When your company decides to take a certain action or decision, either the directors or shareholders of the company may need to approve that action. Likewise, you may need to consult the law, the company’s constitution, the company’s shareholders agreement or a combination of any of these for the correct process of undertaking certain actions.
Resolutions are legal approvals of any decisions by the directors or shareholders entitled to vote on a certain matter, along with the context and reasons for those decisions. Once presented with a resolution, if the director or shareholder is in favour of the resolution, they will sign the resolution to signify their approval. This negates the need to call a board or shareholders meeting, which will likely cause a delay in the decision-making process due to the requirements and timings of calling such meetings.
However, although you would generally pass resolutions in the context of a meeting, you do not always need a meeting. It is important that you understand the process of passing a company resolution so that you can comply with your business administration requirements. This article explains the different types of company resolutions and the process for passing them.
Board Resolutions
A board resolution is simply a resolution by the board of directors. As the board of directors is responsible for the company’s day-to-day operations, these resolutions are used to make most company decisions.
Examples of decisions that typically require board resolutions include:
- approving the company to enter into a contract with a third party;
- authorising the company to borrow or lend money;
- issuing dividends to the company’s shareholders; or
- approving capital expenditure.
Ordinary, Special and Unanimous Resolutions
Most board resolutions only require a simple majority of the company directors to pass, known as an ordinary resolution. Decisions that are considered to be more important for the company may need to be passed by a larger majority of the directors (usually at least 75%). These are known as special resolutions. If a decision requires approval from all company directors, it is a unanimous resolution.
Common examples of decisions for which companies may require a higher threshold of approval from the board include:
- merging with or acquiring another business;
- issuing shares in the company;
- adopting a business plan and/or budget for the company; or
- restructuring the company.
For some types of decisions, it may be appropriate to include a financial threshold to determine whether you need an ordinary, special or unanimous resolution. For example, if the company proposes to lend up to $100,000 to another entity, an ordinary resolution may be sufficient. However, if it proposes to lend more than that amount, a special or unanimous resolution may be more appropriate.
Continue reading this article below the formShareholder Resolutions
Shareholder resolutions (or member resolutions) are resolutions by the shareholders of a company. Normally a shareholder has one vote for every share they own in the company. This ensures that their voting power is proportional to their ownership stake.
For example, the vote of a single shareholder with a 20% stake in a company will outweigh the votes of ten shareholders with a collective 19% stake in a company.
However, it is possible to amend the voting rights of particular shareholders by issuing them different classes of shares, each with different voting rights.
Shareholders are not normally actively involved in the day-to-day decision-making of a company. So, a company would use shareholder resolutions less often than board resolutions. They are also typically used for more fundamental decisions about the company.
Your company’s constitution or shareholders agreement can set out the types of decisions requiring a shareholder resolution. However, the Corporations Act 2001 (Cth) (Corporations Act) requires you to make certain decisions by a special resolution of the shareholders at law, including, but not limited to:
- changing the company name;
- winding up the company;
- changing the company type (e.g. taking a private company public);
- adopting, repealing or amending a company constitution; and
- changing the rights attached to shares (e.g. converting ordinary shares into preference shares).
You can also tailor shareholder resolutions to the situation your company finds itself in. For example, where you take on a large investment from a sophisticated investor (i.e. high net worth individual, venture capitalists etc.), they may want any shareholder resolution to only pass in the event they have explicitly provided their approval. This can also apply to director resolutions where the sophisticated investor has the right to appoint a director, and any special resolution of the board requires the explicit approval of that director.
How Do You Pass a Resolution?
In most cases, you can pass resolutions by either:
- passing a written unanimous circulating resolution of the board/shareholders (where all entitled to vote must vote in favour for the resolution to pass); or
- calling a board meeting or general meeting of shareholders and passing a special resolution (i.e. at least 75% of votes being in approval by directors/shareholders entitled to vote on the resolution).
To pass a resolution at a meeting:
- you must call the meeting in accordance with the Corporations Act, the company’s constitution and the shareholders agreement; and
- a minimum number of directors/shareholders must be present (i.e. you must meet quorum as set out in your constitution and shareholders agreement).
The Corporations Act, your company’s constitution or shareholders agreement will set out the:
- correct process for calling a meeting; and
- quorum required.
If the resolution passes by the required majority, you should put it into the company records within a month of the date of the meeting. You should also include the minutes from the meeting and have the meeting chair sign it. It is important to follow these requirements, as failure to do so may result in the invalidation of your resolution.
Circular Resolutions
An alternative to calling a meeting in respect of a proprietary company is passing a circular resolution. A circular resolution is a written resolution that you distribute to all directors entitled to vote on the resolution (for a board resolution) or shareholders entitled to vote on the resolution (for a shareholder resolution). Distributing and signing a circular resolution means you do not need to call a meeting.
Circular resolutions are particularly helpful when:
- there are a smaller number of shareholders or directors, and it is more efficient to pass a resolution by signing a written statement;
- the company’s directors or shareholders are in different places; or
- calling a meeting would be impractical for any other reason.
By default, under the Corporations Act, companies can pass circular board and shareholder resolutions. However, you can amend your company’s constitution or shareholders agreement to set out whether you can use circular resolutions with respect to the decisions of directors. You can also limit the types of decisions that directors can make and define the process for passing them. With respect to the decisions of shareholders, it is not possible to restrict the use of a circular resolution.
Notably, for a circular resolution to pass, all directors and all shareholders entitled to vote for the respective resolution must sign and agree to the proposal. Despite a certain decision only needing a simple majority or 75% approval, circular resolutions must obtain unanimous approval of those entitled to vote. If you are unlikely to obtain unanimous approval, you will have to call a board or shareholders meeting, through the proper processes, to obtain the simple majority or 75% approval.
Notifying ASIC
Depending on the decisions made, it may be necessary to notify ASIC of the company’s resolution by lodging a:
Some examples of the decisions that require submitting ASIC Forms include:
- changing the company name;
- conducting a share split;
- providing financial assistance to someone to acquire shares in the company;
- converting share classes; and
- changing the company type (e.g. a company limited by shares to a company limited by guarantee).
This guide will help you to understand your corporate governance responsibilities, including the decision-making processes.
Key Takeaways
When making important decisions within your company, it is important that you follow the process of passing a formal company resolution. You can pass most decisions concerning your day-to-day operations by a board resolution. This will require ordinary, special or unanimous support, depending on the significance of the resolution, the law and what your company’s governing documents state.
Any decisions that substantially affect the company will likely require a shareholders resolution, which is passed by those shareholders with voting rights. Finally, you can use circular resolutions to collect the votes of directors or shareholders when it is not possible to call a meeting. It is vital that you understand when to use each of these different processes so that your resolution remains binding.
If you would like advice about how to pass a company resolution, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A board resolution is simply a resolution passed by the board of directors. As the board of directors is responsible for the company’s day-to-day operations, these resolutions make most company decisions.
Shareholder resolutions (or member resolutions) are resolutions passed by the shareholders of a company. Normally a shareholder has one vote for every share they own in the company. This ensures that their voting power is proportional to their ownership stake.
Most board resolutions only need to be passed by a simple majority of the company directors, which is called an ordinary resolution. Decisions that are considered more important for the company may need to be passed by a larger majority of the directors (usually at least 75%), in which case they are known as special resolutions. If a decision requires approval from all company directors, it is a unanimous resolution.
An alternative to calling a meeting for a proprietary company is passing a circular resolution. A circular resolution is a written resolution that you distribute to all directors entitled to vote on the resolution (for a board resolution) or shareholders entitled to vote on the resolution (for a shareholder resolution).
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