What is a special resolution?

Usually the board of directors of a company is responsible for the day to day running of the company. For practicality reasons, most decisions required to operate the company on a daily basis are usually able to be approved by the majority of the board (i.e. 51% of the directors present being in agreement). This is referred to as an ordinary resolution of the board. However, some more important decisions may require a higher percentage of directors (or shareholders) to approve a matter. This is known as a special resolution of the board (or shareholders) and generally 75% or more of the directors (or shareholders) must agree to a matter in order for a special resolution to be passed (although this percentage is negotiable). A special resolution makes matters more difficult to pass (as you have to have more directors (or shareholders with a higher percentage of shares) in agreement) and therefore it can help protect smaller shareholders with less/no board representatives against unfavourable matters being passed by more major shareholders with more board representatives.

What matters must be approved by special resolution?

The Corporations Act requires that the following matters be approved by special resolution:

  • adopting a constitution after registration and modifying or repealing the constitution
  • changing a company’s name
  • changing a company type
  • applying to change a company type
  • varying and cancelling class rights
  • issuing bonus, partly-paid, preference and redeemable preference shares
  • converting ordinary shares to preference share
  • limiting calls to when a company is externally-administered
  • different dividend rights
  • selective reduction or cancellation of shares
  • selective buy-back
  • financial assistance
  • appointing an auditor to replace an auditor removed from office
  • applying for a company to be wound up by the court
  • applying for a company to be wound up voluntarily
  • power of liquidator to accept shares etc. as consideration for sale of property of company
  • for an arrangement to be binding on creditors, it must be sanctioned by a special resolution
  • transferring a company’s registration to another state or territory

A company may also require that certain other important matters must be approved by special resolution (such as the issuance of new shares, the issuance of dividends and the issuance of directors’ fees). These matters should be set out clearly in writing, usually in the shareholders agreement in respect of the company.

Conclusion

When incorporating a company with more than one shareholder (or indeed taking on additional shareholders), it is important to consider whether certain issues (in addition to those specified in the Corporations Act) should be decided by special resolution. Once you have decided on a list of matters, it should be clearly set out in the company’s shareholders agreement so that there can be no disputes going forward.

If you require advice on what matters are appropriate to be decided by special resolution or you would like a shareholders agreement drafted or reviewed, please get in touch with one of our specialised lawyers and they will be able to assist.

Jill McKnight

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