How resolutions work, the different types of resolutions, and when companies need to pass.
Resolutions provide an opportunity for a company’s directors and/or shareholders to vote on key matters. They serve as a written record for making and approving important decisions or changes that affect the company’s share capital, governance and key stakeholders.
They often fall into two categories – directors’ resolutions and shareholders’ resolutions – where the consent of the company’s directors and shareholders is needed to authorise the resolution.
How do resolutions work?
That all depends on the company’s governance. Your company’s Articles of Association and any Shareholders’ Agreement will state:
- When resolutions are needed
- What type of resolutions are needed
- The pass percentage for each resolution
The need for resolutions – and their pass percentages – can vary depending on each company’s Articles of Association and Shareholders’ Agreements. If resolutions aren’t covered in either of the two documents, then the Companies Act 2006 will dictate when a resolution is required.
You can view and update your company’s governance settings and resolution pass rates by going to Secretarial & admin > Governance via your side navigation bar.
As mentioned above, there are two types of resolutions – directors' and shareholders’ resolutions.
When both resolutions are needed for a matter, the directors’ resolution must pass before the shareholders’ resolution can be sent for signing.
To somewhat complicate matters, both resolutions aren’t always needed. It may be that a directors’ resolution is only needed, or vice versa. Again, this depends on the company’s Articles of Association and Shareholders’ Agreement.
If a company has a Shareholders’ Agreement, it may state that certain shareholders must sign resolutions in order for them to pass. These shareholders may be key investors with a minority stake (<20%) but have a say in company decisions.
When a company goes through a funding round, investors may negotiate ‘investor consent’ rights into the deal. It’s a way for investors to protect their capital by ensuring they have a say in key business decisions.
Investor consent can be a standalone agreement or form part of the Shareholders’ Agreement. In any case, investors with these rights must sign the shareholders’ resolution in order for it to pass.
Different types of resolutions and their pass rates
Each director and shareholder (with voting rights) can vote for or against the resolution – either by a show of hands or written consent, i.e. a signature. Then a certain percentage of votes (or signatures) are needed to pass the resolution.
Here are a few common examples of the different names and types of resolutions:
Directors’ resolutions: >50% of votes are typically needed to pass, but this percentage can vary between the company’s Articles of Association.- When a directors’ resolution is required, it must pass before any shareholders’ resolution is sent for signing.
- There are no statutory provisions so any rules for directors’ resolutions must be found in the articles or Shareholders’ Agreement.
- General rule: any decision of the directors must be a majority decision at a meeting or a decision taken in accordance with Article 8 of the Model Articles.
Once the directors’ resolution passes, the following shareholders’ resolutions can be sent for signing:
Ordinary resolutions: a simple majority (>50%) is needed to pass.- Can be passed either as a written resolution or by a show of hands at a general meeting.
- Anything that may be done by ordinary resolution may also be done by special resolution.
Special resolutions: >75% of votes are needed to pass.
- Special resolutions can only be special resolutions if they are proposed as such beforehand, and they can also only be passed as such.
- Where a resolution is passed at a meeting, the resolution is not a special resolution unless the notice of the meeting includes the text of the resolution and specifies the intention to propose the resolution as a special resolution.
- Special resolutions must be filed with Companies House. Vestd does this for you automatically.
Ratifications: A ratifying resolution can be sent out to amend errors in previous resolutions or company changes, such as:
- Clerical errors in resolutions
- Directors’ errors
- Shareholders can ratify (approve) a breach of duty, breach of trust or other default by a director, using the statutory procedure set out in section 239 of the Companies Act.
- If a written resolution is circulated, all shareholders (Save for the conflicted director/s) must sign the resolution.
Unanimous resolutions: 100% of votes are needed to pass.
It’s worth adding that the company must send or submit a copy of the resolution to every eligible member (i.e. all shareholders with voting rights), even if it doesn’t require all of their signatures. This is stated in s.291 of the Companies Act 2006.
Why (and when) do companies need to pass resolutions?
As we’ve alluded to above, they don’t always have to. But if the company’s governance requires a resolution, it must be sent to the appropriate people.
Even if a company has a single director and shareholder, a directors’ and shareholders’ resolution is still needed.
When companies have more directors and shareholders involved, resolutions help share the commercial power and responsibility amongst those invested in the company – and stop individuals from making their own decisions that may negatively affect the business or its other stakeholders.
For those of you that have joined Vestd, you’ll become quite familiar with when resolutions are needed. Don’t worry though, the platform automatically generates the resolutions and sends them to the relevant people as and when required!
You can also create and send bespoke resolutions on Vestd. Almost every reason for sending a resolution is covered, you just need to write the resolution and select a few details such as who needs to sign it, the pass percentage and any must-sign directors/shareholders. Go to Secretarial & admin > Resolutions > Create a bespoke resolution.
Here are some common examples of when you may need to send a resolution:
Share capital: Any changes to the company’s share capital, for example share authorisations and issuances, new share classes and share class conversions, stock transfers and buybacks, and the waiving of pre-emption rights.Governance: Changes to the company's Articles of Association or the appointment or removal of directors.
As well as when resolutions are needed, the why is just as important. Resolutions help ensure the company’s directors and shareholders are aligned on key decisions, and give everyone a chance to voice their ideas or concerns on the direction of the business.
Resolutions help improve accountability and transparency between the company’s stakeholders.
What if a resolution doesn’t pass?
Resolutions fail to pass when they don’t get the percentage of votes required.
Much like when a bill doesn’t pass through parliament, the resolution fails and whatever the resolution was asking for cannot happen.
In this case, the ‘owner’ of the resolution may amend or negotiate the terms of the resolution to try and get more votes, or they may wait until a later date and try again.
Other useful info
Resolutions sometimes contain an expiry date. For example, where authorisation is required for share and option pools, the resolution must contain an expiry date no more than five years from the date the resolution passes. As well as the resolution pass date, you may often refer to the circulation date (i.e. the date the resolution is sent for signing).
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