Extraordinary general meeting

What Is Extraordinary General Meeting?

An extraordinary general meeting (EGM) is a formal gathering of a company's shareholders that takes place outside of the regularly scheduled annual general meeting (AGM). These meetings are convened to address urgent or significant matters that require immediate attention and cannot wait until the next scheduled AGM. As a crucial element of corporate governance, EGMs ensure that major decisions impacting the company's direction, structure, or management are put to a vote by its owners, even on short notice.

History and Origin

The concept of general meetings for company members has deep roots in corporate law, evolving to ensure accountability and provide a mechanism for collective decision-making. While regular annual meetings became standard practice for reporting and routine business, the need for ad-hoc gatherings to tackle unforeseen critical issues led to the formalization of extraordinary general meetings. In jurisdictions like the United Kingdom, the Companies Act 2006 (and its predecessors) established specific provisions for convening EGMs, including scenarios where a company's financial health deteriorates significantly, or where shareholders demand a meeting.¹³ This framework ensures that a company can respond agilely to urgent situations while upholding the rights of its members to be informed and to vote on material matters.

Key Takeaways

• An extraordinary general meeting (EGM) is called for urgent matters outside of a company's standard annual meeting.
• It provides a mechanism for shareholders to vote on significant decisions that cannot be postponed.
• Common reasons for an EGM include major mergers and acquisitions, capital restructuring, or changes to the board of directors.
• Shareholders typically must receive sufficient notice, and a specific quorum must be present for any resolutions to be binding.
• The rules governing the calling and conduct of an extraordinary general meeting are typically outlined in the company's bylaws and relevant corporate laws.

Formula and Calculation

The extraordinary general meeting itself does not involve a specific financial formula or calculation. Instead, its "calculation" relates to the procedural requirements for its validity. Key quantitative aspects often involve:

• Shareholder Requisition Threshold: The minimum percentage of voting equity shares required for shareholders to compel the board of directors to call an EGM. This is often expressed as a percentage of paid-up share capital, for example, 10%.¹¹, ¹²
• Notice Period: The minimum number of days' notice that must be given to shareholders before the meeting can take place. This can vary by jurisdiction and company type (e.g., 14 days for a private company, 21 days for a public company for special resolutions).⁹, ¹⁰
• Quorum Requirement: The minimum number or percentage of shareholders or their proxies that must be present for the meeting to be valid and for resolutions to be voted upon. This is often defined in the company's bylaws.⁸

These are not formulas in the mathematical sense but rather conditions that must be met for the legal and effective conduct of an extraordinary general meeting.

Interpreting the Extraordinary General Meeting

An extraordinary general meeting signifies that a company is facing an issue of considerable importance or urgency that warrants immediate input from its shareholders. The nature of the EGM's agenda can provide significant insights into a company's operational health or strategic direction. For example, an EGM called to approve a major acquisition suggests an aggressive growth strategy, while one convened to discuss a significant change in the board of directors or address a legal matter might indicate internal challenges or external pressures.

Investors and analysts often scrutinize the agenda of an extraordinary general meeting, the reasons behind its sudden convocation, and the proposed resolutions. The outcome of votes at an EGM can have material impacts on stock performance, future business operations, and the overall stability of the company. A high level of shareholder activism leading to an EGM might signal investor dissatisfaction with current management or strategy, highlighting the importance of the meeting as a mechanism for investor influence.

Hypothetical Example

Imagine "TechInnovate Inc.," a publicly traded software company. Its next annual general meeting is six months away. Suddenly, a rival company makes an unsolicited, time-sensitive takeover bid that requires immediate consideration and approval from TechInnovate's shareholders to proceed.

Since this critical decision cannot wait for the regular AGM, TechInnovate's board of directors decides to call an extraordinary general meeting. They issue notices to all shareholders, specifying the date, time, location, and the sole agenda item: voting on the acquisition proposal. The notice also includes details on how shareholders can participate via proxy voting if they cannot attend in person. At the EGM, the board presents the terms of the takeover, answers shareholder questions, and facilitates a vote on the proposed acquisition resolutions. If the necessary majority of shareholders approve the acquisition, TechInnovate can then proceed with the transaction.

