Powers exercisable by extraordinary resolution: Overview, definition, and example
What are powers exercisable by extraordinary resolution?
Powers exercisable by extraordinary resolution refer to the authority granted to a company’s shareholders or members to make decisions or take actions that go beyond the normal scope of day-to-day operations. These powers can only be exercised by passing an extraordinary resolution, which typically requires a higher level of approval than a regular resolution. Extraordinary resolutions usually require a significant majority vote, often two-thirds or more of those present at a meeting, depending on the company's bylaws or legal requirements. These powers are typically used for major decisions that could significantly impact the company, such as altering the company's articles of association, approving mergers or acquisitions, or winding up the business.
Why are powers exercisable by extraordinary resolution important?
Powers exercisable by extraordinary resolution are important because they ensure that major decisions affecting the company are made with a broad consensus. These decisions often have significant implications for shareholders, employees, and other stakeholders, so requiring a higher threshold of approval helps ensure that such actions are carefully considered and broadly supported. By setting a higher bar for approval, extraordinary resolutions help protect the interests of minority shareholders and prevent major changes from being made without adequate support or due process. These powers help safeguard the company's long-term viability and ensure that significant changes are made in the best interests of all parties involved.
Understanding powers exercisable by extraordinary resolution through an example
Imagine a company considering a merger with a competitor. The company's board of directors proposes the merger, but due to its significant impact on the company’s future, an extraordinary resolution is required to approve it. The shareholders are called to a meeting where they vote on the proposal. According to the company’s articles of association, the extraordinary resolution requires a two-thirds majority vote to pass. After a detailed review of the merger's potential benefits and risks, the shareholders vote in favor of the merger, passing the extraordinary resolution and allowing the company to proceed with the deal.
In another example, a company decides to change its articles of association to allow for more flexible governance. This change would significantly alter the company’s internal management structure, so an extraordinary resolution is required to approve it. The shareholders must vote on the proposal, and after a discussion, the resolution passes with the required majority, granting the company the ability to make the proposed changes.
An example of a powers exercisable by extraordinary resolution clause
Here’s how a clause about powers exercisable by extraordinary resolution might appear in a company's articles of association or shareholder agreement:
“The following powers may be exercised only by an extraordinary resolution passed at a general meeting: (i) the amendment of the Company’s Articles of Association, (ii) the approval of a merger or acquisition involving the Company, (iii) the voluntary liquidation of the Company, and (iv) any other matter that, under applicable law, requires shareholder approval by extraordinary resolution. An extraordinary resolution requires the approval of at least two-thirds of the votes cast at the meeting.”
Conclusion
Powers exercisable by extraordinary resolution ensure that major decisions affecting a company are made with broad shareholder support, protecting the interests of all parties involved. By requiring a higher level of approval for significant actions, these resolutions help safeguard the company’s stability and long-term success. Understanding when and how extraordinary resolutions are used is essential for both business owners and shareholders, as it ensures transparency, fairness, and careful decision-making for important company matters.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.