What is a Board Resolution and when is it required?
A board resolution is a record of decisions made by the Board of Directors during a board meeting.
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.
This article outlines the basics of this documentation process. Let us try to understand why such board resolutions are important and how to create them. We begin by exploring “What is a board resolution?”.
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. Here is how a typical board resolution looks:
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
Types of Board Resolution
A 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:
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
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:
- 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
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.
Tips for writing your Board Resolution
- 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
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.
Create your Board Resolution on Eqvista
You can now create your Board Resolutions on Eqvista and share it with your board members for voting. Eqvista’s sophisticated equity management software allows companies, investors, and company directors to hold meetings on board resolutions for the company. Here are the steps to create and share a Board Resolution using Eqvista:
Step 1: Click on “Board” and “Resolutions” from the left-hand panel.
You will be redirected to a new window to create new board resolutions.
Step 2: Click on “Create Resolutions”
You will get a new interface to create your desired board resolutions.
For example, here we create a board resolution for selecting the board chairman of XYZ Company. You can first edit the name of resolution as “Board Chairman Section”
Include the consent details and attach relevant documents if needed.
Once you are done, click “Next”. Then, add the “Extra Approvers” for consent by searching through the company’s shareholder list.
In this example, we add another board director “Hibert Lio” to the list.
Once you click “ADD” it will be added to the “APPROVERS” list.
Similarly, if you have more approvers you can add it as above. Once you finish adding approvers click “Next”.
In the next section, you need to add an “EXPIRATION DATE” and “EMAIL MESSAGE” to be sent. The approver can also vote on this resolution openly or anonymously, which can be set in “PRIVACY SETTINGS”.
Once you click the “Submit” button, this resolution will be sent via email to all the approvers for voting. The approvers will get an invitation link to the particular resolution and they can vote for this to pass this resolution.
You can also check the status of this resolution as below:
You can see the overview of the resolution, vote history, and other relevant details.
Our team is continuously working on introducing more updates on our board resolutions and other functions to make our app better for our users. Stay tuned with us for more product updates! Learn more about how to issue and manage shares with our documentation or contact us today!