Practical Applications

Extraordinary general meetings serve several critical functions in the corporate world, facilitating timely and democratized decision-making beyond routine annual business:

• Major Corporate Actions: EGMs are frequently called to approve significant corporate events such as proposed mergers and acquisitions, divestitures, or substantial changes in the company's capital structure, like a large share issuance or a major capital restructuring. For example, in November 2023, Siemens Energy shareholders voted at an EGM on a capital increase, illustrating the use of such meetings for urgent financial matters.⁷
• Changes to Corporate Governance: These meetings can be convened to amend the company's articles of association or bylaws, which dictate how the company is governed. Such changes might include altering voting rights, restructuring the board of directors, or modifying executive compensation policies.
• Removal or Appointment of Directors/Auditors: In cases of unforeseen circumstances or significant performance issues, an EGM may be held to remove or appoint members of the board of directors or company auditors. This provides a mechanism for shareholders to exert control over leadership outside of the annual election cycle.
• Addressing Urgent Legal Matters: If a company faces a pressing legal challenge that requires immediate shareholder input or approval, an extraordinary general meeting can be called to address the issue, ensuring compliance and collective decision-making.

Limitations and Criticisms

While extraordinary general meetings are vital for urgent corporate decisions, they are not without limitations or criticisms. One primary concern is the potential for management to use an EGM to push through complex resolutions with shorter notice periods compared to an annual general meeting. This limited preparation time can disadvantage shareholders, potentially hindering their ability to fully understand the implications of the proposals or to effectively organize opposition.

Critics also point out that, despite the intent to empower shareholders, the power to call an EGM often rests primarily with the board of directors, or requires a significant percentage of shareholder support (e.g., 10% of voting shares) to requisition one.⁶ This threshold can be difficult for individual or smaller institutional investors to meet, limiting the practical exercise of their shareholder activism rights. Furthermore, the complexity of some EGM agendas, particularly those involving intricate financial transactions like mergers and acquisitions or capital restructuring, can make it challenging for the average investor to cast an informed vote. Research on shareholder rights highlights ongoing efforts to enhance shareholder power to call special meetings, indicating that the current mechanisms may still fall short for some investors.⁵

Extraordinary General Meeting vs. Annual General Meeting

The key distinction between an extraordinary general meeting (EGM) and an annual general meeting (AGM) lies in their regularity, purpose, and the nature of the business conducted.

In essence, the EGM serves as an emergency valve for corporate decision-making, while the AGM is the scheduled, periodic forum for accountability and routine governance.

FAQs

What is the purpose of an extraordinary general meeting?

The primary purpose of an extraordinary general meeting (EGM) is to address urgent or significant matters that require immediate shareholder approval and cannot be postponed until the next annual general meeting. These can include major transactions, changes to company structure, or leadership issues.⁴

Who can call an extraordinary general meeting?

An extraordinary general meeting can typically be called by the board of directors of a company. Additionally, a certain percentage of shareholders (often 10% or more of the voting equity shares) may have the right to requisition or compel the board to call an EGM.³

What kinds of issues are discussed at an EGM?

Issues discussed at an EGM are usually critical and non-routine, requiring urgent attention. These can include approving significant mergers and acquisitions, substantial capital restructuring, amendments to the company's bylaws or articles of association, or the removal or appointment of directors.²

Is an extraordinary general meeting mandatory?

An extraordinary general meeting is not held on a fixed schedule like an annual general meeting. It is only convened when necessary for urgent or special business. However, if specific legal or regulatory conditions are met (e.g., severe financial distress in some jurisdictions, or a valid requisition from shareholders), holding an EGM may become mandatory.

What is the difference between an EGM and an AGM?

The key difference is regularity and purpose. An EGM is an unscheduled meeting for urgent, non-routine matters, while an AGM is a regularly scheduled annual meeting for routine business, financial reporting, and the election of the board of directors.¹