The board of directors makes decisions and represents the company in business. But how does it function? Read this blog to know more.
Overview
In this introductory guide, we delve into the distinctive features of ordinary and special resolutions, unraveling their roles in the corporate decision-making tapestry. By understanding the nuanced differences in their voting thresholds and applications, stakeholders can navigate the terrain of corporate governance with clarity and purpose.
Key Difference Between Ordinary and Special Resolutions
The primary distinction between an ordinary resolution and a special resolution lies in the majority required for their approval.
An ordinary resolution necessitates a straightforward majority vote, constituting 50% +1 of the cast votes. It applies to routine or less significant matters, such as endorsing annual financial statements, appointing auditors, or declaring dividends.
In contrast, a special resolution demands a higher majority, usually 75% or more, for passage. It is reserved for crucial matters with a profound impact on the company. Key differentiators between ordinary and special resolutions include:
- Ordinary resolutions require a simple majority vote (50% +1), while special resolutions mandate a higher majority vote (typically 75% or more).
- Ordinary resolutions pertain to routine matters, while special resolutions address important or substantial concerns.
- Ordinary resolutions are less formal, while special resolutions are more formalized.
- Ordinary resolutions are less likely to yield significant consequences, whereas special resolutions are more consequential.
- Ordinary resolutions usually do not necessitate legal or professional advice, but special resolutions often require such guidance.
- Ordinary resolutions are typically approved at general shareholder meetings, whereas special resolutions may involve additional formalities like regulatory filings or specific language in the resolution.
- Ordinary resolutions do not demand specific notice to shareholders, whereas special resolutions typically require a lengthier notice period.
- The implementation of an ordinary resolution can be immediate, while executing a special resolution may involve additional steps like filing with relevant authorities.
- Ordinary resolutions can be proposed by the company’s board or shareholders, whereas special resolutions can only be initiated by the board.
- Ordinary resolutions are considered less binding on the company and shareholders compared to special resolutions.
What is Ordinary Resolution
An ordinary resolution constitutes a formal decision reached by a company or organization’s members or shareholders during a meeting. It receives approval through a simple majority vote of those present and voting, typically applied to routine or uncontroversial matters. Matters addressed by an ordinary resolution include the appointment of directors, adoption of financial statements, and approval of amendments to the company’s articles of incorporation.
Upon passage, an ordinary resolution becomes binding on all members or shareholders, regardless of their presence or voting stance at the meeting. The decision is documented in the meeting minutes, and a copy is usually submitted to the relevant government agency or regulatory body.
Examples of decisions made through an ordinary resolution encompass:
- Appointment or removal of directors
- Adoption of financial statements
- Approval of changes to the company’s articles of incorporation
- Approval of mergers or acquisitions
- Approval of stock option plans for employees
- Approval of dividends or capital distributions
- Appointment of auditors
Important Considerations:
- Ordinary business matters, such as approval of financial statements, are conducted at the AGM using this resolution form
- The number of votes supporting the resolution must be greater than the number of votes cast against it
- Declaration of dividend
- Appointment of directors
- Recruitment of auditors and their compensation. In other words, the resolution will be approved if a simple majority votes in favour of the proposal
- By the 2013 Companies Act requirements, all members must have received advance notice of the meeting. A valid resolution must receive the support of a minimum of 51% of the members to pass
- The votes cast by members who are qualified to vote would be counted
- Once the required signatures are obtained, the duplicate of the ordinary resolution may occasionally need to be filed with the Registrar.
Advantages of Ordinary Resolution
Advantages of employing an ordinary resolution for decision-making within a company or organization include:
- Simplicity: The straightforward majority vote required for ordinary resolutions is easy to comprehend and implement.
- Flexibility: Ordinary resolutions can address a broad spectrum of matters, including routine or non-controversial decisions.
- Efficiency: Given their simple majority vote requirement, ordinary resolutions can be swiftly and minimally delayed.
- Cost-effectiveness: Ordinary resolutions are less formal and more cost-effective than other resolution types, such as special resolutions.
- Transparency: These resolutions are formal decisions documented in meeting minutes, ensuring transparency and accountability.
