Chapter 5: Managing Companies: Shares & Shareholders

Question 1

1.1 Shareholders

Answer 1

There are two important consequences of this:
* The shareholders exercise ultimate control over the company; and
* The shareholders hope to receive a financial return on their investment.

The shareholders exercise their control in two key ways:
* By determining the company’s constitution; and
* By voting on shareholder resolutions

Shareholder Power: Although the directors manage the company on a day-to-day basis, a key element of
shareholders’ control is their power to vote on a resolution to remove directors from the board (s 168 CA 2006), and/or to appoint new directors whose approach to managing the company the shareholders prefer (MA 17).

Question 2

1.2 Separation of powers – Directors’ powers

Answer 2

Check against abuse of their
powers: As part of these
duties (which you saw in the previous topic):
* Directors must disclose certain information about themselves and their dealings with the
company,
* Shareholder approval must be obtained for certain transactions; and
* Shareholders have certain important decisions reserved to them (such as amending the
company’s articles of association, s 21).

Question 3

1.3 Separation of powers – Shareholders’ reserve powers MA 4 Shareholders’ reserve power

Answer 3

(1) The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action

(2) No such special resolution invalidates anything which the directors have done before the passing of the resolution.

(3) The company’s articles regulate the relationship (and allocate power) between directors (acting as a board) and shareholders (acting through the general meeting)

Question 4

1.4 The shareholders may act where the board of directors is unable to do
so Key case: Barron v Potter [1914] 1 Ch 895

Answer 4

This case established that the shareholders of the company in a general meeting may act in place of the directors where there is no board of directors competent or able to do so. Here the two directors of the company were not on speaking terms, so that effective board meetings could not be held.

B (one of the directors) called a general meeting at which the shareholders attempted to appoint additional directors. P (the other director) objected that the power to appoint directors was stated under the company’s articles to belong to the directors alone. The court held that in view of the deadlock, the power to appoint directors reverted to the shareholders and so the
appointments were valid.

Question 5

1.5 The general meeting

Answer 5

General meetings are usually called by the directors (s 302) by passing a board resolution at a board meeting.

The board of directors has the power to call a general meeting of the shareholders by passing a board resolution. This is usually passed by a simple majority of the directors.
The Board needs to give 14 clear days’ notice of a general meeting (s 307(1) and s 360) This is unless the short notice procedure is used (s 307(4)-(6)). If 90% of shareholders with voting rights agree, the short notice procedure allows the general meeting to take place on short notice,
immediately after the board meeting.

Question 6

1.6 Shareholders can also call a general meeting ss 303-305

1.6.1 If the board refuse to call a general meeting, the shareholders have a reserve power to
do so themselves

Answer 6

Under s 303(1) CA 2006, shareholders together holding not less than 5% of the paid-up voting share capital of the company can serve a request on the company ie the board. The request will
require the board to call a general meeting (the ‘s 303 request’).

The s 303 request must state the general nature of the business which the shareholders wish to be
dealt with at the general meeting and may include the text of the resolution they want to propose
at the meeting.

Question 7

1.6.2 What are the directors’ obligations on receipt of a s 303 request?

Answer 7

Under s 304(1) CA 2006, when the directors receive a s 303 request, they must call the general meeting within 21 days from the date on which they become subject to the s 303 request to call the general meeting, to be held on a date not more than 28 days after the date of the notice convening the general meeting.

Question 8

1.6.3 What happens if the directors fail to call the general meeting?

Answer 8

If the directors fail to call a general meeting under s 304(1) CA 2006, all of the shareholders who submitted the s 303 request or any of them representing more than one half of the voting rights of those who submitted that s 303 request, can call a general meeting themselves pursuant to s 305 CA 2006. If the shareholders call the general meeting themselves then that general meeting must be held within 3 months of the date that the directors received the initial s 303 request.

