Shareholder approval: Overview, definition and example
What does shareholder approval mean?
Shareholder approval refers to the process by which shareholders of a company vote to approve or disapprove a specific action, decision, or change within the company. This approval is often required for major corporate decisions, such as mergers, acquisitions, amendments to the company's bylaws, or the issuance of new shares.
Why is shareholder approval important?
Shareholder approval is important because it ensures that key decisions affecting the company's future are made with the input and consent of those who own the company. Shareholders, as the owners, have a vested interest in the company's direction and financial performance. Requiring shareholder approval for significant actions protects their rights and maintains a level of control over the company’s operations.
It’s commonly used to protect minority shareholders, ensuring they have a say in decisions that could impact their investment.
Understanding shareholder approval through an example
Imagine a company plans to merge with another business. The merger is a significant decision that could affect the company’s financial health and operations. Before moving forward, the company must seek approval from its shareholders, who vote on whether they support the merger. If a majority approves, the merger can proceed.
In another example, a company decides to issue additional shares to raise capital. This decision typically requires shareholder approval to ensure that the existing shareholders agree with diluting their ownership or giving up a portion of the company's control.
An example of shareholder approval clause
"The completion of the merger shall be subject to the approval of at least two-thirds of the shareholders, as per the requirements outlined in the company’s bylaws."
Conclusion
Shareholder approval is a critical process that allows shareholders to have a direct influence on important corporate decisions. By requiring this approval, companies ensure that their major actions are aligned with the interests of their owners. Understanding when shareholder approval is necessary can help businesses avoid conflicts and ensure smoother operations.
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.