In Short
- Shareholders’ agreements detail voting rights, ensuring decisions reflect proportional ownership and influence.
- These agreements help manage potential conflicts by clearly outlining shareholder roles and decision-making processes.
- They protect all parties’ interests by establishing rules for significant actions like issuing new shares or selling the business.
Tips for Businesses
Draft a detailed shareholders’ agreement to clearly establish voting rights and decision-making processes. This will help minimise conflicts and ensure that all shareholders understand their roles and obligations. Regularly update the agreement to accommodate changes in company structure or shareholder dynamics, ensuring continued alignment with business goals.
Table of Contents
- How Many Votes Does Each Shareholder Have?
- How Many Shareholders Need to Vote in Favour of a Matter for It to Pass?
- How are Matters Usually Decided?
- Why are Shareholders’ Voting Rights Important to Understand?
- What Happens if a Shareholder Cannot Attend a Meeting?
- Key Takeaways
- Frequently Asked Questions
When setting up a company with more than one shareholder or bringing on a co-founder, it is appropriate to consider the decision-making processes and the voting rights attached to each class of the company’s shares. The company’s shareholders’ agreement, constitution, and the Corporations Act contain the matters requiring shareholder approval and the voting rights attached to each class of shares on issue in the company. This article discusses commonly asked questions about company shareholder voting rights and how shareholders can exercise them.
How Many Votes Does Each Shareholder Have?
The voting rights of each shareholder depend on the class of shares they hold and the rights set out in the company’s corporate governance documents.
The default position is that each shareholder carries one vote. This position is reasonable as it ensures that each shareholder holds a proportional number of votes relative to the number of shares it holds. For example, if a shareholder holds 75 shares out of 100 shares on issue in the company, they will hold 75 out of 100 votes. When starting a company, it is important to consider the number of shares each shareholder will receive and the rights attached to those shares.
Although less common, it is possible for a company to:
- create and issue different classes of shares with unique voting rights;
- create and issue classes of shares that do not have voting rights at all.
However, unless circumstances warrant the company issuing non-voting shares, you would ordinarily expect all shares to have voting rights. Investors are paying for their shares and typically expect the right to vote on certain matters that could impact the business and, in turn, their investment.
How Many Shareholders Need to Vote in Favour of a Matter for It to Pass?
Generally, the company’s directors will handle its day-to-day decision-making. However, your company’s governing documents may also set out specific matters which require shareholder approval.
The company’s governing documents may differentiate between matters requiring approval by:
- ordinary resolution of the shareholders;
- special resolution of the shareholders;
- written consent of certain shareholders; or
- unanimous resolution of the shareholders.
Usually, the passage of an ordinary resolution requires approval by the shareholders holding over 50% of the company’s shares. Accordingly, if a single shareholder holds 60% of the company’s shares, they can pass the resolution by themselves without the approval of any other shareholder.
Finally, the passage of a unanimous resolution requires the approval of all shareholders, regardless of the number of shares or votes they hold. Ultimately, it is essential that the directors and shareholders are familiar with:
- the matters requiring shareholder approval;
- approval thresholds required for certain decisions; and
- voting rights belonging to each class of shares.
How are Matters Usually Decided?
Decisions that are particularly important and could change the fabric of the company usually require approval by a special resolution of the shareholders. Some common examples of matters requiring shareholder approval by special resolution are:
- amending the company’s constitution;
- creating a new class of shares;
- selling a majority of the Company’s assets;
- selling or licensing the Company’s intellectual property;
- undertaking an Initial Public Offering (IPO), which involves publicly listing the company’s shares on a recognised stock exchange; and
- varying the rights of shares or altering the company’s share structure.
Why are Shareholders’ Voting Rights Important to Understand?
Your company’s decision-making structure affects who controls it and how they make important decisions. Shareholders, unlike directors, do not have to vote in the company’s best interests and can vote according to their own interests. Obtaining shareholder approvals can also be time-consuming and administratively burdensome, particularly if the company has a large number of shareholders. As such, companies often seek to limit the matters requiring shareholder approval as much as is reasonable.
What Happens if a Shareholder Cannot Attend a Meeting?
Shareholders who cannot attend in-person meetings can appoint a proxy to vote on their behalf. Business owners should encourage shareholders to utilise this option, especially in cases where decisions may significantly affect the company.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Key Takeaways
A critical aspect of corporate governance is understanding shareholder voting rights. In particular, you should learn which decisions require shareholder approval and the number of votes required to approve those decisions. The Corporations Act and, if applicable, the company’s shareholders’ agreement and constitution often determine this, as they set out the voting rights of the company’s shareholders. The importance of the decision typically influences the degree of shareholder approval required concerning a particular decision and whether it could significantly impact the company and its shareholders.
If you need assistance with your shareholders’ voting rights, 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
When it is difficult or unattainable to hold a members’ meeting to vote on a matter, a circular resolution, which may also be called a ‘circulating resolution’ or ‘written resolution’, allows decisions requiring a member’s resolution to be made if the company’s constitution or shareholders’ agreement contains clauses that permit this method. To determine if you can use a circular members’ resolution, you must first review your company’s constitution and shareholders’ agreement for any clauses that allow or disallow such resolutions. If these documents do not reference circular resolutions, you can rely on the Corporations Act to implement one. A circulating resolution, used in companies with more than one member, offers an alternative to a meeting for decision-making, and it is validly executed when members sign and date individual copies of the resolution, with the resolution considered passed once the last member signs.
Existing shareholders do not have an implied right to purchase shares when another shareholder decides to sell their shares in a company. The requirement to advertise and offer the shares to existing shareholders is known as a pre-emptive right of the sale of shares, which can be included in either the company’s constitution or shareholders’ deed. The Corporations Act does not provide for a pre-emptive right for shareholders to offer their shares first to existing shareholders before seeking alternative buyers. Therefore, to rely on this right, you must expressly include pre-emptive rights in your company’s constitution or shareholders’ deed.
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