Under s 305(6) CA 2006, if the shareholders are forced to call the general meeting themselves,
they can recover their reasonable expenses for doing so from the company. The company is then able to recoup the monies back from the directors who should have called the general meeting
initially

Question 9

21 days

Answer 9

Shareholders together holding not less than 5% of the paid up share capital can request on a Board to call a GM

Question 10

28 days

Answer 10

Directors must call GM within 21 days of the 303 request to be held not more than 28 days later (Section 304)

Question 11

3 months

Answer 11

If the directors do not call a GM under section 304, shareholders may then call for a meeting themselves. GM must be held within 3 months time

Question 12

1.7 Annual general meeting (AGM)

Answer 12

You may have heard of an annual general meeting. CA 2006 abolished the requirement for private limited companies to hold an AGM, but public companies remain subject to this requirement (see s 336). For public companies an AGM must be called by directors (s 302) on 21 clear days’ notice (s 307(2), s 360(2)) within six months of the financial year end.

Section 360 provides that the days must be ‘clear’ days. This section applies to most of the provisions regarding notice of meetings in CA 2006. ‘Clear’ days means that the day the notice is given, and the day of the meeting are discounted in calculating the relevant number of days

At the AGM, the directors of the company present an annual report containing information for shareholders about the company’s performance and strategy. Shareholders with voting rights then vote on current issues, such as appointments to the company’s board of directors, executive compensation, dividend payments, and the selection of auditors.

Question 13

1.8 Voting at general meetings

Answer 13

Shareholders can vote at a general meeting either on:
* A show of hands (where each shareholder has one vote); or
* A poll vote (where each shareholder has one vote per share held).

Question 14

Key case: Re Horbury Bridge Coal Co (1879)

Lord Jessell MR

Answer 14

We first of all consider what may be termed the common law of the country as to voting at meetings. It is undoubted, and it was admitted by Sir Henry Jackson in his argument for the Respondents, that, according to such common law, votes at all meetings are taken by show of hands.

Of course it may not always be a satisfactory mode – persons attending in large numbers may be small shareholders and persons attending in small numbers may be large shareholders, and therefore in companies provision is made for taking a poll, and when a poll is taken the votes are to be counted according to the number of shares

Question 15

Under MA 42

Answer 15

Under MA 42, a resolution put to the vote of a general meeting must be decided on a show of hands unless a poll is duly demanded in accordance with the articles.

Question 16

MA 44 deals with the right to demand a poll vote

Answer 16

(1) A poll on a resolution may be demanded -
(a) in advance of the general meeting where it is to be put to the vote, or
(b)at a general meeting, either before a show of hands on that resolution or immediately after the result of a show of hands on that resolution is declared.
(2) A poll may be demanded by -
(a) the chairman of the meeting;
(b) the directors;
(c) two or more persons having the right to vote on the resolution; or
(d) a person or persons representing not less than one-tenth of the total voting rights of all the shareholders having the right to vote on the resolution.

Question 17

Right cannot be excluded

Answer 17

Note that this right cannot be excluded: s 321(1) CA 2006 states that a provision of a company’s articles is void in so far as it would have the effect of excluding the right to demand a poll at a
general meeting on any question other than:
(a) The election of the chairman of the meeting; or
(b) The adjournment of the meeting.

Question 18

1.9 Shareholder voting: Ordinary and special resolutions

Answer 18

As you saw in Section 1, there are two types of shareholder resolution under the CA 2006 requiring different voting thresholds. These are:
* Ordinary resolutions; and
* Special resolutions.

Where the CA 2006 does not specify the type of resolution to be used then an ordinary resolution is required unless the company’s articles require a higher majority (s 281(3) CA 2006). Special
resolutions are required for more key or constitutional decisions such as amending the articles (s 21 CA 2006).

Votes at General Meetings are counted out of all shareholders present and voting.

Question 19

Differences between ordinary and special resolutions

Answer 19

Ordinary resolution: Requires a simple majority (more than 50% of votes are cast in favour of the resolution) (s 282(1) CA 2006).

