#3221 - Shares - Business Law and Practice

Company Law – Private Limited Companies

Shares

Share Capital
Class Rights
Variation of class rights
Protecting Minority interests

Shares and Share Capital

Shares [general info]:

S.540(1) Shares = shares in the company’s share capital
S.541: shares are personal property
S.542(1): shares in limited company having a share capital must each have fixed nominal value.
Model Article 21: all shares must be FULLY paid up (exception for subscriber shares)

Is it legal:

S.755: a private company is prohibited from offering to sell shares to the public (for cash or otherwise).
S.756: meaning of “public offers” – an offer to any section of the public, however selected.
It is not a criminal offence however.

Filing requirements [shareholdings]

On Statutory books only (i.e. no requirement to file at CH)
However, Annual Returns contain details of membership.
S.113: Sets out what information needs to be recorded
S.123: applies if company has only ONE member – statement to that effect must be filed.
S.126: only record legal title (i.e. no notice of trust)
S.114: register to be kept at office (but note S.1136 – can be held elsewhere so long as CH is notified)
S.116-119: rights to inspect and require copies of the register – this is LIMITED right however. To an extent the information is private.

Shareholders

CA 2006 – one of the main themes of the 2006 Act = enhance shareholder involvement in controlling company!

S.112: shareholders are the ‘members of the company’
Shares can be issued (allotment) / transferred / by transmission (i.e. bankruptcy)

Rights of Shareholders

Granted by law / by constitution of company

1 share = 1 vote (usually)

Payable in interim / final

ONLY out of distributed profit

Model Art 30 – 35

S.847(2): consequence of unlawful distribution

Shareholders are at the bottom of the priority list / set order list (i.e. after creditors etc)

Birch v Cropper: in absence of agreement SH rank equally (consider class rights)

Class rights

The rights attached to a particular class of shareholders
Set out in the Company Articles
S.629(1): “shares are in one class if the rights attached to them are in all respects uniform”.
Birch v cropper – If the Articles of Association contain no agreement about class rights, then all classes treated equally.

Preference: a share conferring preference as to income or capital (or both) over the ordinary share capital of a company.

Priority as to dividends.

Non voting (most usual);or
Voting
non participating
Participating: allows SH to maximize chances of recovering the money it has put in. SH get priority to dividend and capital BUT ALSO “rights of participation”.

On payment of dividend: receive fixed preference dividend + chunk of whatever the ordinary SHs, those who are next in line, are entitled to.
On winding up: receive arrears of dividend + repayment of capital before ordinary SH receive anything PLUS a slice of the surplus.

Convertible
Cumulative: note that SH has no absolute right to dividend until it is declared. Dividend can’t be declared unless company has sufficient distributable profits.
Redeemable (i.e. repayable) =provides exit route for SH! Company simply takes shares back and repays SH.

S.684: a company, if authorised by articles, may issue shares which are redeemable at the option of the company or the SH. (Model Article 22(2)).

Variation of class rights

Distinction:

Variation of class rights: No Variation of the class rights:

Variation of the right itself .V. Variation of the enjoyment of the right

e.g. remove right to vote e.g. dividend becomes smaller

White v Bristol Aeroplane Co Ltd.

If it amounts to a variation of class rights – follow procedure: S.630- 633 CA 2006
Procedure:

630	Follow procedure in articles first; If articles are silent – need consent [in writing] of the holders of in nominal value of the issued shares of the relevant class; OR Passing of special resolution at a separate GM of the relevant class to sanction the variation.
633	Permits SH the right to object to the variation – must be by holders of 15% of issued shares of the relevant class [this cannot include any SH who voted in favor of the variation beforehand] Apply to court to have variation cancelled S.633(3): If an application is made the variation of rights has no effect until the court confirms it.

Protecting minority interest / breach of class rights by directors:

1. First consider articles / SH Agreement: – is there anything that might help aggrieved SH in the minority?

SH can seek remedy individually or as a class.

S.33: Says that the company’s constitution is binding on the company therefore a breach of articles is a actionable breach of contract.

Take Derivative Action – using exception to Foss v Harbottle [1843] =

F v H Rule: company is proper plaintiff in case where wrong has been done TO the company decision to take action has to be by board / shareholders resolution this would disallow minority SH to take an action.

Exception to the Rule: Courts have to be satisfied that the rule cannot grant justice to be done. This is called “ derivative action” [where SH brings an action relying on the above exception. SH has derived the right to take action that the company has failed to exercise].

S.260(3): codified derivative action

2. Action under Part 30, S.994: ‘Protection of Members against Unfair Prejudice’

Alternative to derivative action
Allows SH to petition the court

Must prove

1	Rights of SH have been prejudiced; including Rights in constitution Legitimate expectation
2	Unfair prejudice is OBJECTIVELY determined no need to prove bad faith / intention to defraud therefore easier test unfairness must be more than...

#3221 - Shares - Business Law and Practice

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