resolution process
Founder blocking change despite being semi-retired
No exit mechanism for family members who want out
Best Practice:
Implement formal governance layers, including advisory boards or independent chairs. Use buy-sell provisions, performance-linked rights, or staged handovers to smooth transitions.
4. Weak or Unenforceable Shareholder Agreements
Too many shareholder agreements are generic, poorly drafted, or left unsigned. Worse, some are legally binding but commercially useless — they contain vague obligations, no enforcement options, and no thought given to actual business dynamics.
If the agreement lacks clear remedies for deadlock, bad behaviour, or funding disputes, it often causes more harm than good. Directors and shareholders then fall back on vague expectations, which unravel in real-world scenarios.
Risk:
Deadlock, delays, and litigation. Investors lose confidence. Business value erodes.
Best Practice:
Draft shareholder agreements tailored to your business stage and shareholder mix. Include meaningful leaver clauses, valuation methods, exit pathways, and decision-making thresholds.
Structure Types and How They Impact Control
Sole Director Companies
Sole director companies are lean and efficient. They offer speed, simplicity, and full control, making them a common structure for founders and small businesses.
However, this simplicity comes with fragility. If the sole director becomes incapacitated, passes away, or is otherwise unavailable, the company may be left without any legal authority to act. Banks may freeze access. Contracts cannot be executed. Urgent decisions cannot be made.
Key Risks:
Business operations may halt entirely if the director is unavailable
No automatic mechanism for appointing a new director
Estate delays or legal disputes in the event of death or incapacity
Best Practice:
Put in place a successor director clause in the constitution or shareholders' agreement. Consider appointing an alternate director or preparing an enduring power of attorney covering corporate functions. Regularly review personal succession plans alongside business structures.
Corporate Trustees
Companies acting as trustees for discretionary or unit trusts are a common feature in private business and investment structures. This approach separates control (via the company) from beneficial ownership (via the trust), which can offer asset protection and succession planning advantages.
However, directors of a corporate trustee carry dual duties — to the company itself and to the trust’s beneficiaries. This can complicate governance, especially when the interests of the trust diverge from those of related business entities or individuals.
Key Risks:
Confusion over whether directors are acting in their capacity for the company or as trustee
Conflicts between corporate obligations and fiduciary duties to beneficiaries
Disputes where personal interests are entangled with trust decisions
Best Practice:
Keep trust and company documents aligned. Maintain clear trustee resolutions and record-keeping. Where possible, avoid mixing operational company functions with long-term trust ownership without proper governance structures and independent input.
Joint Venture Companies
Joint venture (JV) companies are common in property, infrastructure, and project-based businesses where multiple parties collaborate but want to ring-fence the venture. While JVs offer commercial alignment, they require careful governance design to avoid becoming deadlocked or dysfunctional.
50/50 Ownership:
Equal shareholdings sound fair but are inherently unstable without mechanisms to break deadlock. If parties disagree on a major decision and neither has majority control, the business can grind to a halt. This is especially problematic in capital-intensive or time-sensitive ventures.
Unequal Ownership:
When one party holds majority control, minority shareholders are at risk of being sidelined or unfairly diluted. Minority protections need to be hardwired into the constitution and shareholder agreement.
Key Issues to Address:
Board Composition: Should reflect shareholding, but also enable practical decision-making
Reserved Matters: Clearly identify which decisions require unanimous consent or special majority
Deadlock Mechanisms: Include escalation paths such as independent chairpersons, put-and-call options, or external mediation
Exit Rights: Include tag-along, drag-along, or forced buyout clauses in case the relationship breaks down
Best Practice:
Invest early in a robust JV agreement. Clarify contributions, expectations, governance, and exit rights upfront. Review the agreement regularly as the project evolves.
Dual-Class Shares
Dual-class share structures allow certain shareholders — usually founders — to retain outsized voting control while issuing shares to external investors. This structure separates economic ownership (i.e. dividends, proceeds on sale) from voting rights.
It can be a powerful way for founders to retain vision and leadership while raising capital. However, it must be used with discipline and transparency. Poorly drafted or misunderstood dual-class structures create long-term investor conflict, especially as valuations rise and new capital enters.
Key Risks:
Perceived unfairness by new investors or employees
Difficulty raising capital from funds with “one-share, one-vote” policies
Disputes around governance, especially during exit events or leadership transitions
Best Practice:
Ensure the constitution and shareholders’ agreement clearly set out the rights attached to each class. Regularly communicate the rationale for the structure to investors and staff. Use sunset clauses or conversion events to balance long-term control with future flexibility.
Practical Tips for Founders and Business Owners
Put it in writing. Verbal understandings about control mean nothing in a dispute. Use a constitution, shareholders’ agreement, and a board charter.
Design decision thresholds intentionally. Not everything needs unanimous approval. Too many hurdles lead to stagnation.
Build the right board. You need directors who bring value, not just tick boxes. Avoid boards that are dominated by a single view or paralyse every decision.
Control information flow. Whoever has the best information usually has the real influence. Set clear reporting lines to maintain balance.
Plan exits early. The ability to leave is often the most powerful control right. Good exit terms protect everyone if things go south.
Final Word
Control is not just about company constitutions and share registers. It is about how those tools work in real life. The best structures are simple, enforceable, and reflect the reality of how the business is run.
If you are raising capital, planning succession, or cleaning up your company structure, understanding control is critical. Get it wrong and you risk governance disputes, stalled growth, and lost deals.
This article is general information only and is not legal advice. For advice tailored to your situation, contact MWBL Consulting.