Special resolution : Requires a majority of not less than 75% (s 283(1) CA 2006).

Question 20

1.10.1 Notice (14 clear days)

Answer 20

There are strict rules on giving timely (s 307) and appropriate (s 311) notice to all shareholders entitled to attend a General Meeting. The general notice is 14 clear days (s 307(1), s 360) although
there is a procedure by which short notice can be used if sufficient members are in agreement to this (s 307(4)-(6)). The validity of resolutions passed at a general meeting depends on proper
notice being given.

Question 21

Quorum (2 shareholders)

Answer 21

The quorum for a General Meeting is two shareholders under s 318(2) (other than for single member companies, for which the quorum is one (s 318(1)). MA 38 confirms that no business other
than the appointment of the chairman of the meeting is to be transacted at a General Meeting if the persons attending it do not constitute a quorum

Question 22

Proxy (Appointing Representatives)

Answer 22

Under s 324, shareholders may appoint a proxy to exercise any or all of their rights to attend and speak and vote at a general meeting. Corporate shareholders must appoint a representative to attend general meetings under s 323.

Question 23

1.10.2 Enhanced voting rights

Bushell v Faith clauses

Answer 23

You will recall that a Bushell v Faith
clause is a mechanism by which a company’s directors who are also shareholders can seek to prevent themselves from being removed from office. The clause is inserted into the articles of the company and provides that, when voting on a resolution for the removal of a director in a general meeting, the director/shareholder in question will have their votes weighted by a factor of great enough magnitude that the other shareholders cannot get the requisite majority in the meeting to pass this motion. You will recall that a Bushell v Faith clause is a mechanism by which a company’s directors who are also shareholders can seek to prevent themselves from being removed from office.

The clause is inserted into the articles of the company and provides that, when voting on a resolution for the removal of a director in a general meeting, the director/shareholder in question will have their votes weighted by a factor of great enough magnitude that the other shareholders cannot get the requisite majority in the meeting to
pass this motion.

Question 24

Bushell v Faith clause & Section 168

Answer 24

Bushell v Faith clauses do not change the requirement under s 168 to pass an ordinary resolution to remove a director; rather they represent an internal agreement amongst the shareholders as to the weight their vote carries on a specific resolution which is not something the courts intervene in.

Question 25

1.11 Shareholder voting: Written resolutions

Answer 25

Under s 288, private companies may pass shareholder resolutions (both ordinary and special resolutions) using the written resolution procedure, instead of at general meetings. A written resolution has effect as if passed at a general meeting (s 288(4)).

Question 26

Written resolution to all members

Answer 26

Written resolutions must be sent to all eligible members (ie those entitled to vote on the resolution).
A time limit of 28 days applies for the eligible members to respond, after which time the resolution will be deemed not passed if a sufficient majority of shareholders (over 50% of eligible members for an ordinary resolution or not less than 75% of eligible members for a special resolution) have not indicated that they vote in favour of the resolution. Written resolutions must be passed by the required percentage of all eligible members.

Question 27

Two resolutions

Answer 27

There are two resolutions which may not be passed as written resolutions. A general meeting will
always be required for these resolutions to allow representations to be made:
* Section 288(2)(a) a resolution under s168 removing a director before the expiration of his
period of office;
* Section 288(2)(b) a resolution under s 510 removing an auditor before the expiration of his term
of office.

Question 28

1.12 Informal decision making - the ‘Duomatic’ principle = informal resolutions agreed by all shareholders are valid and binding

Answer 28

Re Duomatic Ltd [1969] 2 Ch 365 established the principle that informal resolutions agreed by all the shareholders outside of a formal meeting will be valid and binding. In this case the liquidator of Duomatic claimed repayment of remuneration from one of the company’s directors, Mr Elvins,
on the ground that the payments were not formally authorised by the company in general meeting. The court allowed the decision to stand despite the fact that it was not made at the general meeting, as it clearly had the backing of all shareholders

