74. Rights of holders of classes of shares Flashcards
- Rights of holders of classes of shares
General overview [74.01] Section 74 read with reg 8(1) of the Companies (Model Constitutions) Regulations 2015 provides that a company may issue different classes of shares with different rights attached to that class of shares, or to the shares. Class rights can always be varied or abrogated with the consent in writing of holders of 75% of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of that class. This clause is called a modification of rights clause. A variation of class rights may result in unfair prejudice of some members and as such, s 74(1) allows the holders of not less in the aggregate than 5% of the total number of issued shares of that class to apply to court to have the variation or abrogation cancelled.
Class rights
[74.02] A company can issue classes of shares with different rights attaching to each class, e.g. shares may have different voting rights ( Bushell v Faith [1970] AC 1099, HL ); different rights to dividends; return to capital or upon winding up. Section 74 applies only when there are “class rights” and if those rights have been varied. What are “class rights”? It was held to include a right given to a member so long as he hold at least 10% of the shares of the company even though no specific shares are designated to which those rights are attached: per Scott J in Cumbrian Newspapers Group Ltd v Cumberland and Westmorland Herald Newspaper and Printing Co Ltd [1987] Ch 1, Ch D . The term “ordinary preferred stock” meant a sub-class of ordinary stock, which had some preference or priority over another sub-class of ordinary stock
Variation of class rights
[74.03] Class rights may be varied with the consent in writing of holders of 75% of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of that class: reg 8(1) of the Companies (Model Constitutions) Regulations 2015, so-called a modification of rights clause. A vote on a resolution to modify class rights must be exercised for the purpose of benefiting the class as a whole The rights of a class of shareholders are not altered if the modification merely affects the enjoyment of the rights: White v Bristol Aeroplane Co [1953] Ch 65, CA ; Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512, CA . There is no variation of class rights where different classes of shares are cancelled to effect a reduction of capital: Re Saltdean Estate Co Ltd [1968] 1 WLR 1844, Ch D ; approved in House of Fraser plc v ACGE Investments Ltd [1987] AC 387; [1987] BCLC 478, HL ; cf where the articles expressly provide that rights to a class of shares shall be deemed to be a varied by a reduction of capital
Separate class meetings
[74.04] Separate meetings have to be held for each class of shares to cast the votes pursuant to the modification of rights clause. If such meetings yield the required majority, the company has to further procure a special resolution to be passed at a general meeting of the company in order to vary or abrogate the class rights.
Unfair prejudice
[74.05] A resolution for the alteration of voting rights that was passed in good faith for the benefit of the company as a whole could not be said to be oppressive, and that, accordingly, the court would not interfere by interlocutory injunction to restrain the company from acting on the resolution: Rights & Issues Investment Trust Ltd v Stylo Shoes Ltd & Ors [1964] 3 WLR 107, Ch D ; applied Carruth v Imperial Chemical Industries Ltd (1937) 53 TLR 524; [1937] 2 All ER 422, HL (s 74(4)). The court is often guided by the decision of the members and creditors as to what is to their commercial advantage: Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385, CA . The remedies of members who are unfairly prejudiced by the variation under s 216 of the Act are expressly reserved: s 74(8).
Deemed variation
[74.06] An issue of preference shares ranking pari passu with existing preference shares shall be deemed to be a variation of the rights attached to those existing preference shares unless the issue of the preference shares was authorised by the terms of the issue of the existing preference shares: s 74(6).
Modification of Article 4, Table A
[74.07] Regulation 8(1) of the Companies (Model Constitutions) Regulations 2015, has often been called a modification of rights clause. Section 74(7) provides that “for the purposes of this section”, altering a modification of rights clause is deemed a variation of class rights
