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Case law: Private company shareholder ‘written resolutions’ invalid unless circulated on the authority of the board

Companies proposing to use written resolutions to make shareholder decisions – ie, agreeing to a decision in writing rather than holding a formal meeting - should ensure every such resolution is approved and circulated by the board and sent on its behalf to all shareholders entitled to vote on the decision, otherwise it will be invalid - as a recent ruling makes clear.

August 2019

This update was published in Legal Alert - August 2019

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

It is common for shareholders in private limited companies to make decisions by ‘written resolution’ signed by the holders of the requisite majority of shares, rather than having to go through the formalities of calling and holding a shareholders’ meeting. Written resolutions are lawful provided the company is private (public companies cannot pass written resolutions), and company law rules are complied with.

A, B and C were the three shareholders of a private company. A and B were also directors. A proposed that the shareholders should appoint C as a director. His plan was that the shareholders would do this by written resolution.

A and C together held a majority of the company’s shares - enough for them to pass the resolution even if B was against it.

Company law rules require that if a written resolution is proposed by a shareholder, the board of directors can choose whether or not to circulate it to the shareholders for approval, unless the board receives a written notice from shareholders representing not less than five per cent of the total voting rights (or any lower percentage specified in the company’s articles of association) requiring it to circulate the written resolution, in which case the board has to do so.

If the board does not receive such a notice, it can choose not to circulate the resolution. If the board decides not to, there is no rule authorising only one of the directors, or one shareholder (or even all the shareholders), to circulate it instead.

A written resolution can still be effective in law even if it is not circulated to all the shareholders.

A emailed B on 19 November 2018, purporting to convene a board meeting on one hour’s notice, authorising the circulation of the written resolution to the shareholders for approval. B refused to attend, saying it was not enough notice.

A and C signed the written resolution anyway. They did not send a copy to B for signature and claimed this was effective to appoint C as a director.

B argued that the written resolution was invalid because the board had not approved its circulation to the shareholders, and because it had not been circulated to all the shareholders.

The court agreed. It said the rules meant that a written resolution can only be circulated to shareholders if the directors, acting as a board, say it can be. A director and/or shareholder acting on their own cannot circulate it.

It also found that the rule requiring that a written resolution could still be effective even if it was not circulated to all the shareholders only applied if the omission was inadvertent. In this case, it was deliberate so the resolution would not have been effective, even if properly circulated by the board.

Operative date

  • Now

Recommendation

  • Companies proposing to use written resolutions to make shareholder decisions, rather than hold a formal meeting, should make sure the resolution is always approved and circulated by the board and sent to all shareholders entitled to vote on the decision, or it will be invalid.

Case ref: Re Sprout Land Holdings Ltd (in administration) [2019] EWHC 806

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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