De Facto Directors vs Shadow Directors

De facto directors and shadow directors are commonly mistaken to be the same thing. There are, however, some crucial differences.

A de facto director is someone who has not been formally appointed as a director, but acts as one and/or has decision-making powers over the company. A shadow director is someone who is not formally appointed but whose instructions or wishes the board of directors are accustomed to following, due to the significant influence that person wields over them. In short, a de facto director acts as a director whereas a shadow director controls them.

What is a Director?

To fully understand these roles, we need to understand what a director is in the first place. A director is a person who:

• Participates in making decision that affect the whole or a substantial part of the company
• Has the capacity to affect the company’s financial standing
• Ensures compliance with laws like the Corporations Act 2001 and statutory obligations like tax and superannuation
• Manages conflicts of interest and disputes among members
• Ensures record-keeping of financial statements and other important company records, as well as protecting the company’s intellectual property, and
• Under the Corporations Act 2001 (s 9), a person may also be considered a director if they are not formally appointed but the directors of the company are accustomed to acting in accordance with that person’s instructions or wishes.

In Buzzle Operations Pty Ltd (In Liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233, the court set a high threshold for proving shadow directorship. Apple’s actions were seen as legitimate commercial pressure rather than an indication that they were acting as a ‘director’. The court held that in order to be classified as a director, there had to be “habitual compliance over a period of time” with their instructions and/or wishes.

The Differences Between a De Facto and Shadow Director

The most obvious difference between the two is that a de facto director openly acts as a director, while a shadow director indirectly influences or controls decision-making behind the scenes. It is important to note that both are subject to the same statutory duties under the Corporations Act as a regular director and can face personal liability.

When determining whether someone is a de facto director, the court will consider several factors such as the duties expected to be performed by the person, the duties that are actually performed, whether people both inside and outside the company consider them to be a director, the size and internal management of the company, and the allocation of responsibilities within the company.

If you have any questions about de facto and shadow directors, please do not hesitate to contact us. We are here to help.

DISCLAIMER: This article is for informational purposes only and does not constitute legal advice.