This is the third in our series of short articles in which we try to shed light on some of the more confusing areas of the Companies Act 2006 (the "Act"). It discusses the means by which shareholders take formal decisions, and looks, among other things, at the options available to single member companies and the question of whether there are decisions for which a written resolution is not suited.
Areas of confusion
The headline changes under the Act in relation to decisions by shareholders were the abolition of the mandatory AGM for private companies and the abolition of the requirement that a written resolution could be passed only with the consent of all the shareholders. The aim of these changes was to make written resolutions the default means by which private companies take decisions, and this aim has certainly been achieved, because general meetings of private companies are now very much the exception rather than the rule.
The Act's regime on decision-making is not, however, without its difficulties. The questions that arise include the following:
- what options for making decisions are available to shareholders?
- is a resolution in the form of a written resolution any less "formal" than one which is passed at a general meeting? In other words, are there some decisions which ideally should be taken at a general meeting?
- is it possible to pass a written resolution under a power contained in the company's articles?
- what does the sole shareholder of a single member company need to do to comply with section 357?
- now that the mandatory AGM has been abolished, what should meetings of private companies be called? In particular, is it ever appropriate to describe a meeting as an AGM or an EGM?
The Act is, at first glance, perfectly clear as to the options which are available to shareholders to take decisions. Section 281 specifies that resolutions of a private company must be passed either as written resolutions or at a general meeting, while resolutions of a public company must be passed at a general meeting.
This is, however, slightly misleading, because companies with just one shareholder, whether they are private companies or public companies, can also take advantage of section 357, which allows a sole shareholder to take a decision otherwise than by means of a written resolution or at a general meeting and then provide the company with details of the decision.
The complete 'tool kit' of options available to shareholders is, therefore, as follows:
- private companies - decision by sole member, written resolution, general meeting. This range of options is the same as it was under the Companies Act 1985
- public companies - decision by sole member, general meeting. This is a change from the previous position. Under the Companies Act 1985, not only were public companies effectively required to have at least two members, which meant that the decision by the sole member option was not available but, more importantly, they were permitted to take decisions by means of a written resolution, as long as their articles contained a power to do so. Non-statutory written resolutions are discussed further below.
Is a written resolution appropriate?
The Act prohibits the use of a written resolution in two specific cases: neither a resolution under section 168 to remove a director, nor a resolution under section 510 to remove an auditor, can be passed as a written resolution (section 288). However, since many private companies' articles contain an alternative to the section 168 procedure for removing directors, in practice a written resolution is usually available for all shareholder decisions other than a decision to remove the auditor.
Are there, though, any decisions which are so important and far-reaching that, although a written resolution is technically available, they really ought to be taken at a general meeting? For example, should a resolution granting the directors authority to issue a large tranche of shares ideally be passed at a meeting rather than by means of a written resolution? Our view is that, unless the shareholders want to debate the resolution, it is perfectly acceptable to use a written resolution in all cases other than for a section 168 or section 510 resolution. As noted above, the written resolution procedure was relaxed in order to encourage shareholders to use it, and a resolution passed in the form of a written resolution is certainly no less "formal" than one passed at a meeting.
Non-statutory written resolutions
Under the Companies Act 1985, companies could insert into their articles an alternative to the statutory written resolution procedure. It was possible, therefore, to pass a written resolution either in accordance with the statutory procedure or in accordance with the company's articles. While the statutory procedure was available only to private companies, the non-statutory alternative was available to both private companies and public companies.
The non-statutory option is not available under the Companies Act 2006, and so all written resolutions must be passed in accordance with Chapter 2 of Part 13 of the Act. As a result of this change:
- a resolution which purports to be passed in accordance with a procedure set out in the company's articles will not be valid. Companies which have not yet removed from their articles any provision purporting to provide a non-statutory procedure for passing written resolutions should do so at the next available opportunity
- following on from the bullet point above, all written resolutions should state that the resolutions are being proposed under the Companies Act 2006 rather than the company's articles
- public companies can no longer pass resolutions by means of a written resolution, because the procedure in Chapter 2 of Part 13 applies only to private companies.
Decisions by sole members
A sole shareholder can take a decision at any time (that is, otherwise than by means of a written resolution or at a general meeting), but he must "provide the company with details of that decision" (section 357). A shareholder will normally comply with this requirement by giving the company a formal written record of the decision, in the shape of a piece of paper, signed by him, setting out his decision.
Is there any scope to take a less formal approach? Would it be acceptable, say, for the shareholder to inform the company of his decision in the body of an e-mail or even by telephone? On a strict reading of section 357, either of these methods of informing the company should, indeed, be acceptable, and there may be instances when the wide scope of the section will come in useful. From an administrative perspective, however, a formal written record is the best option; companies are obliged to keep records of decisions of sole members, and that task is made more difficult if the decision is communicated to them in an informal fashion. Our view, therefore, is that the formal written record approach should be adopted as the default, and departed from only in exceptional cases.
Terminology - what's in a name?
The answer, in this context, is: not much at all.
Since the Act has abandoned the concept of AGMs and EGMs in relation to private companies, all general meetings of private companies should be called, simply, general meetings, unless their articles specify otherwise.
If the articles require the company to hold an AGM, that meeting should be called an AGM. It may be a non-statutory AGM, but it is an AGM nonetheless. Similarly, if the articles specify that all other meetings should be called EGMs, those meetings should be called EGMs. Provisions in the articles of this nature are not common, but they may be found, for example, in older companies whose articles are based on the Companies Act 1948 version of Table A.
The point to note is that, whatever name the meeting is given, it will still need to comply with the Act's provisions governing general meetings.