Class Rights Flashcards
Borland’s Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279
the contract engendered in the articles of association are prior to the rights contained in a share. He said the argument that the article was repugnant to absolute ownership needed to assert, wrongly, that a share is a sum of money dealt with by executory limitations. But in fact a share is an interest and consists of ‘a series of mutual covenants entered into by all the shareholders inter se in accordance with section 16 of the Companies Act 1862.’[1] The argument about perpetuity has no application because the rule against perpetuities does not apply to personal contracts.[2] Cambridge Gas The case was cited with approval in the decision of the Privy Council in the leading case of Cambridge Gas Transport Corp v Official Committee of Unsecured Creditors (of Navigator Holdings Plc and Others) [2006] UKPC 26, [2007] 1 AC 508.[6]
Borland’s Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279 is a UK company law case, concerning the enforceability of a company’s constitution and the nature of a company share. It is also one of the rare exceptions to the rule that a transfer of assets which only takes effect upon a person’s bankruptcy is normally void.
Facts
Steel Bros Ltd’s articles of association said if a member went bankrupt his shares would be transferred to designated persons at a fair price not above par value. Mr JE Borland held 73 £100 shares and went bankrupt, and so the company gave Borland’s trustee in bankruptcy notice of the transfer. The trustee argued the article was void because it compromised ownership and property rights which tended to perpetuity, against the rule against perpetuities. It requested an injunction against the share transfer at all, or at anything less than a fair value
Judgment
Farwell J rejected Borland Trustee’s argument and held the article was valid. The transfer could be made, because the contract engendered in the articles of association are prior to the rights contained in a share. He said the argument that the article was repugnant to absolute ownership needed to assert, wrongly, that a share is a sum of money dealt with by executory limitations. But in fact a share is an interest and consists of ‘a series of mutual covenants entered into by all the shareholders inter se in accordance with section 16 of the Companies Act 1862.’[1] The argument about perpetuity has no application because the rule against perpetuities does not apply to personal contracts.[2]
Cambridge Gas
The case was cited with approval in the decision of the Privy Council in the leading case of Cambridge Gas Transport Corp v Official Committee of Unsecured Creditors (of Navigator Holdings Plc and Others) [2006] UKPC 26, [2007] 1 AC 508.[6]
Scottish Insurance Corp Ltd v Wilson and Clyde Coal Co Ltd [1949] 1 All ER 1068
It illustrates that where the rights of shares are explained in the articles, that is likely to be an exhaustive statement.
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Scottish Insurance Corp Ltd v Wilsons & Clyde Coal Co Ltd [1949] AC 462 is a UK company law case concerning shares. It illustrates that where the rights of shares are explained in the articles, that is likely to be an exhaustive statement.
Facts
Wilsons & Clyde Coal Co Ltd was nationalised under the Coal Industry Nationalisation Act 1946. The company’s assets were transferred to the National Coal Board, and the company was waiting for reimbursement. In advance of liquidation the company procured a special resolution for reduction of capital, whereby all paid up capital would be returned to preference shareholders, to settle any claims. The aim was to eliminate them from the company, so ordinary shareholders could get excesses from compulsory purchase compensation. The preference shareholders, including Scottish Insurance Corp Ltd complained that they should be able to share in the proceeds from liquidated assets.
Judgment
The House of Lords held that preference shareholders had no right to share in surplus assets, so it could not be said that the scheme was not fair and equitable. Lord Simonds said the following[1]
It is clear from the authorities, and would be clear without them, that, subject to any relevant provision of the general law, the rights inter se of preference and ordinary shareholders must depend on the terms of the instrument which contains the bargain that they have made with the company and each other. This means, that there is a question of construction to be determined and undesirable though it may be that fine distinctions should be drawn in commercial documents such as articles of association of a company, your Lordships cannot decide that the articles here under review have a particular meaning, because to somewhat similar articles in such cases as In re William Metcalfe & Sons Ltd [1933] Ch 142 that meaning has been judicially attributed.
Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland Herald
set out three main categories of “special rights” that might exist:
(1) rights annexed to shares
(2) rights for particular people under the constitution, and
(3) rights unattached to particular shares but conferring a benefit on a group of members.
Class Rights may not be varied
Cumbrian Newspapers Group Ltd v Cumberland & Westmorland Herald Newspaper & Printing Co Ltd [1986] BCLC 286 is a UK company law case concerning variation of the class rights attached to shares.