Question 29

Application of Duomatic’ principle =Unqualified agreement

Answer 29

In order for the Duomatic principle to apply, there must be unqualified agreement of all shareholders, whether this is express or implied, verbal or by conduct. In Schofield v Schofield
[2011] EWCA Civ 103, Neil Schofield (representing the corporate holder of 99.9% of the shares in the company) unsuccessfully argued that he and Lee (his son and the owner of the remaining
share) had agreed, informally, to treat as valid and effective a meeting which was called without regard to the notice requirements of s 307, and at which (amongst other matters) Lee was
dismissed as director and Neil was appointed sole director

Question 30

1.13 The rights of shareholders to vote

1.13.1 General principle: shareholders may vote in their own interests

Answer 30

Shareholders are under no fiduciary duty to the company and can vote as they wish, regardless of whether their vote would be in the best interests of the company. However, shareholders must
act in way that is bona fides.

Question 31

Clemens v Clemens Bros [1976] 2 All ER 268

Answer 31

The court refused to allow a majority shareholder to authorise an allotment of shares where the motive was to dilute the voting power of the minority shareholder. The same principle also applies to shareholders who are also directors, when they are voting in their capacity as shareholders (Northern Counties Securities Ltd v Jackson & Steeple Ltd [1974] 1 WLR 1133)

Question 32

Removal of director

Answer 32

Shareholders may also vote as they wish to remove a director, provided due process has been
followed (Citco Banking Corporation NV v Pusser’s Ltd [2007] UKPC 13). However, in exceptional circumstances the courts have made orders to restrain a shareholder from exercising their vote in
a manner which was irrational eg Standard Chartered Bank Ltd v Walker [1992] 1 WLR 561, where a minority shareholder was ordered not to vote against a restructuring agreement where the consequence of his doing so would be that the company would collapse and his shareholding would become worthless.

Question 33

1.13.2 Voting on a decision to amend the articles (in good faith)

Answer 33

However, where shareholders are voting on a decision to amend the articles, the court will look at whether reasonable shareholders could have considered that the amendment was for the benefit
of the company. Shareholders must vote to amend the articles in good faith (Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656) and not to undermine substantive rights of minority shareholders. If not, the court
may hold the amendment invalid.

Question 34

Key case: Sidebottom v Kershaw, Leese & Co [1920] 1 Ch 154

Answer 34

In this case the court held that the power to alter a company’s articles must be exercised bona fide for the benefit of the company as a whole. The facts of this case were that the company had altered its articles to introduce a provision which gave the directors the power to buy out, at a fair price, the shareholding of any member who competed with the company’s business.

The plaintiffs were minority shareholders who carried on a competing business, who challenged the validity of this alteration. The court held that the alteration had been introduced bona fide for the benefit of the company and, was therefore valid.

Question 35

Key case: Citco Banking Corpn NV v Pusser’s Ltd [2007] UKPC 13

Answer 35

This was a Privy Council case involving a Hong Kong company, which at a general meeting amended the share rights in its articles and created a new class of shares, which had the effect of giving the Chairman of the company control.

The Privy Council dismissed the claim by Citco that these amendments were invalid. They stated that the test was whether reasonable shareholders
could have considered that the amendment was for the benefit of the company.

On the facts of this case, it was found that it would have been reasonable for shareholders to have accepted in good faith the arguments put forward by the Chairman as to why the amendment would be in the interests of the company

Question 36

1.14 Summary

Answer 36

• Shareholders are the owners of the company and as such, particular decisions are reserved to
  them under CA 2006. Although directors undertake the day-to-day control of the company with the powers they are given under MA 3 and MA 5, the shareholders have a reserve power under MA 4.
• Decisions of shareholders are taken by ordinary or special resolution.
• Shareholders may vote either at a General Meeting or by way of Written Resolution (unless the vote concerns removal of a director or auditor see s 288(2)).
• At a General Meeting, voting takes place either on a show of hands or a poll.
• The courts may also uphold unanimous decisions of shareholders taken informally (the Duomatic principle).
• Shareholders may generally vote in their own interests unless the vote concerns the alteration of the articles or the shareholders’ vote would be irrational and perverse

