Abstentions and Section 60 Shareholder Resolutions

Abstentions in the context of shareholder resolutions adopted under section 60 are not often considered in practice, usually because shareholder participation is typically sufficient to avoid uncertainty.

Section 60

Section 60(2)(a) provides that a resolution:

“will have been adopted if it is supported by persons entitled to exercise sufficient voting rights for it to have been adopted as an ordinary or special resolution, as the case may be, at a properly constituted shareholders meeting.”

At first glance, section 60 appears straightforward. It permits shareholders to adopt a resolution without convening a meeting and is easy to apply where shareholders holding a majority of all voting rights support or oppose a proposed resolution.

Even though the Act defines ordinary and special resolutions with reference to voting rights exercised on the resolution and deals with the calculation of votes for the purpose of adopting a resolution consistently, the wording of section 60(2)(a) has given rise to competing interpretations, and the issue does not appear to have been definitively settled by the Courts.

Resolutions

An ordinary resolution is defined in section 1 as:

“a resolution adopted with the support of more than 50% of the voting rights exercised on the resolution, or a higher percentage as contemplated in section 65(8):
(a) at a shareholders meeting; or
(b) by holders of the company’s securities acting other than at a meeting, as contemplated in section 60.”

The definition of a special resolution follows the same approach, requiring support from at least 75% of the voting rights exercised on the resolution. Under these definitions, whether a resolution is adopted at a shareholders' meeting or by written consent under section 60, the relevant threshold is calculated with reference to the voting rights exercised on the resolution.

Sections 65(7) and 65(9) reinforce this principle by expressly providing that the applicable threshold is determined with reference to the voting rights exercised on the resolution.

Although many practitioners interpret section 60 to mean that a written resolution is adopted if it receives support from shareholders holding sufficient voting rights to pass the equivalent resolution at a properly constituted shareholders' meeting, others advocate a different interpretation. In some cases, this alternative view is influenced by comparisons with the UK Companies Act 2006.

According to Henochsberg:

“The words ‘supported by persons entitled to exercise sufficient voting rights for it to have been adopted as an ordinary or special resolution, as the case may be, at a properly constituted shareholders meeting’ gives the impression that the minimum majority will be as at a minimum quorate meeting, ie by the requisite majority of the votes at a meeting where the minimum quorum (eg 25% of all the votes) and not all the votes, is present. However, it could also be argued that the ‘properly constituted shareholders meeting’ in sub-s (2) refers to a meeting where all the (voting) shareholders are present, but the subsection does not state this qualification (see in respect of private companies eg s 296 (4) of the English Companies Act 2006 (c 46) that provides that the majority must be in respect of eligible members, ie persons who are entitled to vote on that resolution (s 289 (1) of the English Companies Act). It is submitted that the above alternatives are the only possibilities in interpreting s 60, with the second interpretation clearly the more logical one if the English example is taken into account... Abstentions in this process will obviously, due to the words ‘entitled to exercise voting rights’ (ie of all the votes) be votes against the proposed resolution.”

English Companies Act

The approach under the English Companies Act is vastly different to the South African Act. The threshold under the English Companies Act for an ordinary resolution is a simple majority where simple majority varies depending on the type of resolution.

For example, if a resolution is adopted following a poll at a meeting, a simple majority is calculated with reference to the total voting rights of members who vote on the resolution, while simple majority for a written resolution is calculated with reference to the total voting rights of eligible members, with eligible members being members who would have been entitled to vote.

South African Companies Act

Going back to Henochsberg, it is not clear why the phrase “entitled to exercise voting rights” is interpreted to mean that the threshold should be calculated with reference to all voting rights capable of being exercised, rather than only those actually exercised.

In section 60(1), the phrase is used to identify the shareholders to whom the proposed resolution must be submitted and who are entitled to vote on it. It does not prescribe the method for calculating whether the resolution has been adopted. That question is addressed by section 60(2)(a), read together with the definitions of ordinary and special resolutions in section 1 and the provisions of section 65, all of which focus on voting rights exercised on the resolution.

It seems there is a strong basis for concluding that abstentions should not be treated as votes against a proposed section 60 resolution. Rather, like with a shareholders' meeting, the relevant threshold should be determined by reference to the voting rights actually exercised in favour of or against the resolution.