Just before one proceeds to register a new company UK, the detailed information of share capital, especially a share capital divided into groups of shares needs to be understood. Whether you are setting up a ltd company UK with a divided share capital or any other kind, the class rights is also going to be a topic of interest for you. Any company may give some rights that are specially bestowed upon any particular group of members or shareholders and nobody other than that class benefits from them.
According to Section 125 of Companies Act 1985, class rights after form a company UK are those rights that are attached to any particular class of shares. These classes of shares may arise from the division of share capital of the company into different classes of shares.
Variation of Class Rights
Just like other articles, the articles that provide rights to classes can be amended. Thus, resulting in a variation in the rights attached to different classes. There are certain general rules that need to be followed for any variation as per Section 630 of Companies Act 2006. These are as following:
- A change can be brought into the rights of any specific class by following the method in the articles of company.
- If in case there are no such provision in a company’s constitution then a written approval should be given by the holders 3/4th majority of the shares of that class. Also it can be done by passing a special resolution at a meeting that is arranged solely for that class’s members.
Rules for Class Rights
- Even those rights that are given to a member but do not refer to any specific class of shares can be termed as class rights.
- When a poll is held regarding an alteration in any class right, the vote should be made use of as such that the intention while voting is the benefit of that class.
Situations when Class Rights remain Unaltered
After form a company UK, whenever a company structure changes, the class rights given to shareholders of the class are not subjected to alteration or are affected from it. Also, the rights of a specific class remain unchanged if there is a modification brought in the rights of any other class of shares. However, these conditions are true only if the relevant change is impacting merely the benefits of these rights.
For elaboration consider the case studies of White v Bristol Aeroplane Corporation and Greenhalgh v Arderne.
Case Study: White v Bristol Aeroplane Corporation
The 68th article of the company which was at defense, allowed that the rights given by any particular class of shares could be subjected to modification, variation, abrogation or affected or handled in any manner, if the approval was given via passing an extraordinary resolution in a meeting solely arranged for the persons holding membership of that class. A proposal was given which introduced an increment in company’s capital by issuing bonus shares in the company to the persons having existing shareholdings in that company including ordinary and preference shareholdings. A claim was made on part of persons holding preference shares, by the plaintiff that stated: Such a proposal had its impact on the rights of vote linked with their shares and lied within the scope of the article cited. However, the company believed, the rights had no effect of the proposal on them because they were independent from the enjoyment of the rights and hence no class meeting was needed to be held. The Court of Appeal upheld the view of the company.
Romer LJ held that:
- The rights given to the holders of preference stock are bestowed by the virtue of articles 62 and 83. Amongst these, only article 83 concerns the present case. The provision 83 of articles states that whenever a voting is held, every shareholder will be allotted one vote per share and in case of preference stockholders, for each 1euro preference stock the holder would enjoy one vote. The given suggestion is that by increasing the capital of the company, there will be some kind of effect on this right of the holders of preference stock.
- However, I cannot notice any effect that may happen on it. The overall position would not differ from the current situation. It means, one vote would be allotted for every 1euro preference stock, to the holder of these shares. It may be true that the vote of blocking, described as the total authority of votes of that class would become less effective because there would be an increase in the votes of overall members of the company.
- However, the vote is not accompanied by any particular scheme of weight in the articles of the company, as separate from the right of utilising the vote. Moreover, there is no such right given by the articles of the company that requires an equilibrium to be maintained between the class and the holders of the ordinary shares in the company.
- In a discussion, I inquired Mr. Gray that would not it be true to state that logically the consequence of his argument would be that the rights given by the virtue of ordinary shares would have an impact of the issuance of new capital because of all the considerations that he was depending upon existed in this case?
- The voting power given to the present shareholders, would become less valuable and the profit would be shared amongst a greater number of people and upon the liquidation of the company, the assets would be divided between more number of people. Mr. Gray was constrained in answering it.
