Quorum and majorities in companies: How Many votes are needed to pass a resolution?

One of the most important questions when investing in a company, or when setting one up, is knowing what decision-making power you will actually have within it.

Holding an interest in a company purely to obtain a financial return, for example, through dividend distributions or a possible future sale, is not the same as holding one with the intention of taking part in decision-making or gaining control of the company.

In the latter case, it is essential to understand the quorum and majority rules that apply to companies, since these determine when the General Meeting can be validly constituted, what percentage of votes is required to pass different resolutions, and which decisions a shareholder can put forward or block depending on their stake in the share capital.

That is why understanding the quorum and majority rules in companies is essential before investing, setting up a company or taking an active role in its management.

In this article, we analyze the quorum and majorities required in Limited Liability Companies and Public Limited Companies, the situations in which reinforced majorities apply, and the extent to which these rules can be altered through the articles of association.

Difference between quorum and majority

Although both concepts relate to the passing of resolutions at the General Meeting, quorum and majority refer to different things.

The quorum determines what proportion of the share capital must be present or represented for the Meeting to be validly constituted. The majority, on the other hand, determines how many votes are required to pass each resolution put to a vote.

Therefore, it’s important to keep in mind that a General Meeting may be properly constituted, having met the required quorum, and yet one or more resolutions may still fail to pass because they do not obtain the necessary majority.

Furthermore, neither the quorum nor the majorities work in the same way across different types of company.

By contrast, in Public Limited Companies don’t exit a minimun attendance quorum; instead, the directly sets out the majorities required to pass the various resolutions.

For this reason, working out whether a decision can be validly taken is not just a matter of checking how many shareholders attended the General Meeting; it is also necessary to take into account the type of company, the resolution to be passed, and the majority required in each case.

Quorum and majorities in Limited Liability Companies (SL)

Minimum quorum in an SL

As noted in the previous section, unlike Public Limited Companies (known by its Spanish acronym, SA), Limited Liability Companies (SL)  have no minimum attendance quorum for the General Meeting to be validly constituted. In other words, the the Spanish Companies Act (Ley de Sociedades de Capital, LSC) does not require any minimum percentage of the share capital to be present or represented for the General Meeting to be held.

However, the absence of a minimum quorum does not mean that resolutions can be passed with any percentage of capital present or represented, since passing them will still require reaching the majority the law sets for each type of resolution.

Majorities required to pass resolutions in an SL

Although, as mentioned, Limited Liability Companies have no minimum attendance quorum, LSC does set out the different majorities required for each type of resolution to be passed.

As a general rule, three types of majority can be distinguished:

Applicable majority	What does the law require?	For which resolutions?
Ordinary majority (art. 198 LSC)	There must be more votes in favour than against, and the favourable votes must represent at least 1/3 of the votes corresponding to the share capital. Abstentions (blank votes) are not counted.	Applies, as a general rule, to resolutions for which the law does not set a special majority.
Reinforced majority: more than 50% (art. 199.a LSC)	A favourable vote of more than half of the votes corresponding to the share capital is required.	Increase or reduction of share capital and any other amendment to the articles of association.
Reinforced majority: at least 2/3 (art. 199.b LSC)	A favourable vote of at least two-thirds of the votes corresponding to the share capital is required.	Among others, conversion, merger or demerger, global transfer of assets and liabilities, exclusion of shareholders, withdrawal or restriction of pre-emption rights, and certain authorisations for directors in relation to competing activities.
Reinforced majority set out in the articles of association (art. 200 LSC)	The articles of association may require voting percentages higher than those set by law, though they can never require unanimity.	May be established for all resolutions or only for specific matters.

As can be seen, the law sets out an ordinary majority and a reinforced majority, the latter split into two levels depending on the significance of the resolutions to be passed.

The ordinary majority, governed by article 198 LSC, applies as a general rule to all resolutions for which the law does not require a reinforced majority, which is governed by article 199 LSC.

For a resolution subject to the ordinary majority to be passed, it must obtain more votes in favour than against and, in addition, the favourable votes must represent “at least one third of the votes corresponding to the quotas into which the share capital is divided.” It should be noted that abstentions (blank votes) are not counted.

Therefore, although an SL has no minimum attendance quorum, passing a resolution by the ordinary majority under article 198 LSC requires the favourable votes to represent, at a minimum, one third of the company’s total votes, in addition to there being more votes in favour than against.

For example, in a company whose capital is divided into 300 quotas, each carrying one vote, at least 100 votes in favour are needed to pass the resolution, and there must also be more votes in favour than against.

For certain resolutions of greater significance, on the other hand, Article 199 LSC sets out reinforced majorities, distinguishing two levels depending on the resolution to be passed.

First, a favourable vote of more than half of the votes corresponding to the quotas into which the share capital is divided is required to approve an increase or reduction of the share capital, as well as any other amendment to the articles of association.

In other words, more than 50% of the company’s total votes is required, not merely more than half of the votes of the shareholders who attended the General Meeting.

For example, continuing with a company whose capital is divided into 300 quotas, each carrying one vote, at least 151 votes in favour are needed to approve a capital increase or an amendment to the articles of association. 150 votes would not be enough, since the law requires more than half.

Second, for the conversion, merger or demerger of the company, the global transfer of assets and liabilities, the exclusion of shareholders, or the withdrawal or restriction of pre-emption rights, Article 199 LSC raises the required majority to “at least two thirds of the votes corresponding to the quotas into which the share capital is divided.”

