Supermajority: What it Means, Examples in Corporate Finance

What Is a Supermajority?

A supermajority is an amendment to a company's corporate charter that requires a large majority of shareholders (generally 67% to 90%) to approve important changes like mergers and acquisitions.

This is sometimes called a "supermajority amendment." Often a company's charter will simply call for a majority (more than 50%) to make these types of decisions. A supermajority is also frequently used in politics, required for passing certain laws.

Understanding a Supermajority

Supermajorities date back to discussions among juries in classical Rome. The medieval church later adopted a two-thirds supermajority rule for its own elections. Despite Pope John Paul II's attempt to change this in 1996, the supermajority rule for electing a pope still exists.

Requiring a supermajority of stakeholders to vote on a corporate issue makes it far more difficult to reach a decision and move forward; however, those issues that do make it through such an intense dialogue pass with far more support and could ultimately be more sustainable long-term, given that more team members are in favor of its success. 

Examples of critical issues that might require a supermajority vote include a merger or acquisition, executive changes (including the hiring or firing of a CEO), the decision to hire an investment bank to go public, or, in reverse, to leave the public markets and go private.

A major corporate decision that does not require a vote is the declaration of dividends, which the Board of Directors of a company decides on independently. However, most other important decisions that affect the direction a company are subject to a vote.

Supermajorities and Voting Shareholders

A supermajority of voters is usually counted at a company’s shareholder meeting. This can be an annual meeting or a non-regular meeting throughout the year, depending on the nature and urgency of the matter being voted upon.

Shareholder meetings are generally administrative sessions that follow a specific format that is decided in advance. The format is usually a parliamentary procedure, with specific time allocated for each speaker and protocols for shareholders who wish to make statements.

A corporate secretary, attorney, or another official often presides over the process. At the conclusion of the meeting, the minutes are formally recorded.

A supermajority is the opposite of a simple majority, which requires 51% of votes for a decision to go through. When a supermajority is implemented and passed, it shows that a larger portion of shareholders are happy with the decision and believe that it should go through.

A supermajority vote, when passed, can be productive; however, the opposite can also be true. A supermajority vote can lead to an impasse where no decision is made, adversely impacting the company.

This further holds true when any one individual or a small group of individuals have a significant share of the company. This means that an individual, or small group, can prevent a certain action from taking place if they do not think it is in their best interest, even though it might be for the company.

Example of a Supermajority

Company ABC has amended its charter to state that a voting percentage of 75% is needed to approve the spinoff of one of its business segments. Though the segment does generate a profit, when compared to the cost of running the business segment, profit margins are slim, whereby the capital allocated to the business unit could be better used elsewhere.

The company holds a vote with the shareholders. There is a group of shareholders that believes the business segment could be even more profitable if certain changes are made within the unit that would result in improved margins. For this reason, they do not vote in favor of divesting the business unit, resulting in a 65% vote in favor of selling off the business. As a result, the business unit is not sold.