Question 37

2. The legal nature of shares

2.1 How does a company fund its business?

Answer 37

There are various ways in which a company can raise funds, including by:
* Issuing shares (‘equity finance’);
* Borrowing (‘debt finance’);
* Issuing a ‘hybrid’ investment which has the characteristics of both debt and equity (for example a convertible bond or a preference share), and/or
* Retaining its profits for use in the business (rather than paying the profits to the shareholders
by way of a dividend).

Question 38

2.2 Share terminology

Answer 38

The general term ‘capital’ is used to refer to the funds available to run the business of a company. For example, you may hear that a business needs an ‘injection of capital’. All it means is that the
company requires more finance or funding to run its business. In company law, the term ‘share capital’ relates to the money raised by the issue of shares. The
share capital is contributed by investors in the company and is represented by shares that are issued to such investors who become shareholders (or members).

Question 39

Issued share capital

Answer 39

The amount of shares in issue at any time is known as the ‘issued share capital’ (‘ISC’). A company’s ISC is made up of:
* Shares purchased by the first members of the company, known as the ‘subscriber shares’; and
* Further shares issued after the company has been incorporated, to new or existing
shareholders

New shares can be issued at any time provided that the correct procedures are followed.

Question 40

2.3 Why subscribe for shares?

Answer 40

By investing in the share capital of any company, the investor becomes a part owner of the company and will often have voting rights at shareholder meetings.

In the case of a private company, most investors make a long-term investment and will only usually get their investment back on a sale of their stake, a sale of the company itself, on a flotation (when the company floats on the stock market in order to grow through wider investment), or when the company is wound up (ie liquidated, provided sufficient funds are available). Once a company has become public and floated on the stock market, it is able to grow through wider investment

Question 41

Incentives for investing

Answer 41

The incentives for investing would be the receipt of income (by way of dividend) and a capital gain (by way of the growth in the value of the company, and therefore the value of the individual shares), although neither are guaranteed.

Question 42

2.4 The legal nature of shares

A share is often described as a ‘bundle of rights’:

Answer 42

(a) It is a fraction of the capital of the company and sets out the shareholder’s financial stake in the company, which allows the shareholder to receive dividends and capital on a winding up
(if the share carries these rights).
(b) It is a measure of the shareholder’s interest in the company as a member and their right to vote.
(c) It is a property right which can be bought and sold and carries legal and beneficial interests.

There is no formal definition of a share in CA 2006 but s 541 confirms that shares are ‘personal property’. Note that share ownership does not give any entitlement to ownership of company assets, which
are owned by the company itself (Macaura v Northern Assurance Co Ltd (1925)).

Question 43

2.5 How do you become a shareholder?

Answer 43

Initial subscriber: This is where that person subscribes for the first shares issued when the company is incorporated.

Share issue: This is where a person acquires further shares issued by the company after incorporation.

Share transfer: This is where a person acquires shares by way of a transfer from an existing shareholder.

Transmission: This is a mechanism by which the title to shares is devolved other than by transfer

Question 44

2.6 Share ownership

Answer 44

Section 112 CA 2006 states that in order to become a member of a company a person must be entered into the company’s register of members. The register is the primary source of who the
members are and how many shares they own.

Question 45

Key case: Glencoe Developments Ltd v Sneddon [2012]

Answer 45

Glencoe Developments Limited had two shareholders S and M. S sold one of her shares to H, creating, on the face of it, three shareholders. However, the transfer was not noted in the register of members.

The resolution was then challenged by M on behalf of Glencoe Developments Ltd who raised a court action. M’s action was successful as (amongst other defects) a quorum had not been achieved by the parties. It was ruled that because the register of members had not been updated, the only properly
registered shareholder present at the meeting was S. As a result, the sale was ruled invalid.

