#3573 - Legal Capital Cases - Company Law

LEGAL CAPITAL - CASES

Formation of Capital

Re Bradford Investments (No.2) [1991]

D received shares in return for assets which contravened rules on payment for shares. Held:

D could not show the assets it had provided were of any value.

Therefore court relief not granted.

Re Ossory Estates [1988]

Company received property in consideration for issuance of shares to D. Company had already resold the properties at a substantial profit. Held:

Relief from liability granted to D.

Sunrise Radio [2009]

C had 15% shareholding in a company. Company made issue of shares despite knowing that C would be unable to exercise her rights o pre-emption, and as result shareholders was decreased to 8%. Sued under s.994. Held:

Where directors know a shareholder might not have enough money to subscribe, directors must consider what price could and should be extracted from those willing and able to subscribe

i.e. should not simply issue shares at par without thinking about it

This is particularly case where directors exercising the power stand to benefit from the exercise of power in a particular way.

Price that should be offered depends on circumstances of case.

Variation of Class Rights

‘Variation of Rights’

Greenhalgh [1946]

Company’s ordinary shares were divided into 50p shares, and 10p shares. Articles provided for each share (regardless of value) to get one vote each. Was proposed to sub-divide 50p shares into 10p shares, so that holders of 50p shares would then get 5 votes per share. Held:

Rights of 10p shareholders were not varied

i.e. was no formal change in rights attaching to 10p shares

this even though voting effectiveness of 10p shareholders was significantly diminished

However had the proposal been to simply give 50p shareholders 5 votes per share, this would have been variation

i.e. as 10p shares had a right to voting power pari passu with other ordinary shares

White v Bristol Aeroplane [1953]

Articles of company had provision requiring special procedure to be followed where class rights were to be ‘affected’ in any manner. Company proposed to issue new preference shares ranking pari passu with existing preference shares. Held:

Rights of existing preference shareholders were not affected by issue of pari passu preference shares.

This because in formal terms rights of preference shareholder would be the same

albeit that the voting power attached to each preference share would be less effective than before

Procedure for Variation

British American Nickel v O’Brien [1927]

Class shareholders voted in favour of a variation – was evidence that one of class members had done so after being promised large block of ordinary stock, without whose vote the resolution would not have passed. Held:

See notes.

Thus class shareholders’ resolution invalid.

Re Holders’ Investment Trusts [1971]

Trustees held majority of preference shares in a company, and all of the ordinary shares. Proposed to convert preference shares into loan stock (leading to a reduction in capital). Was clear that when making proposition, they were acting entirely on basis of what was in interests of trust (as they were obliged to). Held:

Clear that trustees had not even applied their mind to question of what was in interests of preference shareholders as a class

Thus consent to variation given by preference shareholders invalid.

Reduction in Capital

Re Northern Engineering [1994]

Company’s articles provided that any reduction in capital would be a variation in class rights of the preference shares. D claimed that consent of class of preference shareholders was not required as a ‘reduction’ for purposes of articles did not include ‘cancellation’. Held:

‘Reduction’ did include a ‘cancellation’

Therefore consent of class of non-preference shareholders was required

This even though in event company had not made specific provision, consent of class would not have been required.

House of Fraser [1987]

D made a reduction in capital; repaid the non-participating preference shareholders first. Was provision in articles for class consent to be required wherever class rights where ‘affected’; moreover D claimed that reduction had caused variation in class rights. Held:

Is no variation of rights

paying off preference shares entitled to priority on a winding-up is giving effect to rights attached to those shares

moreover by having priority upon a return of capital, non-participating preference shareholders must be taken to have agreed to allow their entitlement to be extinguished first

Moreover rights attaching to shares were not ‘affected’

words ‘affect’ contemplate that there is some right remaining after transaction in question

whereas here, C’s rights were completely extinguished

Financial Assistance

Chaston [2003]

D was director of a subsidiary of a parent company which was subject to a takeover bid. Subsidiary company incurred liability to pay accountants’ fees in respect of the transaction (20,000); actual cost of takeover itself was 2.5 million. D, as director of company alleged to have given financial assistance, was sued. Held:

Paying of accountants’ fees was financial assistance

This because it smoothed the path to the acquisition of shares

i.e. reduced the transaction cost for purchaser

thus acted as a financial incentive to buy parent company’s shares

This even though cost of accountant’s fees were dwarfed by cost of takeover!

MT Realisations [2003]

Purchase acquired a target company from the vendor. Vendor assigned purchaser the benefit of an on-demand loan due from the target company; purchaser agreed to pay vendor for the assignment of loan. Purchaser was later unable to make payment to the vendor, so agreement was later restructured – target was made to make payments directly to the vendor, and this was set-off against the money still owed to the vendor by the purchaser under the loan assignment. Was argued that set-off of money owed by purchase was unlawful financial assistance. Held:

Was no financial assistance

For there to be financial assistance, something has to be given to someone that he does not have already

here, purchaser had not been given any new rights against target company

rather, it had already acquired the right to a loan payable by target company

had purchaser wished to use this to pay off the vendor for the loan assignment, could have simply demanded payment in full at any time

by making loan payable to vendor and setting this money off against money due to vendor under loan assignment, was simply short-circuiting the process

Thus purchaser was simply exercising a pre-existing legal right

this cannot constitute financial assistance

Anglo...