Directors’ Voting Rights for Shareholders’ Agreements

A company’s board is made up of one or more directors.  Where there are at least two directors sitting on the board, the directors must hold board meetings in order to vote on certain issues which have to be resolved by the board.

How many votes does each director have?

It is standard practice for each director to have one vote.  Directors’ votes should never be linked to shareholdings as directors do not necessarily own shares.  If a matter is to be decided based on shareholdings, the shareholders’ agreement should state that the matter is to be decided by the shareholders rather than the directors.

How many directors need to vote in favour of a matter for it to pass?

Often shareholders’ agreements differentiate between:

• matters that have to be passed by an ordinary resolution of the director,
• matters that require a special resolution of the directors, and
• matters that require a unanimous resolution of the directors.

Generally, an ordinary resolution of the director requires over 50% of the directors to vote in favour of the matter.  This means that if there are two directors then both have to vote in favour; if there are three directors then at least two have to vote in favour; if there are four directors then at least three have to vote in favour; and if there are five directors then at least three have to vote in favour.

A special resolution usually requires at least 75% of the directors to vote in favour of a matter (although this percentage is a commercial matter and it is not uncommon for it to be changed, depending on the number of directors).  This means that if there are two directors then both have to vote in favour; if there are three directors then all three have to vote in favour; if there are four directors then at least three have to vote in favour; and if there are five directors then at least four have to vote in favour.

A unanimous resolution requires all directors to vote in favour of a matter.

How are matters usually decided?

Generally most matters are decided by an ordinary resolution of the board.  This allows the business to function effectively without having to get all directors to agree on each and every matter.  However, there may be a list of critical business matters that require a special resolution or unanimous resolution of the directors.  Usually, these are limited to key issues that each director wants to make sure he or she has say in.

What is a casting vote?

The directors will appoint a chairperson to chair each board meeting.  The chairperson may be appointed for one board meeting alone or may be appointed for a set period.

The shareholders’ agreement should specify whether the chairperson has a casting vote.  If the chairperson does have a casting vote then, if there is a board deadlock (in other words 50% of directors are in favour of a matter and 50% are against it), the chairperson can use his casting vote to pass the matter, if he chooses.

If the chairperson does not have a casting vote, then he is not able to change a board deadlock.  There should be detailed provisions set out in the shareholders’ agreement explaining what will happen in the event of a board deadlock.

Conclusion

Voting provisions can be quite complex.  As a shareholder, you need to think about these carefully before you enter into a shareholders’ agreement.  You need to make sure that no one party has complete control of the board, particularly when it comes to critical business matters that could seriously affect you.  In addition, you need to think about the future and how the board might change (for example is it likely that additional directors will be appointed?) and how this could affect you (for example will this mean that you no longer have control of the board?).

If you would like any additional information about voting provisions or shareholders’ agreements or you require a shareholders’ agreement to be drafted or reviewed, please do not hesitate to contact LegalVision today.  One of our business structuring experts would be delighted to assist you!