Question 46

2.7 The register of members

Answer 46

It is crucial that an up-to-date register of members is maintained by the company. Until the register of members is updated shares are not legally transferred to the prospective new shareholder. The member’s register ensures that nobody other than a company member can vote on decisions which affect the company.

The transfer of shares should only be recorded where a stock transfer form has been completed and the appropriate Stamp Duty has been paid, if applicable.
Furthermore, by not keeping an up-to-date register of members a company is committing an offence under CA 2006. Both the company and every officer of the company who is in default
may be liable for a fine.

Question 47

2.8 Allotment and issue of shares

Answer 47

Allotment: An allotment of shares is a contract between the company and a new/existing shareholder under which the company agrees to issue new shares in return for the purchaser paying the subscription price. The powers of directors to allot shares derive from ss 549–551 CA 2006.

Shares are ‘allotted’ when a person acquires the unconditional right to be included in the company’s register of members in respect of those shares (s 558 CA 2006). This term is often used interchangeably with the issue of shares but the terms have different meanings. Allotment of shares confers equitable title only.

Question 48

Issue

Answer 48

Issue: There is no statutory definition of ‘issue’ but it has been held that shares are only issued and form part of a company’s issued share capital once the shareholder has actually been registered as such in the company’s register of members, and their title has become complete, and s 112(2) confirms that full legal title to shares is only achieved once a person’s name is entered into the company’s register of members

Question 49

2.9 Transfer of shares

Answer 49

Transfer: A transfer is a contract to sell existing shares in the company between an existing shareholder and the purchaser. The company is not a party to the contract on a transfer of shares. Note that although under s 544 in principle shares are freely transferable, the articles of most private companies restrict their members’ rights to transfer their shares, so as to ensure control over the ownership of the company. Private companies are also prohibited from offering their shares to the public (s 755).

Question 50

2.10 Summary

Answer 50

• All companies need to raise capital to use in the business. One of the ways in which this can be achieved is by the issue of shares.
• There are three aspects to a share: it is a financial stake in the company, an interest in the company and a property right.
• Shareholders may receive shares by subscribing when the company is incorporated, or when
  the company issues further shares after incorporation. Alternatively, a person may become a shareholder by receiving a share transfer from an existing shareholder, or through
  transmission of shares (on death or bankruptcy).
• A person becomes a member of the company when their shares are entered into the company’s register of members (s 112).

Question 51

3. Class rights

3.1 Types of shares

Answer 51

Section 629 CA 2006 states that ‘shares are of one class if the rights attached to them are in all respects uniform’.
MA 22 gives companies the power to issue different classes of share. Unless this has been excluded in the company’s articles, the company will therefore have this power. There is nothing in CA 2006 which defines classes of shares or class rights and the label attached to a share is not determinative. The rights attached to a class of shares are determined in the
company’s articles.

Some common types of share are listed below:
* Ordinary shares
* Redeemable shares
* Employees’ shares
* Cumulative shares
* Preference shares
* Convertible shares
* Non-voting shares
* Deferred shares

Question 52

3.2 Ordinary shares

Answer 52

Ordinary shares: These are the most common type of shares and are the default position: if a company’s shares are issued without differentiation, they will be ordinary shares.

Ordinary shares carry a right to vote in general meetings, a right to receive a dividend if one is declared by the directors and a right to receive a share of the capital when a company is wound
up (if there is surplus capital left after the creditors have all been paid).

Ordinary shares are defined in s 560(1) CA 2006 as ‘shares other than shares that as respects dividends and capital carry a right to participate only up to a specified amount in a distribution’. This negative definition illustrates the point that ordinary shares are the default position and are shares that have an unlimited right to participate in dividends and in surplus capital when a company is wound up. These shareholders receive a fraction of the dividend and capital in
accordance with their shareholding.

