Shareholders in private limited companies commonly take decisions by written resolution rather than at a meeting. On its face, a written resolution is a simple and convenient method of shareholder decision making. The written resolution is passed as an effective decision of the shareholders once shareholders representing the requisite percentage of voting rights have signed the resolution. For ordinary resolutions, a simple majority of total voting rights of eligible members is required; for special resolutions not less than 75%.
However, directors should be aware that there are strict procedural requirements for written resolutions, set out in the Companies Act 2006. A recent case illustrates how important it is to follow the procedure correctly.
In the matter of Sprout Land Holdings Ltd (In administration) [2019] EWHC 806(Ch) concerned the purported appointment of a director by written resolution. The company had three shareholders: F and M (together holding 55.5% of the shares) and T who held 44.5%. M signed a copy of a written ordinary resolution in respect of her own appointment as director, and F signed it two days later. F then emailed it to the one remaining shareholder, T, informing her that he had asked that the company circulate the written resolution and calling a board meeting. T refused to attend on such short notice and stated that any resolutions passed at that meeting would not have her approval. At the board meeting, F and M resolved to appoint administrators.
The court considered:
- whether the written resolution to appoint M was valid; and
- (in a later judgment) whether the directors’ resolution to appoint administrators was valid.
On the written resolution, the court held that it was not valid because, prior to circulation, the board of directors had not given it due consideration. Even in a small company, circulation must be by the board of directors, not simply by a single director. The company’s obligation under the Companies Act 2006 is, so far as possible, to give all members the same notice “at the same time (so far as reasonably practicable)”, and that requirement was not met either. Deliberate failure to give notice to a shareholder of a proposed written resolution is likely to render it invalid.
The court considered case law in relation to purported appointment of administrators. Here, the quorum for business at a directors’ meeting was two directors. As M was not validly appointed as a director under the written resolution procedure, the board meeting was not validly convened and the decision to appoint administrators was invalid. The judge went on to comment that section 161 Companies Act 2006 (providing that the acts of a person acting as director are valid despite any defects in his appointment) did not assist here in the context of appointment of an administrator. Such appointment was subject to its own statutory scheme, and section 161 was designed to assist third parties who dealt with the company to ensure their dealings with the company were valid. An administrator, as an officer of the court and agent of the company, lacked sufficient third party identity to benefit from this provision.
Comment
The written resolution regime under the Companies Act 2006 should offer a quick and simple way for private company shareholders to take decisions. This case is a reminder of how easy it is to overlook the basic statutory requirements and how the consequences can be far-reaching.
Kathryn Saunders