20 Apr 2015

Quorums and Resolutions under the Companies Act

by Claire Cowan, Partner, Durban,
Practice Area(s): Corporate & Commercial |

To the extent that it has not yet amended or replaced its constitutive documents to bring them into line with the Companies Act, 2008 ("the Act"), a company incorporated before 1 May 2011 is required to call shareholders' meetings and pass resolutions in accordance with the provisions of the Act, and not in accordance with the provisions of its Memorandum and Articles of Association.

The Act has brought about fundamental changes in the manner in which shareholder resolutions are passed.

Under the Companies Act, 1973, an ordinary resolution was typically passed on a show of hands if supported by more than 50% of the shareholders of the company present at a meeting and entitled to vote on the matter.  For example, if 12 shareholders entitled to vote on a matter were present at a meeting, a resolution would not be passed unless at least 7 of those 12 shareholders voted in favour of the resolution. 

The Act introduces a different threshold in this regard.  It provides that an ordinary resolution is passed if more than 50% of the shareholders who exercise voting rights on the matter, vote in favour of the resolution.  This means that if 12 shareholders are present at a meeting and entitled to vote on a matter and voting is on a show of hands, if only 4 of them exercise a vote in relation to the resolution and of the 4 that vote, 3 vote in favour of the resolution, the threshold would have been met to pass the resolution.  This is because more than 50% of the persons who exercised voting rights on the matter would have voted in favour of the resolution. 

For the purposes of counting the votes, an abstention is not taken into account since by abstaining, one has not "exercised" a vote.  It is very important that shareholders attend and exercise their votes at meetings as a failure to do so will not prevent a resolution from being passed by the other shareholders.
Although a poll can be called for under certain circumstances, the polled votes are also calculated with reference to the relative shareholdings of only those who exercised a vote on the matter under consideration.

Of course this cannot happen at a shareholders' meeting unless the meeting is quorate.  In terms of the Act, before shareholders can begin their meeting, the chairperson must ensure that persons representing at least 25% of the voting rights that can be exercised on at least one matter on the agenda for the meeting, are present.  

Once this quorum has been established, the Act introduces a further requirement that a matter may not be considered unless persons representing at least 25% of the voting rights which may be exercised on the matter, are present when the matter is called. 

Since the Act provides that all shares of the same class have identical rights, this second quorum is only a concern if shareholders' holding different classes of shares having different voting rights are attending the meeting, or if attendees leave the meeting before it draws to a close.  In such cases, before calling a matter to be considered at the meeting, the chairperson will have to assess whether the quorum requirements for considering the matter are satisfied.

If a company has more than 2 shareholders, the Act adds a third requirement to the effect that in addition to satisfying the above criteria, at least 3 shareholders must be present before a meeting can begin, or a matter may begin to be debated.

If a quorum is not present within one hour after the time at which a shareholders' meeting is scheduled to begin, the Act provides for an automatic postponement of the meeting for a period of one week.  At the postponed meeting, the shareholders present at the meeting in person or by proxy are deemed to be a quorum.

Instead of voting at a meeting, shareholders may vote on a resolution in writing within a period of 20 business days after the date on which they are given notice of the resolution.  The Act provides that a resolution is passed in this manner if it is supported by sufficient votes for it to have been adopted at a properly constituted shareholders' meeting.

It appears that when voting in writing, except for the election of directors which can be conducted by written polling, the outcome of the vote is calculated on a "show of hands" with reference to the shareholders who actually cast a vote, since the Act only permits shareholders to demand a poll when present at a meeting.
If the quorum requirements set out in the Act are not suitable, they can be changed in a company's memorandum of incorporation ("MOI").  For example, one could increase the quorum required before a matter may be considered so that on consideration of the matter, sufficient shareholders are present for a balanced decision to be made.   

It is also possible to include in an MOI, different percentages for passing resolutions on different matters, provided that at all times there are at least 10 percentage points between the highest requirement to pass an ordinary resolution and the lowest requirement to pass a special resolution. 

More stringent quorum requirements and higher thresholds for passing resolutions may assist to prevent a situation where resolutions are passed in the absence, or without the input, of the majority of the shareholders of a company. 

These are just some of the reasons why companies incorporated prior to 1 May 2011 should seriously consider reviewing and amending their MOIs if they have not done so already.