- But I believe that there would be no effect on the rights of the ordinary shareholders of the issuance of new ordinary capital. The rights would remain same even after the issuance. The mere consequence would be the increase in the number of people who are authorised to utilise those rights.
- I also think that this case has led to a confusion between those rights and the impact or consequence of those rights. The rights are given by a resolution or the constitution of the company and cannot have any change except with the approval of the persons who have been given those rights. However, the consequences that those rights may lead to have not been given any guarantee about, by the articles of the company and are under no security in any manner. Hence I believe the rights given to the preference shareholders will not be effected by the given proposal.
A similar verdict was given by Evershed MR and this verdict was concurred by Denning LJ.
Case Study: Greenhalgh v Arderne
There was an issuance of some ordinary shares of 10s and some other shares that were also ordinary but of 2s by the company having pari passu rank for every purpose. For the voting purpose, each member was allotted one vote per share. As a consequence, Greenhalgh, being the holder of group of 2s shares had a control over 40% votes and hence was able to prevent any special resolution from passing. The persons holding the 10s shares subjected their shares to a subdivision of 2s shares. And the ranking accompanying was the same as for the 2s shares of 1941. An objection was made by Greenhalgh, stating that its rights linked with 2s shares had been subjected to variation by such an act. This claim was unsuccessful.
Lord Greene MR held that:
- When the status of the rights given by original 2s shares is observed, a question is raised in mind that what are those rights regarding the voting process linked with that class under the light of 3rd article of Table A (1929 act), which cannot be subjected to any alteration except with the approval of the holders?
- There is just one right attached with that class of shares, and it entitles every shareholder of that class to one vote per share side by side with other shares that are ordinary in the company issued by that time. They have not been deprived from this right.
- It is obvious that if the voting right would have been harmed in a way such as reducing the weight by giving one vote per 5 shares then it would have been termed as an intervention in the rights of that class of shares. However, nothing of such a nature has been attempted.
- I accept that the consequence of this resolution is the repositioning of the holders of 2s shares of 1942. Greenhalgh does not find itself in a controlling status, rather it thinks it is in a status where there is no more control in its hands. The rights of the 2s shares have been impacted to this expanse in terms of business.
- But in terms of law, I cannot find it possible to give a verdict that there is a variation in the rights by the transaction. They remain unchanged. That is, a right to enjoy 1 vote for every share pari passu along the shares that are ordinary, issued by this time, and involve shares of 2s after dividing them. Hence the appeal should be disregarded.
A similar verdict was given by Morton LJ and Somerwell agreed to it.
Inferences from the Case Studies
- A similar situation is depicted in cases of Re Saltdean Estate as well as House of Fraser. Following the case Re Saltdean, where the judge held that the revocation of class of shares by reducing the capital was not varying the rights. And this remained in consistency with the conditions of issuance of shares that were under consideration.
- The case of Re Hellenic may also be presented as an example. It was held by Templeman J that in relation to an arrangement plan under subsections 425 to 427A of Companies Act 1985, the shareholders of ordinary shares that were also the intending buyers’ subsidiary, were to be classified in a different group and the shareholders of ordinary shares who were outsiders belonged to a different group even when the conditions of all these shares were same. This way of approaching the case is peculiar to the shareholders instead of the shares and contrasts strongly with the two case studies that have been cited lastly. A justification for the verdict can be given by section 425 of this the Act of 1985, as it considers the members’ classes instead of the shares’ classes.
- In such cases, the rights given to various groups of shareholders have been dealt with under common law. However, granting a relief to the members who are in minority, in the light of Section 994 of Companies Act 2006, can be justified at times, by an act which lies within the scope of the rights given to the shareholders in control, in this manner.
Corporation that make share classes, gives special measures of the class rights and depending on the situation they are amended or remains unchanged. Altering one class rights does not affects the other share class rights. Hence, at the time of register a new company UK or setting up a ltd company UK, special care should be given to these class rights and their regulations as given in UK Companies Act.