Class Rights and their Variation in new Company Formation UK

04 Jan

When a company is formed, its memorandum is prepared. The memorandum then provides authorities to the members of the company. A new form of rights is the class rights. These may be given to any specific group of members in the company. This group may depend upon the division of shares. Incorporating an ltd company formation UK without a share capital may not give any rights to classes of shares but ltd company formation UK with a share capital and division of that share capital will assign rights to the members according to the division. This article discusses about what classes are available for a new company formation UK and how their rights can be subjected to variation.

Class Rights and their Variation

A company’s share capital may be divided into different groups of shares. Hence there may be different rights accompanying different classes of shares, known as “Class Rights”. Class rights may be subjected to variation. Chapter 2 of Companies Act 1985 is dedicated for the provisions regarding variation of class rights. But first of all the meaning of variation needs to be under stood clearly. Different textbooks have focused on the meaning of this term. Suppose, the preference shareholders are authorised to a 10% dividend of preference, then this authority will be termed as a class right. Here the question raises in our mind that if there is no such provision about the ordinary shareholders belonging to the same company then their right of getting the dividends would also be termed as a class right or not? Also, if nothing is mentioned regarding the rights of voting about any class then, are the rights of voting given to them also “class rights”?

Let’s have a look the case of Cumbrian Newspapers related to class rights. In this case it was mentioned by Scott J, while defining the class shares and rights that: These might be applied to situations where certain rights are given to a member or a specific group of members but no shares are particularly are entitled for the reference to those rights.

Requirements by the Statute for Varying Class Rights

When the division of the share capital of any corporate body has been done, then the statute enters the scene, making some requirements necessary to be fulfilled for the variation of rights of classes. It is mentioned in Section 630 of Companies Act 2006 that:

  • Class rights can be subjected to variation only according to related provisions in the articles of company.
  • And if there are no such provisions in the articles then if three-fourth of the class’s shares assent in written form, or the passing of a special resolution is done at a meeting arranged separately for the members holding such shares then the rights of class can be subjected to variation.

The articles of any company may specifically provide more or less burdensome regulations for varying the rights given to any class as compared to the provisions for varying class rights in the default Act. The regulations given for company formation of Great Britain or UK such as private companies, companies having limited guarantee and companies that are public, provide clauses for issuing the shares of various classes, but provide no clauses particularly for varying the rights of classes. It is specified in Section 630 of Companies Act 2006 that, if the articles of company outline more difficult rulings for changing the class rights as compared to the procedure of special resolution then that security cannot be overruled by varying the rights given for any shares’ class.

Additional Rules required by the Common Law for changing Class Rights

A common law rule was defined by the case of British American Nickel, which stated that the members who attend any meeting for voting for a particular class, then those members have to focus on voting with the intention of benefitting that class. This has some relevance with the famous rule of Allen v Gold that the members should act bona fide in the best interests of the company on the whole. If the interpretation of rule is done, then the class would not be allowed to subordinate its interests to the company’s interests and the variation of class rights could not be done except for the benefit of class holders.

Definition of Variation of Class Rights

According to the Section 630 (5) of Companies Act 2006, changing or adding a class rights’ variation in company’s articles, is in itself a change in rights and Section 630 (6) deals with the vanishing of rights but not the share itself, provide for this matter. As in Re Saltdean case.

There is a self-contradiction in the fact that the judges never displayed a desire for the interests of members of any class while interpreting the term variation. It may be possible in cases where to lessen the impact of class rights without actually bringing any technical change in them, as elaborated in White v Bristol and Greenhalgh.

Companies Act 1985 about Varying Rights of Classes

Chapter 2 of this Act has been dedicated for this purpose.