- Shareholder’s Rights: Ordinary resolutions empower shareholders to voice their opinions on company affairs and exercise their vote to safeguard their rights.
Disadvantages of Ordinary Resolution
Nevertheless, there are potential disadvantages to consider:
- Limited Control: A simple majority vote for ordinary resolutions allows a small group to pass decisions that may not be in the best interest of the majority.
- Lack of Consensus: Ordinary resolutions may not truly represent a consensus among members or shareholders, as they only require a simple majority.
- Vulnerability to Manipulation: A small group with vested interests may manipulate ordinary resolutions.
- Limited Minority Protection: Ordinary resolutions offer less protection for minority shareholders compared to special resolutions.
- Inefficiency: In some cases, ordinary resolutions may not be the most efficient decision-making method, failing to consider the views of all members or shareholders.
- Lack of Oversight: Ordinary resolutions may be passed without proper oversight, potentially leading to poor decision-making or financial mismanagement.
What is Special Resolution
A special resolution constitutes a formal decision reached by a company or organization’s members or shareholders during a meeting. Unlike an ordinary resolution, it requires a higher threshold of votes, typically 75% or more in favor, indicating its application for more substantial or contentious matters demanding increased approval.
Examples of matters falling under the purview of a special resolution include:
- Altering the company’s name
- Increasing authorized share capital
- Amending the company’s articles of association
- Approving a share buyback
- Changing the company’s business type
- Sanctioning the sale of a significant asset
To pass a special resolution, a quorum must be established at the meeting, with a higher percentage of those present and voting required for approval. The quorum is generally specified in the company’s articles of association or bylaws.
Once passed, a special resolution is binding on all members or shareholders, irrespective of their presence at the meeting or their voting stance. The decision is documented in the meeting minutes, and a copy is usually submitted to the relevant government agency or regulatory body.
Advantages of Special Resolution
Advantages of utilizing a special resolution for decision-making within a company or organization include:
- Protection for Minority Shareholders: The higher threshold of votes in favor provides increased protection for minority shareholders, ensuring significant decisions have broader support.
- Greater Consensus: Special resolutions reflect a higher level of consensus among members or shareholders, demanding a larger percentage of votes in favor.
- Increased Oversight: Involving more oversight and scrutiny, special resolutions can contribute to improved decision-making and financial management.
- Greater Control: Special resolutions afford members or shareholders greater control over substantial decisions, such as amendments to the company’s articles of incorporation or the sale of a significant asset.
- Transparency: Special resolutions are formal decisions recorded in meeting minutes, ensuring transparency and accountability.
- Legal Requirement: In certain cases, the law may necessitate a special resolution for specific matters like changing the company’s name, increasing authorized share capital, or amending the articles of association.
Disadvantages of Special Resolution
However, special resolutions have some disadvantages:
- Higher Threshold for Passage: Requiring a higher level of support, and special resolutions can pose challenges in passing crucial decisions.
- Increased Time and Cost: Conducting a special resolution meeting and tallying votes can be time-consuming and costly.
- Potential for Delays: Challenges or disputes related to a special resolution can lead to delays in implementing the decision.
- Limited Ability to Act Quickly: Special resolutions may take weeks or months to pass, limiting the ability to respond swiftly to urgent issues.
- Limited Ability to Act Without Shareholder Approval: Often used for major decisions, special resolutions may restrict the company from taking action without shareholder approval.
Resolution Adoption
Until permission is passed, a proposed resolution is referred to as a motion. A resolution is created after the required consent is received by the Companies Act of 2013 provisions. The agenda for the meeting, which is provided when the meeting notice is sent out, must include any items that call for a special resolution. Motions that result from negotiation may also be permitted in cases where the Act does not call for a particular resolution.
Each resolution is typically introduced by one member and then seconded by another, as per Secretarial Standard-2 Paragraph 7.1. During the discussion, the motion under evaluation may be changed. The primary motion may be amended in any number of ways. An amendment, however, can only be changed once. When a motion contains many amendments, the previous motion may be abandoned, and a new motion that incorporates all the amendments may be passed with unanimous consent.