Question 53

3.3 Preference shares

Answer 53

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

Dividends can only be paid where the company has distributable profits and a dividend is declared, but where this is the case, the first claim will be for the preference shareholders. Preference shareholders often have a right to priority over the ordinary shareholders when capital is returned to the members in a winding up

Question 54

Cumulative & Non-Cumulative Preference Shares

Answer 54

The rights of preference shareholders to a dividend may be cumulative (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) or non-cumulative (when only the current year’s right to a dividend is payable).

Question 55

Participating & Non-participating preference shares

Answer 55

Preference shares may also be participating (where the 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) or non-participating (where the shareholders receive only their fixed preferential rights).

Question 56

3.4 Other classes of shares

Answer 56

Deferred shares: These shares normally only have a right to a dividend and/or return of capital after the claims of the preference shareholders and the ordinary shareholders. They are not
common.

Redeemable shares: These are 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 ss 684–689 CA 2006.

Non-voting shares: These shares 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.

Convertible shares: These are 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.

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

Question 57

3.5 The articles and class rights

Key case: Birch v Cropper (1889) 14 App Cas 525

Answer 57

There is a presumption that all shares have equal rights unless there is an express provision in the
articles to the contrary.

This case established that 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.

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 58

3.6 Variation of class rights

Answer 58

Variation of class rights: Variation of class rights refers to the situation where shares of a particular class have been issued, and the company is seeking to vary the rights attaching to
those shares.

Question 59

Section 630 CA 2006, Conditions to vary classrights

Answer 59

(a) In accordance with the relevant provisions in the company’s articles (which may specify more
or less onerous provisions), or
(b) If there is no provision in the articles, where:
(i) 75% in value of the shares of the affected class consent in writing, or
(ii) A special resolution is passed at a separate meeting of the holders of the affected class
of shares.

Question 60

British America Nickel Corpn Ltd v O’Brien [1927] AC 369 (PC).

Entrenching class rights in articles

Answer 60

Companies may also entrench class rights in their articles (see s 22) and, if so, this protection cannot be circumvented by changing the rights attached to the shares under s 630. 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 invalid. This principle was established in British America Nickel Corpn Ltd v O’Brien [1927] AC 369 (PC).

Question 61

3.7 What is a ‘variation’ of class rights?

Answer 61

The statutory provisions under s 630 apply only if the shareholders have ‘class rights’ which are to be varied. Variations which affect the exercise of the rights rather than the rights themselves are not subject to s 630.

Class rights are not ‘varied’ simply if the company issues more shares of that same class, even though it may dilute eg the amount of dividend previously paid. That is because the substantive
legal rights of the class have not been altered, only the way in which the exercise of the rights may be enjoyed. To regard this as a variation of class rights would also prevent companies from
issuing more shares and raising capital.

Question 62

Key case: White v Bristol Aeroplane Co [1953] Ch 65 (Court of Appeal)

Answer 62

In this case the preference shareholders argued that a proposal to increase the share capital of the company by way of a bonus issue of shares to all the existing shareholders (both the ordinary
and preference shareholders) affected the voting rights of their shares such that a class meeting should have been required. The Court of Appeal held that this was not the case – 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 63

Key case: House of Fraser plc v ACGE Investments Ltd [1987] AC 387

Answer 63

In this case the 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 64

Key case: Greenhalgh v Arderne Cinemas Ltd [1946] 1 All ER 512 (Court of Appeal)

Answer 64

This company had 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 65

3.8 Right to object to a variation of class rights

Answer 65

Section 633 gives the right to dissenting members of a class of shares to challenge a variation. The conditions for this are:

(a) Only shareholders holding at least 15% of the issued shares of that class may challenge a variation, and
(b) 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.

Question 66

Common law benefitting class as a whole

Answer 66

Since the common law cases indicate that a vote on a resolution to vary class rights must be exercised for the purpose, or dominant purpose, of benefitting the class as a whole, this may be a ground of challenge (British America Nickel Corpn Ltd v O’Brien [1927] AC 369 (Privy Council)).