Shareholders' resolution ineffective

Written resolution procedures must be correct

Written shareholder resolution appointing director was invalid

The High Court has held that a written resolution passed by shareholders holding 55.5% of a company shares was not valid because it had not been circulated properly.

What happened?

Re Sprout Land Holdings Ltd (in administration) concerned the appointment of a director to a company. The company had three shareholders – Ms Tighe, Mr Fraser-Peters and Mrs Morris. Mr Fraser-Peters and Mrs Morris held 55.5% of the company’s shares between them, and Ms Tighe held 45.5%. Mr Fraser-Peters and Ms Tighe were also directors of the company.

In November 2018, Mr Fraser-Peters and Mrs Morris took steps to appoint Mrs Morris to the company’s board by passing an ordinary resolution. Mr Fraser-Peters prepared a written resolution of the company’s shareholders to achieve this. Given their combined shareholding, Mr Fraser-Peters and Mrs Morris were able to pass that resolution even if Ms Tighe were to vote against it.

On 19 November 2018, Mr Fraser-Peters emailed Ms Tighe to convene a board meeting on one hour’s notice to approve formally circulating the resolution to the company’s shareholders. Ms Tighe declined to attend on solely an hour’s notice, stating that any meeting that proceeded would be inquorate.

Mr Fraser-Peters signed the written resolution at some point on 19 November. Mrs Morris had actually signed the resolution two days earlier on 17 November. Mr Fraser-Peters did not send the resolution to Ms Tighe to sign, and so Ms Tighe did not sign it.

What was the issue?

Ms Tighe claimed that Mrs Morris had not been validly appointed as a director. To be effective, a written shareholder resolution must comply with the Companies Act 2006 (the Act). In particular, it must be circulated in the way required by the Act. Although the Act allows either a company’s directors or its shareholders to propose a written resolution, in either case it must be the company that circulates the resolution to the shareholders for approval.

The company must send the resolution to all of its shareholders who are entitled to vote on it. It can send it to them all at the same time, or to each shareholder in turn. However, the resolution will not be invalid merely because the company fails to circulate it in this way.

Ms Tighe said that the resolution had not been circulated properly as required by the Act, because Mr Fraser-Peters had sent it out without the approval of a formal board meeting. Mr Fraser-Peters argued that he had authority, as a director, to circulate the resolution on behalf of the company.

What did the court say?

The court agreed. The judge found two problems with the resolution:

  • The Act specifically requires a written resolution to be circulated by the company. This means the company’s directors must take the decision acting as a board. A single director of a company cannot simply circulate a written resolution acting alone, because this is an act of the director, not the company.
  • The resolution had not been circulated to Ms Tighe. Although the Act says that a resolution can be effective even if it is not circulated properly, the judge felt this was designed to deal with an accidental failure. In this case, Mr Fraser-Peters deliberately refrained from sending the resolution to Ms Tighe, and so the resolution would not have been circulated properly in any case.

One point worth noting is that Mrs Morris had signed the resolution two days before the date on which Mr Fraser-Peters claimed it had been circulated. Helpfully, the judge said that, provided a resolution is circulated properly (which had not happened here), a shareholder can “signify agreement by a pre-circulation agreement”. In other words, it is possible to “pre-sign” a written resolution.

Take note

  • A shareholder cannot circulate a written resolution directly to other shareholders. The proposed resolution must be sent to the company’s board, who are then required to circulate it. If the board refuses to comply, the shareholder’s only remedy is to requisition and call a general meeting. If a shareholder suspects the company’s board is likely to resist the resolution, they may want to consider moving straight to requisitioning a general meeting, so as to avoid wasting time.
  • The directors must decide collectively to circulate the resolution. They could do this by holding a board meeting or (if the company’s constitution allows) signing a “directors’ written resolution”. But a single director or group of directors cannot simply start sending out resolutions for signature.
  • The resolution must be sent to all members who can vote on it. Although the Act makes allowances where a shareholder is accidentally left out, this will not work where the company deliberately keeps a shareholder in the dark.

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