Continuing with the example, if the company has 300 quotas, passing one of these resolutions requires at least two thirds of the share capital, that is, at least 200 votes in favour.

Quorum and majorities in Public Limited Companies (SA)

Minimum quorum in an SA

Unlike Limited Liability Companies, Public Limited Companies are subject to a minimum quorum set by law for the General Meeting to be validly constituted.

Applicable quorum	What does the law require?	For which resolutions?
Ordinary quorum (art. 193 LSC)	On first call, at least 25% of the subscribed voting capital must be present or represented. On second call, the Meeting is validly constituted regardless of the capital present or represented, unless the articles of association set a specific quorum.	Applies, as a general rule, to resolutions for which the law does not set a special quorum.
Reinforced quorum (art. 194 LSC)	On first call, at least 50% of the subscribed voting capital must be present or represented. On second call, 25% is sufficient.	Among others, increase or reduction of share capital, amendment of the articles of association, withdrawal or restriction of pre-emption rights, conversion, merger or demerger, and global transfer of assets and liabilities.

As set out in article 193 LSC, on first call there must be present, or duly represented, shareholders holding “at least twenty-five per cent of the subscribed voting capital.” On second call, however, the General Meeting will be validly constituted whatever capital is present or duly represented, unless the articles of association set a specific quorum.

For example, in a company whose capital is divided into 300 shares, each carrying one vote, at least 75 shares must be present or duly represented for the Meeting to be constituted on first call.

However, for resolutions considered of greater importance — such as an increase or reduction of share capital, any amendment to the articles of association, the issue of debentures, the withdrawal or restriction of pre-emption rights, or the conversion, merger, demerger or global transfer of assets and liabilities — Article 194 LSC sets a reinforced quorum. This means that, for these resolutions, at least 50% of the voting share capital must be present on first call, and 25% on second call.

Continuing with the previous example, if the company has 300 shares, passing one of these resolutions requires at least 150 shares to be present or represented on first call, or 75 shares on second call.

Majorities required to pass resolutions in an SA

Once the General Meeting has been validly constituted, it is necessary to take into account the majorities the LSC sets for passing the various resolutions.

As a general rule, the following majorities can be distinguished:

Applicable majority	What does the law require?	For which resolutions?
Ordinary majority (art. 201.1 LSC)	There must be more votes in favour than against, of the capital present or represented at the General Meeting.	Applies, as a general rule, to resolutions for which the law does not set a special majority.
Reinforced majority (art. 201.2 LSC)	Where the capital present or represented exceeds 50% of the share capital, the resolution must be passed by an absolute majority. Where, on second call, at least 25% but less than 50% of the share capital is present or represented, a favourable vote of 2/3 of the capital present or represented is required.	Among others, increase or reduction of share capital, amendment of the articles of association, withdrawal or restriction of pre-emption rights, conversion, merger or demerger, and global transfer of assets and liabilities.

The ordinary majority, governed by article 201.1 LSC, applies as a general rule, and for a resolution to be passed there must be more votes in favour than against, out of the capital present or duly represented at the General Meeting.

For example, if a company has 300 shares and 90 shares attend, or are duly represented at, the General Meeting, the resolution will be passed once it obtains more votes in favour than against.

For resolutions considered of greater importance, on the other hand, such as an increase or reduction of share capital, any amendment to the articles of association, the issue of debentures, the withdrawal or restriction of pre-emption rights, or the conversion, merger, demerger or global transfer of assets and liabilities, article 201.2 sets a reinforced majority. In these cases, where the capital present or represented exceeds 50 % of the share capital, the resolution must be passed by an absolute majority.

For example, if 180 of the company’s 300 shares are present or represented, more than half of the capital present or represented must vote in favour, meaning at least 91 favourable votes would be required.

Where, however, the General Meeting is held on second call and shareholders holding at least 25% but less than 50% of the share capital are present or represented, the resolution must obtain the favourable vote of two thirds of the capital present or represented at the General Meeting.

For instance, if on second call 120 of the 300 shares are present or represented, at least 80 shares must vote in favour to pass one of these resolutions.

Raising quorums and majorities through the articles of association

The quorum and majority rules we have looked at so far are those set out by law, but they are not set in stone.

Everything explained above reflects the quorums and majorities set by the LSC. However, working out what percentage is actually required to validly constitute a Meeting or pass a resolution is not simply a matter of looking at the law, since the articles of association may raise these quorums and majorities.

In other words, the law sets certain quorums and majorities, but it also allows the articles of association to set higher percentages for specific resolutions.

Therefore, when working out what shareholding is needed to pass or block particular resolutions in a company, the first step is to review its articles of association to check whether they set any reinforced quorum or majority. If the articles contain no specific provision, the quorums and majorities set out in the LSC will apply by default.

Quorum and majorities in companies: practical conclusions

In short, as this article has shown, it is important to bear in mind the quorum and majority rules that apply to companies, since they determine which resolutions can be passed and what shareholding is needed to take part in decision-making or, in certain cases, to prevent decisions from being taken.

For this reason, before setting up a company, taking a stake in it, or regulating relations between its shareholders, it is advisable to review both the rules set out in the law and those provided for in its articles of association.

At Devesa, we have specialist Corporate Law lawyers who can advise you on quorum and majority matters in companies, including reviewing and drafting articles of association, tailoring their provisions to the needs of each company and its shareholders, and helping to set out clear rules for passing resolutions.

Do you need advice? Visit our area related with the analysis of quorum and majorities in companies according to the type of resolution:

Corporate Law