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A core aspect of good corporate governance is the ability to define a resolution properly. Whether you are part of a small start‐up or a larger company, understanding what a company resolution is – and the role it plays in making significant decisions – can be the difference between efficient decision-making and costly legal missteps. In this guide, we’ll walk you through everything you need to know about company resolutions, why they matter, and how they are passed.
What is a Company Resolution?
A company resolution is a formal document that records decisions made by your directors or shareholders. In essence, it’s the way your business acknowledges and officially records significant decisions. Resolutions serve as a legal record and provide proof that decisions – ranging from routine matters to major structural changes – were made in accordance with both company law and your internal governance documents.
For example, when your board decides on key operational matters or changes in the company’s structure, a resolution is passed to capture that decision. This documentation can be crucial for compliance with legal requirements set by the Australian Securities and Investments Commission (ASIC) and other governmental bodies.
Types of Company Resolutions
When looking to define a resolution within your company, it is important to know that there are generally two types of resolutions:
Ordinary Resolutions
Ordinary resolutions are used for routine decisions. They typically require a simple majority – more than 50% – of votes in favour. Ordinary resolutions may cover topics such as:
- The appointment of directors
- Approval of financial statements
- Minor changes in internal policies
Because these decisions are considered standard business matters, passing an ordinary resolution is usually straightforward.
Special Resolutions
Special resolutions are required when decisions have a major impact on the company. These include changes such as amending the articles of association, changing the company’s name, or making fundamental structural changes. Special resolutions need a higher vote threshold – at least a 75% majority of eligible votes.
The higher threshold underscores the importance of consensus on decisions that could affect the future of your business.
How Resolutions Are Passed
Decisions within a company can be formalised through two primary methods: holding a general meeting or using a written resolution.
General Meetings
A general meeting involves the physical or virtual gathering of shareholders or directors. During such meetings, the resolution is presented, debated, and then put to a vote. General meetings are especially useful when in-depth discussion is necessary before a decision is made.
Holding a meeting also allows stakeholders to ask questions and understand the implications of the proposed decision. This alignment is crucial for maintaining trust and transparency within the business.
Written Resolutions
For many private companies, a written resolution is an attractive alternative to convening a meeting. With a written resolution, the proposal is circulated to eligible shareholders or directors, who can then indicate their vote in writing. This process is both efficient and cost-effective and saves valuable time without compromising the formalisation of the decision.
The Procedure for Written Resolutions
While the written resolution process offers convenience, it is important to follow a meticulous procedure to ensure validity. The typical process includes:
- Proposal: The resolution is initially proposed by the board of directors or a qualifying group of shareholders. It must clearly state what decision is being made.
- Circulation: The proposed resolution is then distributed to all eligible voters along with instructions on how to vote and the deadline for submitting responses. This step ensures transparency and fairness.
- Voting: Shareholders review the proposal and cast their vote – either in approval or against – within the specified timeframe.
- Outcome: If the resolution achieves the required majority (either a simple or 75% majority, depending on its classification), it is officially passed. The resolution is then recorded as part of the company’s central documentation.
It is advisable to maintain comprehensive records of all votes and communications regarding the resolution. Not only does this safeguard the legitimacy of the process, but it also provides a reference should any disputes arise later.
The Importance of Company Resolutions
Company resolutions are more than just formalities; they play a vital role in ensuring your business operates in a compliant and organised manner. Here are several reasons why resolutions are essential:
- Legal Compliance: Properly documenting decisions ensures that your company conforms to the necessary legal frameworks. This is critical for regulatory bodies such as ASIC and helps you avoid costly penalties.
- Record Keeping: Resolutions create an auditable trail that proves decisions were made democratically and with due diligence. This meticulous record-keeping is comparable to having a legally binding document on file – a necessity in today’s regulated business landscape.
- Dispute Resolution: In instances where conflicting interpretations arise regarding decisions, recorded resolutions serve as clear evidence of what was agreed upon. This can be particularly useful during internal disputes or external legal challenges.
Incorporating resolutions into your company’s decision-making process not only strengthens internal governance but also boosts stakeholder confidence and can support your efforts if ever scrutinised by regulators or auditors.
Limitations and Considerations
While the benefits of resolutions are clear, there are important considerations and limitations:
- Method Restrictions: Certain decisions cannot be made via a written resolution. For example, the removal of a director before their term ends may require the more formal process of a general meeting.
- Shareholder Rights: Even if your articles of association try to restrict certain procedures, shareholders usually have the right to propose resolutions if they meet the necessary thresholds. This open approach promotes transparency and fairness within your company.
- Timing and Process: It is essential to adhere strictly to deadlines and proper procedural steps. Failure to follow the correct process can render a passed resolution invalid, potentially leading to future disputes. For instance, ensuring that your process aligns with regulatory requirements is fundamental.
In some cases, the speed and ease of written resolutions might encourage hasty decisions. Therefore, it is vital for directors and shareholders alike to carefully consider the proposed resolution before casting their vote.
Final Thoughts on Defining a Resolution
Understanding how to define a resolution is central to effective corporate governance. Whether you choose to pass a resolution via a general meeting or a written format, the end goal is the same: to create a clear, legally compliant record of important business decisions.
For many start-up founders and small business owners, the process might initially seem daunting. Properly drafted resolutions, however, ensure that decisions are made in a structured and lawful manner. As you grow your business, these formal records provide a robust framework that can support future growth and help in any necessary dispute resolution matters.
Moreover, for startup founders who are still navigating the myriad complexities of corporate law, it might be wise to consider what foundational legal agreements are needed to protect your enterprise. Combining this with solid legal advice – perhaps by learning more about choosing the right legal counsel – can safeguard your company’s future and ensure that every major decision is thoroughly and appropriately documented.
Key Takeaways
- A company resolution is a formal legal document used to record significant board or shareholder decisions.
- There are two main types of resolutions: ordinary resolutions (requiring a simple majority) and special resolutions (demanding at least a 75% majority).
- Resolutions can be passed in general meetings or through more efficient written resolutions, especially for private companies.
- The detailed process for written resolutions includes proposal, circulation, voting, and the recording of outcomes.
- Maintaining accurate and legally binding records of resolutions ensures compliance, aids accountability, and can prevent or resolve disputes.
By understanding and properly implementing company resolutions, you lay the groundwork for robust corporate governance and a more secure future for your business.
If you would like a consultation on defining a resolution, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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