Facts
CNG published the Penrith Observer with a 5500 weekly circulation. The chairman Sir John Burgess (as he later became) also had 10.67% of the shares in CWHNP since 1968. Under the constitution CNG had negotiated special rights which it had bargained for in return for closing down a competing paper, the Cumberland Herald, when it had joined, and for acting as CWHNP’s advertising agent. It had the right to preferences on unissued shares (article 5) to not be subject to have a transfer of shares to it refused by the directors (article 7) pre emption rights (article 9) and the right to appoint a director if shareholding remained above 10% (article 12). The CWHNP directors wanted to cancel CNG’s special rights. CNG argued they were class rights that could only be varied with its consent.
Judgment
Scott J held that the CNG’s rights as a shareholder could not be varied without its consent because they were class rights when they were conferred ‘special rights on one or more of its members in the capacity of member or shareholder’. He set out three main categories of “special rights” that might exist: (1) rights annexed to shares (2) rights for particular people under the constitution, and (3) rights unattached to particular shares but conferring a benefit on a group of members. Strictly they could not fall into the first category of rights ‘annexed to’ particular shares, because CNG’s special rights came from the constitution. A second classification of right might be like that in Eley v Positive Government Security Life Assurance Co Ltd[1] but they were not like that either. A third category involves rights or benefits that, although not attached to any particular shares, were nonetheless conferred on the beneficiary in the capacity of member or shareholder of the company.’ These are in this category. It is like the rights in Bushell v Faith.[2] Enforcement of such rights depends simply on the possession of some shares, except article 12 which would appear to require 10% for enforcement. But what did the legislature mean with the phrase ‘rights attached to a class of shares’? ‘It would, in my opinion, be surprising and unsatisfactory if class rights contained in articles were to be at the mercy of a special resolution majority at a general meeting, unless they were rights attached to particular shares.’ So, he said that the phrase ‘was intended by the legislature to cater for the variation or abrogation of any special rights given by the memorandum or articles of a company to any class of members, that is to say, not only rights falling into the first category I have described, but also rights falling into the third category.’
The court also held that this applied not just to rights, but also to obligations. So in Rayfield v Hands [1960] Ch 1 the obligation of shareholders who were directors to purchase the shares of non-director shareholders on request was enforceable on the same basis as a class right (or class obligation) of the director-shareholders.
Newspapers and Printing Co Ltd [1987] Ch 1
White v Bristol Aeroplane Co Ltd [1953] Ch 65
White v Bristol Aeroplane Co Ltd 1953
The facts: The company made a bonus issue of new ordinary and preference shares to the existing
ordinary shareholders who alone were entitled under the articles to participate in bonus issues. The
existing preference shareholders objected. They stated that reducing their proportion of the class of
preference shares (by issuing the bonus of preference shares) was a variation of class rights to
which they had not consented.
Decision: This was not a variation of class rights since the existing preference shareholders had the
same number of shares (and votes at a class meeting) as before.
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explain why the decision was like that?
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The preference shareholders, before the bonus issue, had (say) 40,000 votes and after the bonus issue they still had (say) 40,000 votes
So how have their rights been varied?
The judge in the case Rights and Issues Investment Trust v Stylo Shoes said (something like) “When a shareholder owns shares knowing that he is to be deprived of control, he cannot complain simply because that situation is continued”
Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512.
Exception to the rule in Foss v Harbottle
None of the majority voters were voting for a private gain. The alteration of the articles was perfectly legitimate, because it was done properly.
When a man comes into a company, he is not entitled to assume that the articles will always remain in a particular form, and so long as the proposed alteration does not unfairly discriminate, I do not think it is an objection, provided the resolution is bona fide passed, that the right to tender for the majority holding of shares would be lost by the lifting of the restriction [to transfer shares to individuals outside the company]
Greenhalgh v Arderne Cinemas Ltd (No 2) [1946] 1 All ER 512; [1951] Ch 286 is UK company law case concerning the issue of shares, and “fraud on the minority”, as an exception to the rule in Foss v Harbottle.
Facts
Mr Greenhalgh was a minority shareholder in Arderne Cinemas and was in a protracted battle to prevent majority shareholder, Mr Mallard selling control. The company had two classes of shares; one class was worth ten shilling a share and the other class worth two shilling a share. The ten shillings were divided into two shilling shares, and all carried one vote. Mr Greenhalgh had the previous two shilling shares, and lost control of the company.
