24 FEB 2017
Did you know … that not every shareholders’ resolution is ordinary or special?
One normally thinks of the Companies Act 2006 as providing for shareholders to pass only two types of resolution: an ordinary resolution and a special resolution. In fact, it provides for a third type, for in relation to a number of important provisions requiring a resolution of the shareholders it allows companies to choose for themselves how big a majority is needed in order to pass the resolution.
The basic framework
Under the Companies Act 1985, shareholders could pass three types of resolution:
- an ordinary resolution, albeit that it was not defined, required a bare majority in order to pass
- an extraordinary resolution required a three-quarters majority in order to pass (section 378(1))
- a special resolution not only required a three-quarters majority in order to pass, but also, subject to a short notice provision, required that the meeting could not be held on less than 21 days’ notice (section 378(2)).
(An “elective resolution” was a resolution passed by a private company in order to opt in to a small number of relaxations of the law. It was not, therefore, a resolution of general application.)
The Companies Act 2006 took the sensible step of simplifying this framework. First, it abolished the notion of an extraordinary resolution, save where there was a reference to such a resolution in a company’s memorandum or articles or in a contract (see paragraph 23, Schedule 3, Companies Act 2006 (Commencement No 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007 (SI 2007/2194)). It also removed the 21 days’ notice requirement for special resolutions, such that, for example, a general meeting of a private company at which a special resolution is to be considered can now be called on just 14 days’ notice.
The basic framework of the Companies Act 2006, therefore, provides for shareholders to pass a resolution either as an ordinary resolution or as a special resolution. The requirements associated with these two types of resolution are set out in some detail in sections 282 and 283. The key point, of course, is that an ordinary resolution is “a resolution that is passed by a simple majority”, whilst a special resolution is “a resolution passed by a majority of not less than 75%”.
Provisions requiring a “resolution”
Before the Act turns to ordinary and special resolutions in sections 282 and 283, it notes in section 281(3) as follows:
'Where a provision of the Companies Acts –
(a) requires a resolution of a company, or of the members (or a class of members) of a company, and
(b) does not specify what kind of resolution is required,
what is required is an ordinary resolution unless the company’s articles require a higher majority (or unanimity).'
In other words, where the Act simply requires a “resolution”, it is open to companies to specify in their articles that something more than an ordinary resolution – or, for that matter, a special resolution - is required.
Many familiar provisions of the Act specify that a decision must be taken as an ordinary resolution or a special resolution. For example, section 168 provides for the removal of a director by means of an ordinary resolution, sections 439 and 439A require quoted companies to seek shareholder approval of their directors’ remuneration report and directors’ remuneration policy in the form of an ordinary resolution and section 77 permits companies to change their name by means of a special resolution. However, many of the provisions which are commonly thought of as requiring an ordinary resolution in fact specify simply that a “resolution” is required. For example:
- a director’s long-term service contract must be approved “by resolution of the members of the company” (section 188(2)(a))
- a loan to a director must be approved “by a resolution of the members of the company” (section 197(1))
- an auditor liability limitation agreement must be authorised “by the company passing a resolution” (section 536(2) and (3))
- shareholder authorisation to directors to allot shares must be given by the articles or “by resolution of the company” (section 551(1))
- a company may sub-divide or consolidate its shares if its shareholders “have passed a resolution authorising it to do so” (section 618(3))
- an off-market share buyback must be authorised “by a resolution of the company” (section 694(2)(a)).
In relation to all such provisions, the company’s articles may require something more than an ordinary resolution. If they do, a resolution which is passed by a bare majority, but which does not meet the higher threshold specified in the articles, will not be effective under the Act.
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Practical implications of section 281(3)
Shareholders are not subject to restrictions as to the provisions they may insert into the articles. They are perfectly entitled, for example, to insert wording to the effect that the company may remove a director only with a 90% majority or change its name only if the decision to do so is unanimous. Whether such provisions are effective, however, is another matter. As far as the Act is concerned, an ordinary resolution will suffice to remove a director under section 168 regardless of what the articles say, and similarly a special resolution will suffice to change the company’s name under section 77. A minority shareholder who is aggrieved by the failure to comply with the higher thresholds specified in the articles might, it is true, bring legal proceedings based on a breach of the articles, but it is doubtful, to say the least, that he would be able to persuade a court to enforce the provision in question so as, in effect, to override the statutory position. In the course of their discussion of section 281, the explanatory notes to the Act state that: “When a provision specifies that an ordinary resolution is required, the articles will not be able to specify a higher majority.” This is not literally correct, since companies are free to insert such wording into their articles as they please, but the underlying notion that any such higher majority will not be enforceable is probably sound.
Where, however, the Act merely requires a “resolution”, a provision in the articles specifying that more than a bare majority is required is fully effective. If, for example, the articles state that a loan to a director must be authorised by a 90% majority, a resolution to approve a loan which is passed by a 55% majority will not suffice for the purposes of section 197. By in some instances requiring a “resolution” rather than an ordinary or special resolution, therefore, the Act is making it clear that in relation to those provisions, at least, companies are free to adapt the statutory requirements to their own needs.
Provisions in which the Act refers merely to a “resolution” may be regarded as part of the regime’s efforts to assist minority shareholders. Some minority shareholder protection measures, such as the derivative claim or the unfair prejudice petition, afford minorities automatic protection. Others, such as the power under section 22 to entrench provisions in the articles, protect only those minorities who have sufficient bargaining power to take advantage of them in the first place. The freedom to raise the threshold for approval of certain decisions above a bare majority falls into the latter category, for only a minority shareholder who is in a position to require the majority shareholders to insert a higher threshold into the articles will be able to reap its benefits. However, whilst not all minorities will be able to take advantage of it, it is nevertheless a useful tool in appropriate circumstances, and minority shareholders should bear it in mind when they are devising a scheme to protect their interests.
From the perspective of company secretaries and any other parties who are engaged in arranging or advising on a company’s internal affairs, the law in this area should serve as a reminder of the need to be familiar with the company’s articles in their entirety. Anyone who is seeking to ensure that a shareholders’ resolution is passed correctly will check the articles for wording on matters such as weighted voting rights and, if the resolution is to be passed at a meeting, the quorum. Provisions raising the approval threshold for certain decisions are not common, but that is all the more reason to be alert to the risk of overlooking them. After all, the simple fact is that a resolution which fails to meet a raised threshold has not been passed in accordance with the Act and is therefore of no effect.