Class
rights
A share is essentially a measure of
interest in the company.
There is a presumption of equality
between shareholders so that they are deemed to enjoy voting and dividend
rights, when the company is a going concern, and equal rights to
participate in any surplus assets should the company be wound up.
This presumption will be rebutted
where a company issues shares that carry different class rights. For
example, the holders of preference shares enjoy preferential dividend rights
and priority in the return of a capital in a winding up.
Companies Act 2006 does not define ‘class right’ beyond in section 629(1) stating that ‘shares are of one class if the rights
attached to them are in all respects uniform’.
You can download Companies Act 2006 here: http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf
In Cumbrian
Newspaper Group Ltd v Cumberland and Westmorland Herald Newspaper and Printing
Co Ltd (1987), Scott J stated
that rights or benefits conferred by a company’s article of association can be classified into
three distinct categories:
(a) Rights or benefits annexed to
particular shares, such as dividend rights and voting rights.
(b) Rights or benefits that, although
contained in the articles, are conferred on individuals who are no qua members
or shareholders but, for ulterior reasons, are connected with the
administration of the company’s affairs (I.e. outsider rights). These are not
class right.
(c) Rights or benefits that, although not
attached to any particular shares, but conferred on individuals in their capacity
as members.
In the case itself, it was held that
provisions in the company’s articles which gave the claimant a pre-emptive
right over the transfer of shares in the defendant company, together with
the right to nominate a director to is board so long as it held 10 per cent of
the ordinary shares in the company, were class rights. These rights fall under
the third category, but not the first category, because the rights were
came from the company’s constitution.
Scott
J also explained that, the right in Bushell
v Faith (1970), where the articles gave a director weighted voting rights
on a resolution to remove any director from office, was also a class right
under the third category. The relevant articles have effectively created
two classes of shareholders, namely shareholders who were for the time being
directors, and shareholders who were not for the time being directors.
Where shares are issued with express
provisions relating to class rights, such statements are deemed to be exhaustive
(Re National Telephone Co (1914)).
However, preference shares are presumed to
be entitled to a cumulative dividend even if the terms of issues are silent
on the matter (Webb v Earle (1875)).
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Variation
of class rights
Section
630(2) provides that a variation of class rights can be legally done only
if the variation is complies with the company’s articles and the holders of the
relevant class rights have consented to the variation.
Section
630(4) provides that the consent that is required:
(a) Consent in writing from the holders
of at least three-quarters in nominal value of the issued shares
of that class
(b) A special resolution passed in a separate
general meeting of the holders of that class sanctioning the variation.
The existence of class rights does not
automatically trigger section 630.
For section 630 to be applicable, it
must be proved that there is actually a variation of class rights in question.
The courts have adopted a restrictive
approach. A distinction must be made between the conduct which impacts
upon the substance of the class right itself and conduct which merely
affects its exercise or enjoyment (White
v Bristol Aeroplane Co (1953)).
If the rights themselves have been taken
away as a result of the alteration of AA, it is a variation of class right;
it would not be a variation of class right if it merely affects the
enjoyment or exercise of the class rights.
In White
v Bristol Aeroplane Co Ltd (1953), the company's articles of association
provided that the class rights could only be 'affected, modified, varied, dealt
with, or abrogated in any manner' with the approval of an extraordinary
resolution passed at a separate meeting of the members of that class. The
company made a bonus issue to ordinary shareholders, thereby diluting in
practical terms the preference shareholders’ voting power. A preference
shareholder challenged the share issue on the basis that the preferences’
voting rights had been ‘affected’ without their consent. It was held that there
was no need to obtain their consent. Their voting rights had not been affected
by the bonus issue as they still had the right to one vote per share held. All
that had been affected was the enjoyment of this legal right, which was
‘not the subject of any assurance or guarantee under the constitution of the
company’.
In Greenhalgh
v Arderne Cinemas Ltd (1946), there were two classes of right, namely one
class carries more vote, and another one carries lesser. The company’s articles
provided a pre-emption right to the shareholders, and the company later altered
it by special resolution. The claimant wishes to prevent the control of company
from going away to outsider and argued that the alteration of class right was
invalid. The claimant claimed that, inter
alia, it was a variation of class right. This was rejected by the CoA, on
the ground the class right was not in fact been varied; the right to
vote, and the amount of votes it carries was unaffected. The alteration of
article does not affect the class rights itself, thus not amount to variation
of class right.
A successful claim was brought in Re Old Silkstone Collieries Ltd (1954).
Following the nationalization of coal industry, the company proposed to
reduce its share capital as it was not in excess of its needs. While waiting
for the final settlement of compensation, the company returned capital twice to
the preference shareholders with the promise that they would not pay them
off completely, which means they would retain their membership, so
that they could participate in the compensation scheme to be introduced
under the nationalization legislation. Subsequently, it was proposed to reduce
the company’s capital for a third time by returning all outstanding capital to
the preference shareholders. The effect of this would be canceling the class
completely and they would no longer qualify for compensation. The CoA refused
to sanction the reduction, holding that the proposal amounted to an unfair
variation of class rights in so far as the preference shareholders had
been promised that they would participate in the compensation scheme.
A cancellation of a class of shares
on a reduction of capital will not generally be held to constitute of
class rights, provided that it is viewed as consistent with the terms of issue
of the particular shares in question.
In House
of Fraser plc v ACGE Investments Ltd (1987), the preferences
shareholders seek to challenge the compulsory paying off their shares,
which effectively cancelling off the company’s preference shares. No meeting of
preference shareholders had been held to approve the reduction, despite an
article which called for such a meeting if the rights attached to the
preference shares were ‘modified, commuted, affected or dealt with’. The court
held that the proposed cancellation of preference shares did not attract the
protection of that article, because the cancellation of shares was in
accordance with the rights originally attached to those shares,
specifically, the right to return of capital in priority to other shareholders
where any capital was in excess of the company’s needs. It does not constitute
a modification, commutation, affecting or dealing with rights attached to them.
The decision is still consider as a good law, by virtue of section 630(2)(a).
By virtue of section 630(3), the company’s articles may specify either
less or more demanding requirements for variation of class rights than then
default provisions lay down under section
630. However the statutory procedure is supplemented by the common law
requirement that the shareholders voting at a class meeting must have regard to
the interests of the class as a whole (Re
Holders Investment Trust (1971)).
Section
633 provides that, whether a variation has been effected through the
statutory procedure or under a provision contained in the company constitution,
the holders of not less than 15 per cent of the issued shares of the
class affected may, if they did not consent to or vote in favour of
the provision, apply to the court within 21 days of the resolution
to have it cancelled (section
633(4)(a)).
The effect of such an application is to
suspend the variation until it is confirmed by the court. If, on hearing the
application and having regard to all the circumstances of the case, the court
is satisfied that the variation would unfairly prejudice members of the
class of the shareholders represented by the applicant, it shall disallow
the variation (section 635(5)). If
it is not so satisfied, the court must confirm it.
Feel free to comment if you find any mistakes, or if you have anything to share.
You can read the majority rule and overview of shareholder's remedies here: http://thewallyeffect.blogspot.my/2017/10/the-majority-rule-and-shareholders.html
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Please read the disclaimer (at the top of the page) before proceeding.
Please do not take this note as the sole and only sources to study. It is only a guidance which may assist you in drawing out the full picture of the particular area of law. It is never meant to be a comprehensive text.
Feel free to comment if you find any mistakes, or if you have anything to share.
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