What is Shareholder Resolution?
Shareholder Resolution refers to the proposals submitted by the shareholders, to the management of the publicly listed company, whereby the decision for the outcome of such resolution is arrived at by voting at the annual general meeting. Typically, the process followed is that shareholder propose a recommendation, a resolution to that effect is presented at the annual general meeting and then it is voted upon.
In common parlance, the term ‘resolution’ means a formal decision made at a meeting employing a voting system. Extending this understanding, shareholder resolution refers to the resolution by shareholders for a vote at the annual general meeting. Practically, the management committee opposes this, thus comes the requirement of voting for such resolution. Shareholders, holding a minimum specified percentage of voting rights in the organization, may propose to pass a resolution for aspects such as corporate governanceCorporate GovernanceCorporate governance is a set of rules or practices through which an entity is directed and controlled to increase shareholders wealth by increasing the economic value and is concerned about its relations with various entity stakeholders., corporate social responsibility, etc. Specifically, for publicly held organizations in the United States, the Securities Exchange Commission (‘SEC’) regulates and manages submissions and the handling of shareholder resolutions.
Purpose of Shareholder Resolution
- Shareholders may go for a resolution motion to not only raise a moral flag but also for a requirement for change in company policies, practices and disclosures, and such. The main aim of the shareholderMain Aim Of The ShareholderA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares. is not to file letters with the company but to engage with the company. Ultimately, it is also possible for the company to improve in some areas post considering the requests made for resolution. Here, it is essential to note that These resolutions are not at all binding on the management of the organization.
- However, the board of directors may still undergo the process of passing a shareholder resolution and take that as advice for the matter/case under consideration. It assists the board of directors in achieving a meaningful and effective decision for the organization as a whole. It, simultaneously, also makes an impact on the positive image of the company. It shows that the decision is taken by the investors and directors together, and the management accepts any positive change.
Types of Shareholder Resolution
The board of directors of the organization handles the day to day business and management of the organization. However, the shareholders do play a role when a significant decision concerning the direction and future of the company is concerned. Shareholders are expected to vote for such vital decisions by way of passing a resolution to that effect. Generally, there are two types of resolution, ordinary resolution and special resolution. However, there is a possibility of the third category of resolution coming in the picture at times, that is, unanimous resolution.
#1 – Ordinary Resolution
Ordinary resolution means the resolution being passed at the annual meeting with a simple majority of votes by the shareholders, present or in proxy, or by-poll. Mostly, the majority of the business carried out at the annual general meetings is by way of ordinary resolution. Few examples where ordinary resolution shall be enough for the passing of the motion are:
- Buyback of SharesBuyback Of SharesShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.
- Issuing shares under the employee stock optionEmployee Stock OptionEmployee stock option plan (ESOP) is an “option” granted to the company employee which carries the right, but not the obligation, to buy a promised number of shares at a pre-determined price (known as exercise price). ;
- Change of directors;
- Increasing authorized capital;
- Deciding on high-level executives pay;
#2 – Special Resolution
Special resolution means the resolution being passed at the annual meeting with a majority of not less 75% of votes by the shareholders, present or in proxy, or by-poll. Specific and significant cases regarding the conduct of the business to be carried out require a special resolution. Special instances in which a special resolution is required to be passed are:
- Any amendment to be carried out in memorandum or article of association;
- Change in the name in which the company carries on business;
- Any reduction in share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.;
- Voluntary winding up of the company;
- Ratification of decisions taken by the directors;
However, the percentage of votes required, to consider a resolution as passed by the majority, can vary from jurisdiction to jurisdiction.
#3 – Unanimous Resolution
Rare but not impossible, shareholders may pass a unanimous resolution for a decision to be passed at the annual general meeting. The unanimous resolution, as the term suggests, means a resolution passed with 100% approval of the shareholders present, in person or proxy, for the decision to be considered at the annual meeting. In other words, it simply means that all the shareholders have a positive consent towards the case under consideration for decision.
What should include in the Shareholder Resolution?
There is no standard format prescribed for submission of the proposal by the shareholder for the passing of the motion at the annual general meeting. However, the subject matter relating to the proposal shall consider the following points:
- Details of the shareholding and voting power held by the eligible shareholder along with verification document;
- Details of the case/issue for which request being made – business case, investor case, or a moral case at consideration;
- Detailed information about the proposal – concerning decisions affecting the public, such as corporate governance, corporate social responsibility activity, environmental issues, as the case may be;
- Important Note: Proposal being made should not pertain to decision making of day to day business operations;
- It should include the rationale for the request being made. And also, any supporting documentation in support of the proposal being submitted.
- Information about any risks associated or any operational impact on account of acceptance of the request;
- Market-based information in support of the proposal, such as customer or competitor having adopted any policies concerning the proposal;
- Details of any statutory regulations in effect about the proposal;
- Benefit to be achieved, short term and long term, out of the acceptance of the request;
Shareholder Resolution means a formal resolution made by the shareholders towards a specific action to be taken by the management or the board of directors of the organization. Shareholders pass resolutions for the proposal submitted by voting at the annual general meeting. It may be highlighted that it is not binding on the organization.
Resolution to be passed may be ordinary or special, based on the business to be conducted or the decision to be made. In some instances, a resolution passed at the meeting can be unanimous, whereby 100% give positive consent to the proposal. There are certain statutory aspects to be kept in mind when discussing shareholder resolution. Points to be kept in mind are:
- Only specific categories of shareholders can propose a resolution;
- Restrictions on the number of resolutions that can be proposed by a shareholder;
- Limit on words – Proposal to be made in the specified number of words;
- Resolution to be submitted before a specified number of days of the annual meeting;
This article has been a guide to what is a Shareholder Resolution. Here we discuss what does shareholder resolution contains with its types and purpose. You can learn more about accounting from the following articles –