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Company Resolutions And The Decision Making Process

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Company Resolutions And The Decision Making Process

20th October 2016

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At the core of every organisation, there are key decision makers who are responsible for the management of operational, financial and executive functions and decision-making. Before any action is taking within a corporation, there needs to be a decision made, whether it relates to the ‘how’, ‘why’, ‘who’, or ‘what financial implications or benefits it holds for the company’, etc.

It is therefore important to have the necessary systems and procedures in place for these decision-makers to act efficiently and responsibly, most times under immense pressure. To be able to deconstruct the complexity attaching to a company’s board and executive decision-making and shareholder decision-making in terms of the Companies Act No 71 of 2008 as amended (“the Act”), as well as the dynamics of the relationship between the company’s board and shareholders, knowing how a company makes and executes decisions is imperative.

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The processes and principal instruments considered and followed when making decisions can become fairly complex, especially in larger corporations, hence the necessity for proper understanding of these tools and meetings whereby decisions are taken. 

The Act is an important source for discussions of this nature, and instrumental to any company, whether large or small, in order to make proper decisions. The Act gives authority to two principal organs of a company, namely the board and the shareholders, who in turn may then further delegate certain authority. These two organs execute such authority subject to a decision-making framework in the form of meetings and delegation of authority onto others. 

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The Companies Act and the separation of powers

As mentioned, the two major role players in, especially larger, companies are the shareholders who provides the funding, and the board who is responsible for managing those funds. The relationship between these two organs are governed by the separation of powers doctrine, which can be briefly summarised as follows:

  • the directors have the unfettered discretion to manage the business of the company and no shareholder may interfere in the board doing so; and 
  • even though the shareholders may not interfere in the management of the company, they have a roll in appointing and dismissing directors. 

Provision for the former is made in section 66 of the Act, and the latter in sections 66 and 71, and specifically 71(3) of the Act. The Act, in section 66, amongst others, gives the board of directors the authority to make decisions for the company, in other words to adopt resolutions. These are director’s resolutions, the rules of which are governed in the Companies Act. 

In addition to the Act, the board also derives the power and authority to pass resolutions from the memorandum of incorporation of a company (“the MOI”), rules passed in terms of section 15(4) of the Act, and special and/or ordinary resolutions passed by the shareholders. One can therefore see there is a need for the separation of powers, in order to avoid a situation where all the power of the company is vested in only one of the two major organs, which is usually a recipe for corrupt activities or misappropriation or mismanagement of funds. 

Decisions reserved for shareholders by the Companies Act

The directors of a company’s decision-making authority is typically restricted to the business of the company, in which respect they have the final say, so to speak. There are certain types of decisions which are reserved for the shareholders of a company, which decisions are either made by special, or ordinary resolutions by the shareholders. Section 65(11) read with 65(12) of the Act provides a list of special resolutions, while the list of ordinary resolutions are more complex, and thus the source thereof may arise from various circumstances. 

To briefly give an overview, one can deconstruct shareholder resolutions into three components:

  • Firstly, who is responsible for, or who may call a shareholders meeting. Thus, who manages the process around the meeting whenever a meeting is required in as much shareholders are required to approve a decision. This falls within section 61 of the Act. 
  • Then secondly, what decisions fall within this decision-making remit of the shareholders. In other words, when is the shareholder’s consent required. There are various sections throughout the Act which deals with this issue. 
  • Thirdly, and after the first to points have been dealt with, it needs to be determined how the resolution or decision-making proposition packaged and submitted to the shareholders. For this, we focus on section 65 of the Act.

Thus, before any meeting of shareholders can be held it needs to be established who is entitled or responsible to call such meeting. Whether the board, or a person specified in the company’s MOI, or written demands by at least 10% of the voting rights, are entitled to; or whether the board is required to call a shareholders meeting in terms of the Act or the MOI, the provisions need to be considered carefully. It therefore remains extremely important that whenever there is a decision to be made, one should preferably consult an expert, with sound knowledge of the Companies Act, when calling a meeting, and also drafting any resolutions which will be presented to the shareholders.  

Conclusion

By virtue of the complexity of this Act, and its various provisions requiring corporate action in the form of either shareholders or directors’ resolutions, the drafting of such resolutions have become extremely complex and should be treated the same as when drafting a complex agreement. There are risks that one may fail to identify a resolution required by a certain provision, or draft the resolutions not competently enough, which may cause the decision to be invalid, which in turn may cause the company severe financial or operational harm. It is therefore recommended to always obtain professional advice with regard to company resolutions.  

Written by André Nortjé, SchoemanLaw

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