What is a Special Resolution within a Limited Company?
There are certain decisions and changes that a company makes that must be done via a special resolution. Here we take a look at what makes a special resolution and why a company would need to use one.
According to the regulations set out in the Companies Act 2006, a company making any decisions must be made via resolutions. Where a particular decision or change that is needed to be made is of a sensitive nature, or will have a major effect on the company, then it must be passed by a special resolution.
What is a special resolution?
As a company grows larger or diversifies within it’s sector, changes to the company structure will obviously be needed to accommodate the extra needs of the company as it expands. This means that the rules that company may have originally been set up to run by at the time of their company formation may no longer be practical or effective to carry on following.
When a major decision is proposed to enact important changes to a company structure or to the rules that it works by, then a special resolution would be needed. This means that the company would need at least 75% of the shareholder votes to pass in favour of the proposed decision.
Conversely, where there is no need for a special resolution, an ordinary resolution is passed by shareholders based on more than 50% of the votes cast being in favour of the decision.
Why are special resolutions important?
Having a special resolution in place for very important decision-making procedures really can help to ensure that those proposed changes are much better considered and are being made for the good of the company and those involved in running or working for it.
The special resolution system is the best way to help protect those shareholders that hold minority shares. This means that important decisions cannot be taken without proper consideration and decisions cannot be simply pushed through by the will of the majority shareholders.
Lets look at a scenario where a single shareholder or group of shareholders hold 25% of the company shares. This single shareholder or group of shareholders could be in a position where they can effectively oppose a resolution. This is where a company would need to hold a special resolution to help ensure these changes are bettered considered and to ultimately make the right decision for the company as a whole.
Gaining more support than a simple majority vote can give a company a better decision-making procedure when very important changes are being considered. The only downside to this would be when a decision is blocked by an intransigent minority group of shareholders who are unwilling to accept the proposed changes.
How does a special resolution get passed?
There are a number of ways in which special resolutions can be passed. The most popular methods are passing a special resolution are:
A) On a show of hands or collective poll at a general meeting of shareholders
B) Via a written shareholders’ resolution
When considering decisions or new changes to the company, it is important that you choose the right type of resolution. A special resolution isn’t necessarily good or useful for every single new company decision you need to make. In fact, using the wrong type of resolution, including using an ordinary resolution where you should be using a special resolution, can mean the resolution is invalid because you have not followed correct procedures.
Where should we need a special resolution to be passed?
According to the guidance set out in the Companies Act 2006, there are a number of actions and transactions that need to have a special resolution passed. These include the following examples:
- A reduction in the company’s share capital
- Certain cases where the company purchases its own shares
- Changing the company’s status by registration
- Dis-application of shareholder pre-emption rights
- To amend the company’s articles of association
- To change the company name
- Winding up of the company voluntarily or via the court
There are other company decisions that can be passed by special resolution, even when they can be passed by an ordinary majority share vote resolution under normal circumstances. You can write into your Articles of Association what decisions or transactions you would like to hold a special resolution to decide. This can be written in as a safeguarding measure to protect minority shareholders from the rash or risky decisions of majority shareholders over some changes that could affect how the company is run.
So you can see that there may well be a good reason to introduce special resolutions, especially when your company is steadily growing and you need to make important decisions that would affect the future structure or operation of the company.