BR (Amit Sshukla)
A company is a hierarchical structure of multiple stakeholders. Shareholders, investors, directors, advisors, consultants, and employees, each one of them having well-defined roles which culminate in a company’s performance. And a chain of command has to be followed throughout these levels to keep the business moving forward like a well oiled machine, which is where the role of company directors fits in.
The directors of a company are entrusted with the responsibility of ensuring overall operations and overseeing regular decision making. And these directors are governed by the Board of Directors, with board resolutions being the key to help steer the business in the right direction and keeping these decisions in writing.
COMPANY BOARD RESOLUTION
A company director is vested with significant power to run the business. Though appointed by the shareholders, the Board of Directors as a collective is powerful enough to become a risk to the shareholders if they become reckless in their decision making or act out of personal interest. Bad decisions will directly impact the business and in turn, affect the share value. Thus to protect the interest of shareholders, director duties are created in such a way that they are legally binding, with a board resolution being one such legally binding structures.
WHAT IS A BOARD RESOLUTION?
A board resolution is a record of decisions made by the Board of Directors during a board meeting. It is a formal document that identifies the roles of all corporate officers and their votes over a particular decision concerning the welfare of a company. It is used to pen down every minute detail of the board meeting. It is usually certified by the appointed chairperson and duly signed by all board members present at the meeting. It is maintained along with the Board meeting minutes and is a legally binding decision of every S Corporation or C Corporation
REQUIREMENTS TO PASS A BOARD RESOLUTION
The board of directors are responsible for making the overall corporate decisions and don’t usually get involved in the company’s day-to-day operations. Board resolutions percolate down the company hierarchy and are implemented by the respective business units. Hence board meetings are not a casual, daily affair.
Two aspects are required to pass a board resolution: Quorum – A company’s constitution pre-determines the minimum number of directors required to convene a board meeting. This minimum number is called a quorum. For example, if a company sets quorum to 2, it means that even if there are 5 directors in total, to pass a board resolution, every board meeting must be attended by at least 2 directors. Quorum requirements vary from one company to another and it mostly depends on the size of the business.
Chairperson & Casting Vote – To ensure smooth conduct of a board meeting, the board appoints one among them as a chairperson for the meeting. This person is also given the right to a ‘casting vote’ which is the decisive vote in case there are equal votes for and against a proposal. The chairperson is responsible for certifying the final draft of the board resolution. The company then enters the board resolution in the company’s books within a month of the meeting.
WHEN IS A BOARD RESOLUTION REQUIRED?
There is no mandate to submit board resolutions to a government agency or any other supervising entity. It is maintained for self-assessment within the company or in case any of the important shareholders want to verify the actions which the board of directors have taken on their behalf. Alternatively, some institutions like banks, brokerage firms, the IRS, or the court may demand copies of a board resolution as part of their audit/verification procedures.
Primarily a board resolution is needed to keep a record of two things:To record decisions concerning company affairs (except for shares) made in the board of directors meeting. This is also known as a board resolution.
To record decisions concerning company equity made by shareholders of the corporation. This is also known as a company resolution.
Some companies may have a separate board for directors and shareholders, but the board of most corporations comprises a combination of large shareholders, equity partners, directors, and other senior officers. The extent of their voting rights is laid out in their respective agreements. In such cases, board resolutions are alternatively known as company resolutions.
The most important decisions requiring a board to convene are:Voting in new members
Need to expand, hire or let go of a large number of employees Sell shares of a corporation
Matters concerning intellectual property rights
Other important matters that affect the company at a strategic level. However decision making by the board is not linear and most decisions are passed by a simple majority, while some critical decisions may require a different approach. The next section details the different types of board resolutions.
