What Is Ordinary Resolution?
An ordinary resolution is a motion passed by the shareholders of a company with a simple majority of votes. This means that more than 50% of the votes cast are in favor of the proposed action. It is a fundamental mechanism within corporate governance, allowing for routine business decisions to be formally approved by a company's owners. Unlike other types of resolutions, the ordinary resolution is the most common and typically applies to day-to-day operational matters and standard administrative functions rather than significant structural changes.
An ordinary resolution can be passed at a formal shareholder meeting through a show of hands or a poll, or in some jurisdictions, via a written resolution without a physical meeting.40, 41 The specific rules governing how an ordinary resolution is proposed and voted upon are usually outlined in the company's articles of association and relevant company law.
History and Origin
The concept of shareholder resolutions, including the ordinary resolution, evolved alongside modern company law, which began taking shape in the 19th century, particularly with the rise of limited liability companies. Early corporate statutes established frameworks for how companies could be formed, governed, and how decisions within them would be made. The need for different levels of shareholder consent for varying degrees of corporate action led to the distinction between routine approvals and those requiring higher consensus.
In the United Kingdom, for example, the Companies Act 2006 explicitly defines an ordinary resolution as one passed by a simple majority, whether in a meeting or as a written resolution.38, 39 Similar principles apply in other common law jurisdictions, where the differentiation between an ordinary resolution and more stringent voting requirements for fundamental changes became standard practice, ensuring that shareholders retained oversight while allowing day-to-day operations to proceed efficiently.
Key Takeaways
- An ordinary resolution requires approval by a simple majority, meaning more than 50% of the votes cast.37
- It is used for routine business decisions, such as appointing or removing a director or auditor, and approving annual financial statements.34, 35, 36
- Ordinary resolutions can be passed at general meetings or through written shareholder consent in many jurisdictions.32, 33
- The legal framework for ordinary resolutions is typically defined by a company's governing bylaws and applicable company law.
- Anything that can be achieved by an ordinary resolution can also be achieved by a special resolution, but not vice-versa.31
Interpreting the Ordinary Resolution
An ordinary resolution signifies the general will of the majority of shareholders on matters that are considered part of the company's regular operations. When an ordinary resolution passes, it indicates that the proposed action has sufficient support from the voting body to proceed. The context of its interpretation often involves assessing the level of consensus within the company. For example, if an ordinary resolution passes with just over 50% of the vote, it may suggest a divided shareholder base, which could prompt the board of directors to further engage with dissenting shareholders. Conversely, a unanimous or near-unanimous vote signals strong alignment.
Understanding which matters require an ordinary resolution is crucial for effective decision-making and legal compliance within a company. The requirement for this level of approval helps ensure that significant routine actions have the necessary shareholder mandate, reinforcing principles of accountability and transparency in company operations. Companies must also ensure a sufficient quorum is present for a valid vote.
Hypothetical Example
Consider "Apex Innovations Inc.," a publicly traded company. At its Annual General Meeting, one of the agenda items is the re-appointment of its current auditor for the upcoming fiscal year. According to the company's articles of association and applicable company law, this particular decision requires an ordinary resolution.
At the meeting, shareholders cast their votes, either in person, by proxy voting, or electronically. Suppose the total number of votes cast for and against the re-appointment of the auditor is 100 million. For the ordinary resolution to pass, more than 50% of these votes must be in favor. If 55 million votes are cast in favor, and 45 million against, the ordinary resolution passes because 55 million (55%) is greater than 50% of the total votes cast. Consequently, the incumbent auditor is re-appointed for the next fiscal year.
