Shareholder voting rights are established in the shareholders agreement, which amongst other details, outlines what decisions require shareholder approval.
It is important that your company has a shareholders agreement in place to ensure that all shareholders and directors are in alignment with how the company is run.
A shareholders agreement is a legal document that sets out the relationship between shareholders and directors of a company, and is the fundamental rulebook that shareholders and directors should refer to when making any decision about the company.
Having a shareholders agreement mitigates and reduces the risk of disputes and any confusion arising, and provides exit strategies if any unfortunately occur.
While the below unpacks the standard decision-making approach, a shareholders agreement can be specifically tailored to suit any circumstances.
So, who makes decisions?
Directors and shareholders make decisions by passing resolutions, and the percentage of approval required to pass a certain resolution will depend on the terms of the shareholders agreement.
The shareholders agreement will clearly set out which decisions are made by directors, and which are made by shareholders. This avoids disputes arising as to who has authority to make certain decisions.
Shareholder voting rights are generally assigned to the number of shares; however, this is dependent on the share structure and share class.
The number of votes required to pass a shareholder’s resolution is set out in the shareholders agreement. The three main types of resolutions with specific voting requirements attached are:
- Ordinary Resolution [50% or more of the total votes present and entitled to vote];,
- Special Resolution [75% or more of the total votes present and entitled to vote], and
- Unanimous Resolution [100% of the total votes present and entitled to vote].
While directors’ resolutions are quite similar, most director decisions are made either by the majority agreeing, or unanimously [meaning all directors must agree to pass the resolution].
It is important to outline what critical business matters can be passed by a majority vote, and which must be made unanimously between the directors.
How do shareholders use their voting rights to pass a decision?
Shareholders make decisions by passing resolutions at shareholders meetings. As most decisions are made by directors, shareholders will meet less frequently and only when there is a matter that specifically requires shareholder approval. Your shareholders agreement should set out what these matters are.
For example, the shareholders agreement could include:
- Amending the company constitution [such as to create a new share class],
- A major change in the direction of the business [for example, a merger with another separate business entity],
- The monetary limits of entering into contracts or selling assets, or
- Winding up the company [such as to appoint an administrator or liquidator to the company].
Not sure whether your shareholders agreement has been prepared with your business in mind? Reach out to the businessDEPOT legal team for a complimentary review.
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