What Are the Leading Cases About Company Shares and Class Rights Flashcards

Unlike partnerships where the assets of the business are jointly owned by the partners, shareholders do not have a proprietary interest in the property of the company. Rather, the relationship of a shareholder lies with the company as a separate and distinct entity.

It was held that the sole shareholder and creditor of a company ‘stood no legal or equitable relation to the property of the company. He had no concern in the subject insured, his relation was to the company and not to the goods’
The guiding principle is related to the fact the company has a separate legal personality and therefore the company owns the goods and has a proprietary interest in them, not its shareholders.

Legal nature of a share, rights in the company, not against:
the courts held that ‘a share is the interest of a shareholder in the company measured by a sum of money, for the purposes of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all shareholders inter se in accordance with s.33 of the CA 2006. The contract contained in the articles is one of the original incidents of the share. A share is an interest measured by a sum of money and made up of the various rights in the contract’

it was confirmed that it is presumed that preference shares are cumulative.
where the clause defining the preferential
rights declares that preference shares are entitled to a preferential dividend at a fixed specified rate, the dividend is prima facie cumulative. However, it is submitted that for clarity’s sake it would be better if the word ‘cumulative’ were used in describing the preference shares. If, on the other hand, the intention is that the preferential right to dividends will not be cumulative, this must be clearly stated. In such a case the clause must state at which funds the holders of the preference shares are entitled to look for the payment of their dividend.
Express provisions are, however, usually deemed to be exhaustative

Preference shareholders are also generally entitled to a return of capital on a winding up in priority to the ordinary shareholders, but unless they have an express right of participation, they do not have a claim to any surplus assets

The Parameters of Class Rights:
Scott J took the view that rights or benefits conferred by a company’s articles of association can be classified into three distinct categories:

First, the rights or benefits which are annexed to particular shares. Classic examples are dividend payments and rights to participate in a surplus of assets on a winding up. ‘If the articles provide that particular shares carry particular rights not enjoyed by the holders of other shares, it is easy to conclude that the rights are attached to a class of shares, for the purpose of s.630’

Second, are those rights or benefits which, although contained in the articles, are conferred on individuals not qua members or shareholders, but for ulterior reasons, are connected with the administration of the companies affairs. Rights or benefits in this category cannot be regarded as class rights.

Third, rights or benefits that, although not attached to any particular shares, are conferred on the beneficiary in his capacity as a member in the company, ie. The provisions in the company articles which gave the claimant a pre-emptive right over the transfer of shares in the defendant company, together with the right to nominate a director so long as it held 10 per cent of the ordinary shares in the company, constitutes share rights.

Determining Whether There is a Variation of Class Rights:
the company’s articles provided that the rights attached to any class of shares may be ‘affected, modified, varied, dealt with, or abrogated in any manner’ with the approval of an extraordinary resolution at a separate meeting of the members of that class. The preference shareholders claimed that an issue of additional shares ‘affected’ their voting rights. The Court of Appeal held:
‘It cannot be said that the rights of the shareholders would be affected by the issue of further ordinary capital, their rights would remain just as they were before, and the only result would be that the class of persons entitled to exercise those rights would be enlarged…’

Determining Whether Class Rights Have Been Varied:
it was held that (1) the special resolutions attached special rights, which were contractual in nature, to the preference stock, the intention being that the preference stockholders should be entitled to claim under s.25 on the footing that they were still proprietors of the amount of stock which they would have held had there been no reduction of their capital at all;
(2) these special rights were abrogated by the special resolution and accordingly, in order to carry out the desired reduction, it was necessary to obtain the approval of the preference stockholders, and, as this had not been done, the resolution for reduction had not been validly passed;
(3) the preference stockholders having acted upon the representations contained in the first two resolutions, it would be inequitable for the board to reverse what had gone before

I.e. The proposal amounted to an unfair variation of class rights in so far as the preference shareholders had been promised that they would be able to participate in the compensation scheme

Common law requirements for varying class rights:
‘there is a restriction when conferred on a majority of a special class in order to enable that majority to bind a minority. They must be exercised subject to the general principle that the power given must be exercised for the purpose of benefitting the class as a whole, not merely individual members only’

Substantial changes to class rights must comply with s.630 or the articles
t was held that one of the rights which attached to the preference shares was the right to a return of capital in priority to other shareholders where any capital was appropriately to be returned as being in excess of the company's needs, that the proposed reduction of capital involved an extinction of the preferred shares in strict accordance with the contract embodied in the articles of association, to which the holders of the preferred shares were party, and that the rights of the preference shareholders were not being affected, modified, dealt with or abrogated, but were being given effect to.
As the Articles were being complied with, there was no variation

Consent is only needed where abrogation is substantial
dividends were to be paid in Australia. The Australian dollar was worth less than the GBP, the court however held that the variation did not amount to a substantial variation.

Category 3 Example of Cumbrian News Class Rights ('Class Rights')
Weighted voting. Shareholders who are for the time being also directors, shareholders who were not for the time being directors. The articles provided that on a poll on a resolution for the removal of a director, any shares held by that director should have three votes per share. A and B proposed an ordinary resolution to remove C from his directorship; they voted for such removal and claimed that this resolution was passed by 200 votes to 100. C, however, maintained that, by virtue of the provision in the articles, the resolution had been defeated by 300 votes to 200, his own shares having three votes per share.
Held, (1) that the provision in the articles was not contrary to s.184 and was not, therefore, void; and (2) that C's contention was, therefore, correct.

Category 2 Example of Cumbrian News Class RIghts ('Outsider RIghts')
Articles of association contained a clause in which it was stated that the plaintiff should be solicitor to the company, and should transact all the legal business of the company, including parliamentary business, for the usual and accustomed fees and charges, and should not be removed from his office, unless for misconduct. The articles were signed by seven members of the company, and were duly registered, and the company incorporated under the Companies Act, 1862. The plaintiff acted as solicitor to the company for some time, but ultimately the company ceased to employ him and employed other solicitors. The plaintiff brought an action against the company for breach of contract in not employing him as solicitor to transact their legal business on the terms of the articles:—
Held, that the articles of association were a matter between the shareholders inter se, or the shareholders and the directors, and did not create any contract between the plaintiff and the company.