A board is one or a group of individuals appointed to act as a director of the company. As your company is a separate legal entity, it can enter into contracts, incur debt, sue and be sued. The directors of a company are responsible for managing the company’s business. Directors may exercise all the powers of the company through an ordinary resolution except a power that the Corporations Act 2001 (Cth) (Corporations Act) or a provision of the company’s constitution or shareholders agreement requires the company to obtain a special resolution of the board.
Most day-to-day decisions require an ordinary resolution. Once your company starts to grow and/or you have multiple directors on the board and a growing list of shareholders, you may want to implement documents that set out certain decisions and processes that require a special resolution. This article will explore what each of these resolutions are and where each may be needed.
What is an Ordinary Resolution?
An ordinary resolution refers to decisions that require approval by a simple majority (i.e. more than 50%) of the directors or shareholders.
The board of directors are responsible for the day-to-day running of a company. A board resolution is a formal decision by the board that shows the board resolved to take a certain action. For example, voting on whether to approve a decision for the company to enter into a smaller contract with a client, contractor or supplier. In any case, it is best practice for the board to put a board resolution in writing any time they resolve to take a certain action. This removes potential doubt in the future as to whether the board approved a certain action in the past.
Certain decisions may also need to be made by shareholders. The Corporations Act sets out certain decisions that require a special resolution of the shareholders and are usually less about day-to-day management and more about critical business matters, usually longer-term decisions.
What is a Special Resolution?
Not all decisions are of the same importance to the success of a company. The most important ones typically require a larger majority than ordinary resolutions. These are known as special resolutions.
The Corporations Act is the key piece of legislation regulating companies in Australia. It does not require any decision to be made by a special (and not ordinary) resolution of directors. However, a company’s constitution or shareholder agreement often sets out certain decisions which require a special resolution of the board.
There is no set rule on what percentage of the directors is necessary to approve a special resolution of directors, although 75% is typical. In your company’s constitution or shareholders agreement, you are able to customise the definition of a “special resolution” so that it requires a certain threshold or a specific director who must provide their approval for a special resolution to pass along with the required approval threshold being reached.
However, for shareholder resolutions, the Corporations Act outlines certain decisions that require a special resolution of the shareholders. This needs the approval of at least 75% of the shareholders holding shares with voting rights. Shareholders can agree in a company’s shareholders agreement on the percentage of votes necessary to approve a decision where the Corporations Act does not specify it.
Continue reading this article below the formWhy Are Special Resolutions Important?
1. Special Resolutions Protect Shareholders
If an investor has invested a large sum into your company, they will most likely want to have some influence in the long term decision making of the company. By requiring a certain decision requires a special resolution of the shareholders, it means that the large majority of shareholders in your company must be made aware of, consider and approve a certain decision.
2. Critical Business Matters Should Have Strong Support
A few examples of decisions that may require a special resolution of the board under a shareholders agreement include but are not limited to:
- purchasing or selling any company assets worth over a certain monetary value;
- incurring capital expenditure of more than a certain monetary value in a financial year;
- incurring any financial indebtedness which exceeds a certain monetary value;
- issuing securities in the company; or
- entering into a contract where the company will either pay or receive monies over a certain monetary value.
A few examples of decisions that may require a special resolution of the shareholders under a shareholders agreement include but are not limited to:
- authorising the payment of fees or other remuneration to a director;
- authorising a sale of the business;
- winding up the company; or
- authorising a related party transaction (a deal between the company and a related party, such as one of its directors or shareholders).
As you can see, these decisions may be of high importance to the company. Where decisions are listed as requiring a special resolution of either the board or shareholders, or both, it means there is a high threshold of approval needed. This ensures a large majority of the board or shareholders are on board for that particular decision. Voting and approving matters shows support for the directors to take a certain action that may affect the company or its shareholders going forward.
When Do Decisions Require a Special Resolution?
While it depends on the company documents in place, the Corporations Act sets out a basic set of decisions that require special resolutions of the shareholders.
1. Altering the Company
Decisions that change the fabric of the company generally require approval by a special resolution of the shareholders. Examples include:
- modifying or adopting the company constitution;
- varying rights attached to a certain class of shares;
- changing the company’s name; or
- changing the company type (e.g. from private to public).
The first of these is extremely important. The company constitution is a special form of contract that governs the company’s internal management. Changes to the company constitution could alter the rights given to shareholders.
2. Making Significant Changes to the Company’s Share Structure
Changes to the company’s share structure typically require a special resolution of shareholders. For example, issuing preference shares will require a special resolution. Preference shareholders get priority over ordinary shareholders if the company goes into liquidation. This requires approval by special resolution because issuing preference shares naturally disadvantages ordinary shareholders.
The same is true of converting ordinary shares into preference shares and removing or cancelling shares. If you want to alter the company’s share structure, make sure you consult your company documents and the Corporations Act and follow the right voting procedure.
3. Decisions About the Company’s Future
If your company is facing financial hardship, you may need to decide whether the company needs to be externally administered or wound up. Any of these decisions will require a special resolution. Winding up the company involves finalising any outstanding financial matters and dealing with the assets to satisfy potential debts or creditors.
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
If you own a company, it is important to understand the difference between ordinary and special resolutions when making your company decisions. Particular documents and legislation can require that certain decisions need special resolution.
There is no set rule on what percentage of the directors is necessary to approve a special resolution of directors (although 75% is typical). In your company’s constitution or shareholders agreement, you can customise the definition of a special resolution so that it requires a certain threshold or a specific director who must provide their approval for a special resolution to pass along with the required approval threshold being reached.
If you have questions about ordinary and special resolutions, 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.
We appreciate your feedback – your submission has been successfully received.
