Corporate Decision Making
This isn't a typical blog post . . . but we thought we should get this basic information out there for those of you who have had questions about how decisions are to be made once you incorporate. A small closely-held corporation (corporations with a single shareholder or perhaps just a husband and wife may not need to know this stuff - but everyone who owns and runs a business through a corporation should at least be familiar with this). So here we go:
Directors - The Business Corporations Act (Alberta) (the “ABCA”) specifies that a simple majority (greater than 50%) of the Directors who vote on a resolution is required to pass the resolution.
Shareholders - The ABCA specifies how many Shareholders are required to pass a resolution to authorize a Corporation to do certain acts. Generally, depending on the nature and importance of the decision, the ABCA requires one of three degrees or levels of “majority”:
1. Simple majority (referred to in the ABCA as “Ordinary Resolution”) – is an agreement (resolution) passed by more than 50% of the Shareholders who voted on the matter;
2. Super majority (referred to in the ABCA as “Special Resolution”) – is an agreement (resolution) passed by not less than 2/3 of the Shareholders who voted on the matter.
3. Unanimity (referred to in the ABCA as “Unanimous Resolution”) – is an agreement (resolution) passed by all shareholders entitled to vote (or in some cases all Shareholders who voted on the matter).
Although the ABCA provides that the various decisions corporations make (through its Directors and/or Shareholders) need one of the three majorities noted above, it also says that those majorities can be INCREASED by one or more of the following documents:
A. Articles of Incorporation – NOTE: to amend the Articles to increase the majority needed for any particular decision requires a Special Resolution of the Shareholders;
B. Bylaws – NOTE: to adopt Bylaws, or amend existing Bylaws, requires an Ordinary Resolution of Directors and an Ordinary Resolution of the Shareholders;
C. Unanimous Shareholder Agreement (“USA”) – NOTE: to adopt an USA, or amend an existing USA, requires a Unanimous Resolution of Shareholders.
So for example, if you create Bylaws that state that a certain number of Directors must be present for a Quorum (so that business can only be conducted and decisions made if that quorum exists), and you later discover that the quorum stipulated is too onerous (i.e. you rarely can get the number of Directors together that are required), then all you need is to get a simple majority of the Shareholders (who are present at a meeting properly called) and a simple majority of the Directors (who are present at a meeting properly called), - provided quorum is met for each such meeting – to agree to amend the Bylaws to reduce the number needed for a quorum.
However, if you had entrenched the quorum requirement into the Articles then you would need to get a special resolution passed (2/3 majority) in order to amend the quorum requirement. And if you had entrenched the quorum requirement in a Unanimous Shareholder Agreement then unanimity would be required to change the quorum requirements.
As you can see, before setting up (organizing) a corporation, and certainly before bringing in any new shareholders/directors, it is very important to understand what decisions require what kind of majority – to decide what decisions you would want made by something greater than a simple majority of Shareholders/Directors – and then decide what document you want to ‘entrench’ that requirement. You should contact your lawyer to review your specific corporate situation.