When a special resolution is passed, Form MGT-14 must be filed obligatorily with the Registrar of Companies within 30 days after the resolution’s passage. Included in the attachments is a copy of the adopted resolution.
- A clarification under Section 102 of the Companies Act 2013
- A copy of the association’s bylaws (where any changes are being made)
- A copy of the Articles of Association (where any changes are being made).
Similarity between Ordinary and Special Resolution
Ordinary and special resolutions, both being formal decisions by a company’s shareholders, share several key similarities:
- Meeting Requirement: Both types of resolutions necessitate the convening of a shareholder meeting where the vote on the resolution takes place.
- Quorum Necessity: For both ordinary and special resolutions to be approved, a quorum— the minimum number of required shareholders— must be present at the meeting.
- Voting Requirement: The approval of both ordinary and special resolutions hinges on a vote by the shareholders.
- Documentation in Meeting Minutes: The outcomes of both ordinary and special resolutions are officially documented in the minutes of the meeting during which the vote occurred.
- Impact on the Entire Company: Both ordinary and special resolutions are employed to make decisions that have a company-wide impact, rather than solely affecting specific individuals or groups of shareholders.
FAQs
What is the difference between an ordinary and special resolution?
Ordinary resolutions require a simple majority vote (50% +1), while special resolutions demand a higher majority (typically 75% or more). Special resolutions are used for significant matters, unlike ordinary resolutions that address routine or less substantial issues.
What is the ordinary resolution?
An ordinary resolution is a formal decision passed by a company or the organization's members or shareholders through a simple majority vote. It is employed for routine or less significant matters.
What is also known as special resolution?
A special resolution is also known as an extraordinary resolution. It is a formal decision requiring a higher majority vote and is used for important or significant matters.
What is the difference between requisite majority and ordinary resolution?
Requisite majority refers to the specific percentage of votes needed for approval. While an ordinary resolution requires a simple majority, the term requisite majority is a broader concept encompassing various thresholds, including those for special resolutions.
What is the difference between ordinary and special resolution India?
In India, the key distinction lies in the majority required. Ordinary resolutions need a simple majority, while special resolutions typically require 75% or more. Special resolutions are used for important company matters.
What is a 75% special resolution?
A 75% special resolution implies that the decision in question requires a majority vote of at least 75% of the shareholders present and voting in favor for it to be approved.
What is an example of a special resolution?
Changing the company's name, increasing authorized share capital, or amending the articles of association are examples of matters decided by a special resolution.
What is the difference between unanimous resolution and special resolution?
Unanimous resolutions require the approval of all shareholders, while special resolutions demand a specific high majority, usually 75% or more.
In which cases special resolution is required?
Special resolutions are needed for significant matters such as altering the company's name, amending articles of association, or approving major transactions like mergers.
Who passes the special resolution?
The shareholders of a company are required to pass a special resolution. This type of resolution requires a higher percentage of affirmative votes, often 75% or more.
Why use a special resolution?
Special resolutions are employed for crucial decisions, providing greater protection for minority shareholders and ensuring a higher level of consensus.
What is the difference between a special resolution and a written resolution?
The difference between a special resolution and a written resolution is that a special resolution is passed with at least 75% majority vote, while a written resolution, whether ordinary or special, follows the same voting thresholds but is passed in writing instead of at a general meeting
Conclusion
Meetings are held in businesses to make decisions by voting on formal proposals brought up for discussion. Resolutions are merely the company’s declaration of intent. Ordinary Resolution is adequate to conduct business, except changing a company’s name at the ROC’s direction when the name previously registered is erroneous or wrong or having a company’s name corrected as required by the Central Government, and paying a cost accountant.
The issuance of sweat equity shares, amendments to the articles of association, buybacks of shares or other securities, changes to the prospectus’s objectives, relocation of the company’s registered office, and other situations call for special resolutions. Ordinary resolutions must need the approval of at least 51% of the membership to pass. A special resolution, on the other side, needs the support of at least 75% of the membership.
Passed Ordinary Resolution for conducting Ordinary business. However, by the requirements of the Companies Act, a unique business may be conducted via special or ordinary resolution. Get in touch with the legal experts of Vakilsearch for further details on this.
