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How Does A Company Make Decisions – Corporate Decision Making

A company is a legal entity that is distinct from its Shareholders and its directors. Shareholders and directors are two distinct organs with their respective decision making powers in the company.

 The shareholders can only control the directors by altering the articles of association, or by refusing to re-elect the directors. Further to that, shareholders also have powers stated in the Companies Act. For example, shareholders have the power to approve a director’s issuance of shares. Another example would be that the shareholders of a company need to pass a resolution (ie. 50% majority) to provide the director with his employment related fees and salary.

 It is important to give notice of a meeting for the decisions made in that meeting to be binding. For example, take a meeting that is called for the company to decide to remove a director from office. This is a decision that requires a special resolution (ie. 75% majority) by the shareholders. This requires 28 days notice for a public company. Decisions requiring special resolutions require 14 days notice for a private company. This period of notice gives the director time to decide whether he wishes to voluntarily resign to avoid the embarrassment of being removed, or to prepare to convince the shareholders why he should not be removed. Failure to provide such notice may lead to the meeting being invalidated. To do so, the director would need to seek a corporate lawyer to begin civil proceedings.

Public companies have many shareholders, as such, important decisions are rarely discussed and made in meetings. It is impracticable to get all the shareholders together frequently enough to allow the company to respond quickly to changing circumstances. On the other hand, for smaller private companies, you may be a shareholder who has invested in the company fully expecting to be involved in the key decisions that the company makes. However, the company holds a meeting without giving you notice, and as such, you were absent and unable to vote. This lack of quorum in the meeting is a procedural irregularity as specified under 392(1)(a) of the Companies Act. The meeting is only invalidated if substantial irregularity is caused.

 Whether or not there is substantial injustice depends on what decision was made at the meeting, and what they had agreed to under the articles of association when incorporating the company. For example, the articles of association in the company may have specified that each of the two parties of investors have a deadlock right. This is done by requiring both parties to be present at a meeting. Each party thus has the right to deadlock the proceedings if he doesn’t show up. In such an instance, there will be substantial injustice to either party that was not given notice and does not show up. This is because both sides had bargained for the deadlock right, essentially agreeing that the decision had to be unanimous. The meeting is hence invalidated.

 Mere procedural injustice is insufficient to invalidate a meeting. For example, in a public company, a few shareholders were not given notice and did not turn up. However, even if they did turn up, the result would still be the same because most people voted in favour of the resolution and these missing shareholders do not have enough votes to swing the decision. This is a merely procedural injustice. The reasoning for this is that even if the courts invalidated the meeting, the company can still call for the same meeting, and the results would still be the same.

 It is at times unclear whether an irregularity is procedural or merely substantial. While this article is a good starting point, it is best to ultimately seek legal advice from a Singapore law firm if you are indeed embroiled in such a commercial dispute. If you do wish to pursue your civil claim, you will need to engage a civil litigation lawyer.

This post first appeared on Criminal Law In Singapore, please read the originial post: here

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How Does A Company Make Decisions – Corporate Decision Making


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