The articles of association provided by cl. 10 (a): “No shares in the company shall be transferred to a person not a member of the company so long as a member of the company may be willing to purchase such shares at a fair value to be ascertained in accordance with sub-clause (b) hereof”.
The company changed its articles by special resolution in general meeting allowing existing shareholders to offer any shares to person/members outside the company. Mr Mallard, the majority shareholder, wished to transfer his shares for 6 shillings each to Mr Sol Sheckman in return for £5000 and his resignation from the board.
Mr Greenhalgh wished to prevent control of the company going away, and argued that the article change was invalid, a fraud on him and the other minority shareholders, and asked for compensation.
Judgments
Share issues
Lord Greene MR held,[1] ‘instead of Greenhalgh finding himself in a position of control, he finds himself in a position where the control has gone, and to that extent the rights… are affected, as a matter of business. As a matter of law, I am quite unable to hold that, as a result of the transaction, the rights are varied; they remain what they always were – a right to have one vote per share pari passu with the ordinary shares for the time being issued which include the new 2s ordinary shares resulting from the subdivision.’ !
Derivative action
Lord Evershed MR (with whom Asquith and Jenkins LLJ concurred) held that the £5000 payment was not a fraud on the minority. None of the majority voters were voting for a private gain. The alteration of the articles was perfectly legitimate, because it was done properly.
Lord Evershed MR stated,
When a man comes into a company, he is not entitled to assume that the articles will always remain in a particular form, and so long as the proposed alteration does not unfairly discriminate, I do not think it is an objection, provided the resolution is bona fide passed, that the right to tender for the majority holding of shares would be lost by the lifting of the restriction [to transfer shares to individuals outside the company]
Moreover, it was wrong to say,
that a special resolution of this kind would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give to the former an advantage of which the latter were deprived. When the cases are examined in which the resolution has been successfully attacked, it is on that ground. It is therefore not necessary to require that persons voting for a special resolution should, so to speak, dissociate themselves altogether from their own prospects and consider whether what is thought to be for the benefit of the company as a going concern. If, as commonly happens, an outside person makes an offer to buy all the shares, prima facie, if the corporators think it a fair offer and vote in favour of the resolution, it is no ground for impeaching the resolution that they are considering their own position as individuals.[2]
Webb v Earl
Presumption is that Preference Shares are cumulative
Cummulative Nature can be negated by virtue of AOA
Additional cases
¢ Re National Telephone Co [1914] 1 Ch 755
¢ Macaura v Northern Assurance Co Ltd [1925] AC 619.
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Sample examination question
Explain what is meant by a class right, and what restrictions govern the alteration of
class rights?
Advice on answering this question
You should begin by defining what is meant by class rights attaching to a share. Discuss
Scott J’s formulation in Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland
Herald Newspapers and Printing Co Ltd.
Explain what amounts to a variation or abrogation of class rights.
Discuss the statutory procedure which the company must follow in order to vary class
rights.
CA2006
S. 630
Class Rights may only be varied when it is in accordance with Articles of Association
Where Articles of Association are Silent, by agreement of those who hold 3/4 of Shares in the company at a special meeting (Special resolution)
S. 637 & S. 640
Must notify Company Registrar within one month of variation being made
AOA may specifcy a way of variation, IF
Less onerous than Statute (Go with Statute)
More onerous than Statute (Go with AOA)
S. 633 Right to Object Variation
Where more than 15% of Minority Shareholder apply, variation can be suspended until matter taken up in Court
S. 684
Power to Issue Redeemable Shares
CA 2006 - S. 630
S. 630
Class Rights may only be varied when it is in accordance with Articles of Association
Where Articles of Association are Silent, by agreement of those who hold 3/4 of Shares in the company at a special meeting (Special resolution)
CA 2006 - S. 637 & S. 640
S. 637 & S. 640
Must notify Company Registrar within one month of variation being made
AOA may specifcy a way of variation, IF
Less onerous than Statute (Go with Statute)
More onerous than Statute (Go with AOA)
CA 2006 - S. 633 Right to Object Variation
S. 633 Right to Object Variation
Where more than 15% of Minority Shareholder apply, variation can be suspended until matter taken up in Court
CA 2006 - S. 684
S. 684
Power to Issue Redeemable Shares
