Class Rights

Question 1

What do the different rights in different types of shares relate to?

Answer 1

Usually relate to entitlements to vote, entitlements to dividends and to the return of capital when a company is wound up

Question 2

How is a class of shares defined under s629 CA 2006?

Answer 2

Shares are of one class if the rights attached to them are in all respects uniform

Question 3

Which MA gives companies the power to issue different types of share?

Answer 3

MA 22

Question 4

What are ordinary shares?

Answer 4

The most common type of share and the default position

Question 5

What rights do ordinary shares carry?

Answer 5

• Right to vote in general meetings
• Right to receive a dividend if one is declared by the directors
• Right to receive a share of the capital when a company is wound up

Question 6

How does s560(1) define ordinary shares?

Answer 6

Shares other than shares that as respects dividends and capital carry a right to participate only up to a specified amount in a distribution

Question 7

What is a preference share?

Answer 7

These shares are usually entitled to have dividends paid at a predetermined rate (e.g. 5% of their nominal value) in priority to any dividend paid on the ordinary shares.

Question 8

What is meant by preference shares being cumulative?

Answer 8

Where arrears of preference dividends not declared in earlier years must be paid as well as that for the current year, before any dividend is paid to the ordinary shareholders

Question 9

What if a preference share right is non-cumulative?

Answer 9

Only the current year’s right to dividend is payable

Question 10

What is meant by a participating preference share?

Answer 10

Shareholders can also participate in a dividend or capital on a winding up alongside the ordinary shareholders
Meaning that they will receive BOTH their fixed preferential dividend or fraction of capital plus a fraction of the general dividend or capital in accordance with their shareholding

Question 11

What is meant by non-participating preference shares?

Answer 11

Shareholders will only receive their fixed preferential rights

Question 12

5 other types of share?

Answer 12

1) Deferred shares
2) Redeemable shares
3) Non-voting shares
4) Convertible shares
5) Employee shares

Question 13

What is a deferred share?

Answer 13

Normally only have a right to a dividend and/or return of capital after the claims of the preference shareholders and the ordinary shareholders.
Rare
Usually issued to the founders of the company where those founders offer to defer their own entitlements to those of other investors.

Question 14

What is a redeemable share?

Answer 14

In effect temporary shares which may be bought back by the company at a future date.
The rules governing redeemable shares and their redemption are set out in Chapter 3 s 684 – 689 CA 2006.

Question 15

What is a non-voting share?

Answer 15

May be issued where the company seeks to restrict control of the company, eg when a family owned company seeks outside investors for additional capital, or shares issued to employees.

Question 16

What is a convertible share?

Answer 16

Shares which may be converted to a different type of share in the issuing company according to a pre-arranged formula set out in the company’s articles.

Question 17

What is an employee share?

Answer 17

Companies may issue shares to their employees, often under an employees’ share scheme which has tax advantages.
Usually issued as ordinary shares but are subject to restrictions eg on transfer.

Question 18

What is the presumption about the rights of shares?

Answer 18

All shares have equal rights unless there is an express provision in the articles to the contrary.

Question 19

Case for all shares having the presumption of equal rights?

Answer 19

Birch v Cropper (1889)

Question 20

Birch v Cropper (1889)

Answer 20

Where the terms of issue of a class of shares are silent in some respect, there is a presumption that all shareholders rank equally.

In this case the company had 5% preference shares and ordinary shares, and the articles provided that dividends should be paid in proportion to the amounts paid up on the shares. There was no express provision dealing with the distribution of assets on a winding up. The House of Lords held that the preference shareholders should therefore participate in the same way as the ordinary shareholders in the distribution of assets on the winding up of the company.

Question 21

Which section provided the very specific circumstances where class rights can be varied?

Answer 21

s630 CA 2006

Question 22

s630 CA 2006 provides that class rights can onlby varied:

Answer 22

1) In accordance with the relevant provisions in the company’s articles OR
2) If there is no provision in the articles, where:
a. 75% in value of the shares of the affected class consent in writing, OR
b. A special resolution is passed at a separate meeting of the holders of the affected class of shares.

Question 23

If a class right has been entrenched under s22, can s630 circumvent this?

Answer 23

No, the whole point of entrenching class rights into the articles is to protect them

Question 24

How must shareholders vote at a class meeting to vary rights?

Answer 24

With the dominant purpose of benefitting the class as a whole, or the variation may be deemed invalid

Question 25

Which case established that shareholders must vote at class meeting to vary rights with the dominant purpose to benefit the class as a whole?

Answer 25

British America Nickel Corpn Ltd v O’Brien [1927]

Question 26

British America Nickel Corpn Ltd v O’Brien [1927]?

Answer 26

Shareholders voting at a class meeting to vary rights must vote with the dominant purpose of benefitting the class as a whole, or the variation may be deemed invalid.

Question 27

What is a “variation” of class rights?

Answer 27

It has to be an alteration of the substantive legal rights of the class, not just the way they are exercised

Question 28

Three big cases on variation of class rights?

Answer 28

White v Bristol Aeroplane Co [1953]
House of Fraser plc v ACGE Investments Ltd [1987]
Greenhalgh v Arderne Cinemas Ltd [1946]

Question 29

Greenhalgh v Arderne Cinemas Ltd [1946]

Answer 29

• Issued ordinary shares of 10s and 2s each which ranked equally for all purposes, so that on a poll vote each member had one vote per share.
• G held the bulk of the 2s shares and controlled around 40% of the votes (so could block a special resolution).
• The holders of the 10s shares passed an ordinary resolution to subdivide the 10s shares into five 2s shares each, which altered the balance of the voting power in the company.
• G unsuccessfully claimed that the rights attaching to his 2s shares were varied by this. The court held that this was not the case: the rights attaching to his shares were unchanged, the only change was that more people could now enjoy the same rights.

Question 30

House of Fraser plc v ACGE Investments Ltd [1987]:

Answer 30

House of Lords held that no variation of class rights was involved in the cancellation of a class of preference shares on a reduction of capital, as this was consistent with the terms of issue of the shares themselves

Question 31

White v Bristol Aeroplane Co [1953]:

Answer 31

The actual rights attaching to the preference shares were not varied by the addition of extra shares, even though the exercise of their rights was affected by the increase in shares.

Question 32

Which section give the right to object to a variation of class rights?

Answer 32

s 633

Question 33

What are the conditions for an objection to variation of class rights under s633?

Answer 33

1) Only shareholders holding at least 15% of the issued shares of that class may challenge a variation, and
2) The variation must be challenged in court within 21 days of the date on which consent was given or the resolution was passed to vary the class rights.