Practical Applications
Ordinary resolutions are integral to the day-to-day functioning and governance of corporations. They appear in various aspects of company management and shareholder relations:
- Director Appointments and Removals: A common use of an ordinary resolution is for the appointment or removal of directors to the board. This ensures that shareholders have direct control over the composition of the company's leadership.29, 30
- Auditor Engagements: Companies regularly use ordinary resolutions to appoint or re-appoint the company's auditor.27, 28
- Approval of Financial Statements: At annual general meetings, shareholders typically pass an ordinary resolution to adopt the company's annual financial statements.25, 26
- Declaration of Dividends: While the board of directors may propose a dividend, the shareholders' formal approval for its declaration often requires an ordinary resolution.23, 24
- Shareholder Proposals (U.S. Context): In the United States, shareholders of public companies can submit proposals for a vote at annual meetings, often concerning corporate governance or social responsibility issues. These shareholder resolutions are typically advisory or "precatory" and are considered passed if they receive a simple majority of votes cast.22 The Securities and Exchange Commission (SEC) regulates the submission and handling of these proposals.21 For instance, recent amendments to the Delaware General Corporation Law (DGCL) have simplified the voting threshold for certain corporate actions, moving towards a simple majority of votes cast for matters like certain stock splits and changes to authorized shares.20
- Increasing Share Capital: In some cases, increasing the authorized share capital of a company may be achieved by an ordinary resolution.18, 19
Limitations and Criticisms
While essential for routine operations, the ordinary resolution has limitations inherent in its simple majority requirement. One primary criticism is that a simple majority vote may not always represent a broad consensus among shareholders, especially in companies with diverse shareholder bases. A decision passed with just over 50% of the vote can leave a substantial minority dissatisfied, potentially leading to future disputes or a perception of weak shareholder alignment.
Moreover, the scope of decisions that can be made by ordinary resolution is legally restricted. Matters of fundamental importance to a company's structure or existence, such as amending the articles of association or reducing share capital, almost universally require a higher voting threshold, such as a special resolution.16, 17 This limitation ensures that a bare majority cannot unilaterally effect profound changes that might disproportionately impact certain shareholder groups or the long-term strategic direction of the company. Misuse or abuse of ordinary resolution procedures, though rare due to legal oversight, could occur if proper notice and meeting protocols are not strictly followed, potentially rendering the resolution invalid.
Ordinary Resolution vs. Special Resolution
The distinction between an ordinary resolution and a special resolution is crucial in company secretary practice and corporate law, primarily hinging on the voting threshold required and the nature of the decisions they address. An ordinary resolution requires a simple majority—more than 50% of the votes cast—to pass. It is typically used for routine, day-to-day business matters, such as the appointment or removal of directors or auditors, or the approval of financial statements.
In14, 15 contrast, a special resolution mandates a higher majority, generally 75% or more of the votes cast, to be approved. The12, 13se resolutions are reserved for more significant, fundamental changes to a company's constitution or structure. Examples include altering the company's name, amending its articles of association, reducing share capital, or winding up the company. The9, 10, 11 higher threshold for special resolutions provides greater protection for minority shareholders, ensuring that major decisions require substantial consensus among the ownership.
FAQs
What is the voting percentage required for an ordinary resolution?
An ordinary resolution requires a simple majority, meaning more than 50% of the votes cast, to be approved.
##8# What types of decisions typically require an ordinary resolution?
Common decisions requiring an ordinary resolution include appointing or removing directors, appointing or re-appointing auditors, approving annual financial statements, and declaring dividends.
##5, 6, 7# Can an ordinary resolution be passed without a physical meeting?
Yes, in many jurisdictions, an ordinary resolution can be passed as a written resolution, where shareholders provide their consent in writing without the need for a physical Extraordinary General Meeting or Annual General Meeting.
##3, 4# Is an ordinary resolution legally binding?
Yes, once an ordinary resolution is duly passed in accordance with the company's articles of association and applicable company law, it becomes a legally binding decision for the company.
##2# What is the main difference between an ordinary resolution and a special resolution?
The main difference lies in the voting threshold and the types of decisions. An ordinary resolution requires a simple majority (over 50%) for routine matters, while a special resolution requires a supermajority (typically 75%) for more fundamental changes to the company.1