Drafting written resolutions – Important considerations

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Topics Commercial & Corporate Law | Contract Law

20 May 2020

Calling meetings for the conclusion of transaction documents can be burdensome and unnecessary delays can negatively impact on a proposed transaction. The use of written resolutions certainly helps. There are, however, certain things one needs to keep in mind.

Section 66 (1) the Companies Act, No. 71 of 2008 (the “Act”) stipulates, the business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the Company, except to the extent that this Act or the Company’s Memorandum of Incorporation provides otherwise.

Accordingly, and as a point of departure, you must establish whether the powers of the directors are in any way limited by the Company’s MOI. Next, the type of transaction to be concluded is also important. Certain transactions, for example:

fundamental transactions contemplated in section 112 – 114 of the Act
certain share subscriptions contemplated in sections 41 and 44 of the Act
certain transactions where the Company or subsidiary thereof acquires the Company’s shares in section 48 of the Act
certain transactions that involve financial assistance as contemplated in section 45 of the Act

require authorisation/approval by the shareholders of the Company and possibly the approval by the shareholders of a holding company.

There are only two types of shareholders resolutions, namely, ordinary and special resolutions. Section 65 (11) lists the special resolutions. Note, however, this is not a closed list and the MOI of the Company can expand on this list.

From the wording of section 115 of the Act (approval of fundamental transactions), it appears to require a formal meeting of shareholders. It is therefore doubtful whether one can use written resolutions for the shareholders resolutions that may be required in terms of section 115 of the Act.

1. FORMALITIES: DIRECTORS RESOLUTIONS

Firstly, the requirements for the notice as in the proviso in subs (1) in respect of section 74 resolution appear to be the same as that for a formal meeting (CDH Invest NV v Petrotank South Africa (Pty) Ltd and Others [2019] JOL 41627 (SCA), 2019 (4) SA 436 (SCA)).

Generally, with written director resolutions, the notice requirements of a meeting are dealt with in one of two ways. The resolution either contains an express acknowledgement of the notice by the directors of the Company or more commonly, all the directors sign the resolution and the resolution expressly states that the notice requirements are waived as contemplated in section 73 (5) (a) of the Act.

Section 73 (5) (a) (iii) stipulates that if all directors of the Company:

acknowledge actual receipt of the notice;
are present at a meeting; or
waive notice of the meeting

then the meeting may proceed even if the Company failed to give the required notice of that meeting, or there was a defect in the giving of the notice.
(own emphasis)

It is important to remember that if the resolution states that the Directors waive notice of the meeting that all the directors must sign the resolution.

Unlike written shareholder resolutions, the Act does not provide for a specific timeframe for the adoption of the written resolution of the Directors.

Additional formalities relating to written resolutions can and often is included in the Company’s MOI.

2. VOTING: DIRECTORS RESOLUTIONS

Before diving into more details surrounding directors resolutions, a note of caution: section 73 (5) of the Act (this section deals with various aspects surrounding director resolutions) is an alterable provision. You must therefore always remember to check the Company’s MOI when drafting resolutions for the transaction documents.

For purposes of this note, it is assumed that the Company’s MOI does not alter the default position under section 73 (5) of the Act.

The default position relating to voting stipulated in section 73 (5) of the Act is that –

each director has one vote on a matter before the board;
a majority of the votes cast on a resolution is sufficient to approve that resolution
in the case of a tied vote –
- the chair may cast a deciding vote, if the chair did not initially have or cast a vote; or
- the matter being voted on fails, in any other case.

3. PERSONAL FINANCIAL INTERESTS: DIRECTORS RESOLUTIONS

Voting can be influenced by personal financial interests. Determining whether a personal financial interest exists and whether a disclosure is required can get complex and involves one jumping from section to section and definition to definition in the Act.

The purpose of this note is not to discussed personal financial interests in detail as this warrants a separate article altogether. In the context of drafting written resolutions, the following is, however, worth noting.

It is advisable that any matter to be decided by the board that may potentially involve a personal financial interest of a director should be done in a formal meeting and not by way of written resolution.

Due to practical reasons, holding a formal meeting is not always possible. In such a situation, Legal Practitioners tend to include a blanket declaration in written resolutions stating that none of the directors has any personal financial interest in matters to be decided (even in situations where they know (or reasonably ought to know) there exists a possibility of a personal financial interest that requires disclosure).

The non-disclosure of personal financial interests may amount to fraud (S v Gardener 2011 (4) SA 79 (SCA)) (certainly not a situation you as a Legal Practitioner want to get tangled up in). Instead, try and get the disclosures in writing in a formal meeting is not possible.

4. DIRECTOR TO ACT IN THE BEST INTEREST OF THE COMPANY

There is a general misconception (especially among directors of small and medium-sized companies) that the director must act in the interest of his/her “shareholder”.

Section 76 (3) (b) of the Act, stipulates a director of a company, when acting in that capacity, must exercise the powers and perform the functions of a director in the best interests of the Company.

There may be situations where your mandate extends to a situation where you advise the board of the Company on their duties. You will not always be in the position to consult with all the directors of the Company and advise on their respective duties and responsibilities. Usually, there is a designated director that handles the negotiations and you will mainly be working with him/her.

An option may be to include guidance notes in the written resolution for the other directors, setting out key aspects relating to decisions of the board, for example, their responsibility to make decisions in the best interest of the Company.

5. UMBRELLA AUTHORISATIONS, RATIFICATIONS AND WARRANTIES BY THE DIRECTORS

Most written resolutions include various umbrella authorisations, general ratifications and warranties by the directors of the Company. These inclusions certainly serve a purpose and can, in some way, provide additional comfort to the counterparty and the legal practitioner drafting the resolutions. However, you will get experienced directors that will frown upon these inclusions in written resolutions and require that same be removed. In such a situation, you will have to make sure that you have done all your homework on the transaction.

6. FORMALITIES: SHAREHOLDERS RESOLUTIONS

The formalities surrounding written shareholders resolutions are not clear nor settled at this stage. Most legal practitioners err on the side of caution and still include various recordals relating to the formal requirements contemplated in the Act.

Generally, written resolutions by the shareholders will contain an express waiver by all the shareholders to waive the required minimum notice of the meeting, as contemplated in section 62 (2A) of the Act. When this route is followed, ensure that all the shareholders sign the resolution within the required time. Failure to comply with the time limit of 20 days may have the effect that the proposed resolution is void.

When drafting a written shareholders resolution, remember section 65 (4) of the Act that stipulates:

A proposed resolution is not subject to the requirements of section 6 (4), but must be—

(a) expressed with sufficient clarity and specificity; and
(b) accompanied by sufficient information or explanatory material

to enable a shareholder who is entitled to vote on the resolution to determine whether to participate in the meeting and to seek to influence the outcome of the vote on the resolution.

7. CONCLUSIONS

Most time is usually spent drafting the transaction documents, and the resolutions can often get neglected. One does not want to fall at the last hurdle. By using the contracts.tech platform, all transaction information will already be in the system and can be incorporated into the applicable resolutions with a click of a button. The dynamic questionnaires will guide you through the important considerations contemplated above, ensuring that you do not miss anything late at night when drafting the last resolutions.