Protecting Your Business: The Importance of Corporate Resolutions in South African Startups and SMEs

As a startup founder or small business owner in South Africa, you may have heard the term “corporate resolution” but aren’t quite sure what it means or why it’s important. Corporate resolutions are formal documents that record major decisions made by a company’s board of directors or its shareholders. While they may seem like just another piece of paperwork, resolutions play a crucial role in protecting your business legally and operationally.

What is a Resolution used for?

A corporate resolution serves as an official record of important company decisions and actions. It documents that proper procedures were followed in making those decisions, in accordance with the company’s governing documents and relevant laws. Common uses for resolutions include:

• Approving major financial decisions like taking out loans or purchasing property
• Authorising individuals to act on behalf of the company (e.g. opening bank accounts)
• Appointing or removing directors and officers
• Amending the memorandum of constitution or shareholders’ agreement
• Issuing new shares or changing share classes
• Approving mergers, acquisitions or dissolution of the company

When do I need a Resolution?

The Companies Act 71 of 2008 (”Companies Act”) has certain decisions for which a resolution must be passed by either the shareholders, directors, or both.

For the most part, you’ll need to draft and pass a resolution any time your company is making a significant decision that affects its structure, finances, or operations. For startups and SMEs, this often includes:

• When incorporating the company and appointing initial directors
• Opening company bank accounts
• Taking on debt or outside investment
• Hiring key executives
• Entering into major contracts or leases
• Making changes to company ownership

What legal risk does a Resolution manage?

Corporate resolutions help manage several key legal risks:

1. Disputes between directors/shareholders: By clearly documenting decisions, resolutions reduce the chance of future disagreements about what was agreed.
2. Regulatory compliance: Resolutions demonstrate that proper corporate governance procedures are being followed.
3. Personal liability: Resolutions help maintain the “corporate veil” that protects individual directors/shareholders from company liabilities.
4. Contract disputes: Resolutions prove that individuals had proper authority to enter into agreements on behalf of the company.

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Why do you need a Resolution?

Beyond managing legal risks, resolutions offer several important benefits:

• They are a legal requirement under the Companies Act
• They create a clear paper trail of company decisions for future reference
• They ensure all directors/shareholders are informed and in agreement on major actions
• They help maintain good corporate governance practices
• They may be required by banks, investors, or other third parties to verify company actions

Common pitfalls/inclusions/considerations to note when using a Resolution

When drafting resolutions, keep these key points in mind:

• Use clear, specific language about the decision being made
• Include the date, time and location of the meeting where the resolution was passed unless it was passed by way of round robin
• Note whether the resolution passed unanimously or by a majority vote
• Have the resolution signed by the chairperson and all shareholders and/or directors as applicable
• Store resolutions securely with other important company documents
• Don’t overuse resolutions for minor operational decisions

Conclusion

While they may seem like a formality, corporate resolutions play a vital role in protecting your startup or SME legally and operationally. By properly documenting major company decisions, you create a clear record of your business activities, reduce the risk of disputes, and demonstrate compliance with the Companies Act and good corporate governance. Make resolutions a standard part of your decision-making process to keep your business on solid legal footing as it grows.

Citations:
[1] https://www.law.cornell.edu/wex/corporate_resolution
[2] https://en.wikipedia.org/wiki/Corporate_resolution
[3] https://www.onboardmeetings.com/blog/what-is-corporate-resolution/
[4] https://www.legalzoom.com/articles/corporate-resolution-basics
[5] https://www.ownr.co/blog/what-is-a-corporate-resolution/
[6] https://www.linkedin.com/pulse/corporate-legal-risks-things-every-lawyer-should-know-chedayan
[7] https://futuramo.com/blog/understanding-and-managing-legal-risks-in-business-operations/
[8] https://www.investopedia.com/terms/c/corporateresolution.asp
[9] https://carrotventures.com/the-importance-of-corporate-governance/
[10] https://fastercapital.com/content/The-Significance-of-Corporate-Resolutions-in-Startups.html

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