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 made by the board concerning one of these matters. For example, voting on whether to approve a decision to enter into an important contract with a client. Some decisions might also need to be made by shareholders. These decisions are usually less about day to day management, and more about critical business matters.

For example, if the company is considering winding up when it is insolvent, the shareholders will get a say.

The rules and requirements may vary from company to company. They are usually found in the company’s constitution and shareholder agreements. Most decisions made by the board (or shareholders) are ordinary resolutions.

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 2001 is a 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 shareholder agreement often requires a special resolution of directors to approve critical business decisions. There is no set rule on what percentage of the directors is necessary to approve a special resolution of directors (although 75% is typical).

However, for shareholder resolutions, the Corporations Act states that some decisions need to made by special resolutions. This requires the approval of the holders of at least 75% of the shareholder 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.

Why Are Special Resolutions Important?

1. Special Resolutions Protect Minority Shareholders

Individuals or entities with larger portions of the shares in a company have a greater decision making power. This has the potential to be unfair to minority shareholders whose commercial interests are at risk. A special majority ensures that minority shareholders still get a say in a company’s decision making.

2. Critical Business Matters Should Have Strong Support

A major decision made by more than 50% of the company’s board or shareholders could still be divisive.

For example, converting from a private company to a public company.

This would open the company to general investment from the public and can potentially radically alter the company business. Having special resolutions for these decisions means that the decision has a much higher level of support. This provides commercial certainty because voting parties know that major changes will not happen without a larger majority. It also avoids disputes over critical business matters.

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 requirements for decisions that require special resolutions.

1. Altering the Company

Decisions that change the fabric of the company generally require approval by a special resolution of the shareholders. Some examples include:

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 change 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 the 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

For example, 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.

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 are made by special resolution, including:

  • the Corporations Act;
  • your company constitution; and
  • shareholders agreements.

If you have questions about ordinary and special resolutions, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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