Altering the Rights of Classes

Section 125 of Companies Act 1985 states that:

  • The section under consideration focuses on varying the class rights of any company after companies house register limited company that has divided its share capital into different classes.
  • In situations where the rights are linked with any class of share under the memorandum of the company and its articles include no clause regarding the variation of rights of classes, such rights can be changed only in the following case:
  • Holders of 3/4th of issued shares of any class can give a written consent for variation in rights of class.
  • If in meeting that has been arranged separately for the holders of any class, an extraordinary resolution is passed for the variation.
  • And if there are any requirements regarding change in the class rights, then, these requirements will have to be complied with as long as these two conditions are not comprising it.
  • In situations when:
  • Under the memorandum the rights are linked with the shares of any class; or otherwise
  • There are provisions regarding variation in the memorandum and articles.
  • And the rights’ variation concerns varying, giving, revoking or renewing of an allotment’s power by the virtue of Section 80 or by reducing the share capital of a company via Section 135.
  • The rights cannot be subjected to variation unless:
  • The conditions specified by second provision of this section are fulfilled.
  • And if there are any requirements regarding change in the class rights, then, these requirements will have to be complied with as long as these two conditions are not comprising it.
  • When the rights linked with a shares’ class are specified by the memorandum or otherwise:
  • Also if they are specified by the memorandum and company’s articles which were created when the company was originally being incorporated, provides clauses for variation; or
  • Also where they are specified otherwise, the articles include such clauses (whenever it was included for the first time)
  • In any of these situations, the variation does not have a connection as specified by third subpart of third provision of this section, then the rights may be subjected to variation according to that provision.
  • If the memorandum of the company attaches rights with any particular class of shares and neither the articles nor the memorandum includes provisions relevant to the variation of such rights then, the rights can be subjected to any variation if every member of the company gives consent for it.
  • The regulations given in Section 369 that state about the notice of length given for calling a meeting, Section 371 that provides general rulings for meetings and voting, Section 376 and Section 377 that state about circulating the resolution of members and the rulings given by the articles regarding general meetings shall be applicable on any meeting of the shareholders that is a requirement under this section or has to take place regarding the variation in rights of class of shares, and it will be applicable after required changes and should be subjected to the following rulings:
  • The role of quorum shall be played by two persons owning or representing as proxies minimum 1/3rd in nominal value of the shares issued for the class that is in question in meetings other than an adjourned meeting or in case of an adjourned meeting, the quorum should be 1 person owning shares in the questioned class or his representative.
  • Any person who owns the class in question’s shares who is either present personally or has appointed a proxy is allowed to request for a poll.
  • Any change in any clause of company’s articles for varying the rights given by any class of shares or adding any such clause into the articles shall be deemed as a change in the rights.
  • Under this section, with an exception of cases that require otherwise, references made to variation in any clause about varying rights linked to a class in the memorandum, or the articles, should be considered as taking into account references to the abrogation of such rights.

Securing Court’s Power via other Provisions

Section 126 of Companies Act 1985 states that:

  • Section 125’s subsections 2 to 5 in no way derogates from the authorities given to court by the following sections of Companies Act 1985, including:
  • Sections 4-6 that gives provisions about resolution for alteration of objects.
  • Section 54 that gives provisions about litigated objection to companies that are public and are to become private by re-registration.
  • Section 425 stating about control of court for companies that want to compromise with creditors and members.
  • Section 427 stating about reconstruction or amalgamation of the company.
  • Section 459-461 provides provisions about protecting the minorities.

Registering Class Rights that are Newly Devised

Section 129 of Companies Act 1985 provides provisions about the newly created rights of class of shares for a company after companies house register limited company. It states that:

  • If any company that does not own a share capital but forms a group of members and gives them rights which are not specified by the memorandum or articles or resolution or in any agreement on which Section 380 is applicable, a statement mentioning about rights linked with any class in the required manner should be sent to the registrar in one month’s time after the creation of new class.
  • If the class rights are subjected to variation otherwise than by amending the memorandum, articles, or via a resolution or contract subjected to 380th section of this Act, the company is required to submit to the registrar a statement mentioning about the variation in one month’s time after the variation is made.
  • When any company otherwise than by amending the memorandum, articles, or via a resolution or contract as mentioned in the previous clause, gives a name or any other entitlement or a new name or entitlement to any members’ class then within one month after this action, the registrar should be delivered a notice in the required manner mentioning about the particulars of the action taken.
  • When the company does not obey this section then a fine is imposed on the company and its every officer who is responsible for the default. And if the disobedience is continued then a daily fine will be imposed.
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