TYPES OF BOARD RESOLUTIONA board resolution is subject to voting ‘yes’ or ‘no’. This can be done by a show of hands, chits, or by electronic means. The simple principle of a ‘majority’ dictates the passing of a resolution. However, based on the criticality of a proposal, a percentage of the majority required to pass a resolution may vary. Here are three types of resolutions:
ORDINARY RESOLUTIONS
When a board resolution is passed by a simple majority, it is called an ordinary resolution. Votes cast in favor are more than the ones against. A resolution with a majority of just over 50% of the quorum is considered passed. For example, 6 ‘yes’ votes out of 10 are considered a majority. Matters qualifying for ordinary resolutions are:
Director election
Auditor appointment
Dividend declaration
Fixing remuneration
Alteration in authorized capital
SPECIAL RESOLUTIONS
When board resolutions require a higher majority, they fall under a special category. Prior initiation should be given before convening board meetings with a special resolution agenda. The company constitution pre-determines the majority percentage, being common to set it at 75% or higher. Critical matters that require a special resolution by the board are:v
Change in the company’s registered office from one state to another.
Alterations in the object clause of the memorandum
Alterations in the Articles of Association
Reduction in the company’s share capital
UNANIMOUS RESOLUTIONS
As the name suggests, these board resolutions require 100% votes from the quorum, however these are uncommon. With more board members, it becomes logistically difficult to convene such meetings. An extreme example of a proposal requiring a unanimous resolution is shutting down the company. Apart from such catastrophic situations, most resolutions are subject to the ‘ordinary’ or ‘special’ format.
WHEN ARE BOARD RESOLUTIONS CONSIDERED ‘DECIDED’?
Despite securing the board’s majority, a resolution may run the risk of being disqualified. This happens when certain guidelines are not complied with. A Board Resolution is only valid when:
The board meeting has been properly convened with prior intimation as per Company bylaws.
The board properly holds the resolution and quorum is maintained.
The board resolution is duly certified and signed by the appointed chairperson
The new resolution finds its way into the company books within one month of the board meeting.
Board resolutions are part of the meeting minutes. This means that a board secretary is appointed to judiciously note all proceedings of the meeting. However, board resolutions are not documented as conversations and standard guidelines determine the resolution structure. The following section deals with the composition of Board Resolutions.
WRITING A BOARD RESOLUTION
A board resolution, though not a legal document, is formal and the decisions made by the board are legally binding. Hence, it follows a particular pattern and demands a certain language in its composition. Let us first take a look into what comprises a basic Board Resolution format:
Date of the Meeting
A serial number of the document. Eg. 001, 002, and so on
Appropriate title. Eg. Board Resolution for Appointment of Director of Operations of ABC Inc.
Each paragraph begins with a formal ‘Whereas’
The first sentence declares the Board’s responsibility. Eg. “Whereas it is the Board’s responsibility to appoint a Director……”
The last statement states the final resolution. It is the action the Board has taken regarding the proposal. Eg. “Now, therefore be it resolved to appoint Mr. X as the Director of Operations of ABC Inc.”
At the bottom, the names of all directors are listed with an adjacent column to record their votes as ‘yes’ or ‘no’. A resolution is approved only when the majority votes are ‘yes’
Finally, at the end of the document, space is created for the meeting chairperson’s signature and date of the board resolution.
At the onset, the format and language used can seem daunting. But with time and experience, the person recording these proceedings will have a better understanding of its composition. Sometimes, external help can be sought to compose Board resolutions. Here are some tips that might help you compose these documents.
TIPS FOR WRITING YOUR BOARD RESOLUTION
In an ideal scenario, board resolutions are passed in a board of directors meeting where directors are present. However, in the increasingly globalized marketplace, it might become impossible to wait for directors to be physically present for every meeting, even to suit quorum requirements. Adopting the electronic medium today is ideal, seamless, time-saving, and ensures transparency at all levels.
Identify the issue with the utmost clarity. Keep it as simple as possible
Research the issue in detail
Ensure that the local state or federal government agencies have not already realized the issue
Create a section supporting the statements
Mention policies related to the issue
Provide truthful and verifiable references and sources