CHAPTER 17

CLASSES OF SHARES At the end of this topic you should understand: • what is meant by a “class” of shares; • the rights of preference shareholders; and • how rights attaching to shares can be varied.

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Introduction

A company has the power to decide the terms on which it issues shares and the rights and restrictions attaching to those shares: s 254B(1).

A class of shares is a category of shares which have particular rights and benefits that are different from the rights and benefits attaching to other shares.

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Classes of Shares – Introduction and Source

Classes of shares may differ according to all or any of the following rights: • entitlement to dividend; • rights to priority in payment of dividend; • voting rights; • rights to repayment of capital on winding up; • rights to participate in surplus assets on winding up; and • rights of enjoyment of certain assets.

The rights and benefits attaching to shares should be set out in the internal rules of the company.

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Classes of Shares – Reason for Classes of Shares

Companies may choose to have more than one class of shares for the following reasons: • to confine control of the company to the holders of one particular class of shares; • to enable dividends to be distributed in different amounts to different groups; • for taxation considerations; and • to raise share capital on terms similar to borrowing from creditors.

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Preference Shares

Classes of shares do not require technical names. They can be described as “Class A”, “Class B”, and “Class C”.

Where some shareholders are given priority over other shareholders as to receipt of dividends, their shares are called preference shares and the other shares are called ordinary shares.

Preference shares usually carry an entitlement to a fixed rate of dividend.

Ordinary shares carry no fixed entitlements to dividends even when profits are made.

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Issues and Rights

Companies have the power to issue preference shares, including redeemable preference shares: s 254A(1)(b).

An issue of preference shares must comply with the requirements: s 254A(2).

The company must specify whether the dividends payable to preference shareholders are cumulative or non-cumulative.

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Dividend Right of Preference Shares: Are Dividends Cumulative?

Does special resolution or constitution say cumulative?

NO YES Presume entitled to cumulative dividend (

Webb v Earle

) Rely on special resolution/ constitution Has dividend been declared and fallen due for payment?

NO No right to payment YES Right to receive dividend but NO right to surplus profits (

United Lankat

)  2013 Thomson Legal & Regulatory Ltd. All Rights Reserved.

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Priority of Payment of Capital and Dividend

The company must specify the priority rights enjoyed by preference shareholders, such as: • any priority of payment of dividends over ordinary shares; • any right to further dividends in the same year (participating preference shares); • any option to require the company to repay shareholders’ capital contributions at some future date (redeemable preference shares); and • any restriction of voting rights to certain issues (such as a resolution to wind up the company).

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Interpretation of Rights

A company contravenes s 254A(2) by issuing shares whose rights are not set out in the company’s internal rules.

Courts refer to the following presumptions to fill any gaps in the internal rules regarding the preference shareholders’ rights: • right to cumulative dividends, right to further dividends in the same year for participating preference shareholders, no automatic right to further dividend after preferential dividend is paid; • each shareholder has equal voting rights: s 250E(1); and • right to share equally in the surplus of assets with the ordinary shareholders:

Birch v Cropper

(1889).

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Wound Up and Dividends not Paid Redeemable Preference Shares

The preference shareholders are not entitled to an amount representing those unpaid dividends upon winding up, unless: • the dividends have been fixed or declared and their date for payment has fallen due; or • a right to payment of (undeclared or unpaid) dividends in the event of winding up is set up in the company’s constitution.

Companies may issue preference shares that may be redeemed: s 254A(3). They may be redeemed only if the shares are fully paid up and they are redeemed out of profits or from the proceeds of a fresh issue of shares made for the purposes of the redemption: s 254K.

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Converting Preference Shares – Variation or Cancellation

A company is permitted to: • convert an ordinary share into a preference share; and • convert a preference share into an ordinary share: s 254G(1).

Part 2F.2 (ss 246B-246G) permits companies to vary or cancel the rights attaching to a particular class of shares or members under regulated conditions.

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Variation or Cancellation

The procedures in Pt 2F.2 protect the special (legal) rights attaching to shares in a particular class of shares (or class of members, in the case of companies without a share capital).

A transaction involves a variation of share rights if it varies or cancels the legal rights attaching to shares or membership.

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Variation or Cancellation

Actions may also be taken or deemed to be variations of class rights: • the division of shares into different classes with different rights: s 246C(1); • varying the rights of only some of the shares in a class: s 246(2); • the issue of new shares with different rights to existing shares: s 246C(5); and • the issue of new preference shares that rank equally with existing preference shares: s 246C(6).

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Variation or Cancellation

Actions which have been held not to constitute variations of class rights including: • a reduction of capital:

Re Saltdean Estate Co Ltd

[1968]; and • an issue of shares which has the effect of diluting the voting power of an existing class of shares:

Greenhalgh v Arderne Cinemas Ltd

[1946].

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Legal Procedure for Varying Class Rights

The procedure for varying rights depends on whether or not the company has a constitution which includes a provision for varying the rights attaching to a class of shares or members (“a variation of rights provision”).

Where a company has such a provision in its constitution, any variation of rights must comply with s 246B(1).

Where it does not have such provision, the variation must comply with s 246B(2).

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Procedures for Varying Rights

Does company have a constitution with variation procedure?

YES NO Follow procedure s 246B(1) Special resolution of company Follow procedure s 246B(2) Special resolution/ written consent 75% voters in affected class  2013 Thomson Legal & Regulatory Ltd. All Rights Reserved.

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Legal Procedure for Varying Class Rights

Even where the company complies with s 246B, members with 10% or more of the votes in the affected class may apply to the court to have the variation or cancellation set aside on the ground that it unfairly prejudices them: s 246D.

It may also be possible to bring legal action to challenge: • a removal or expropriation of valuable property rights:

Gambotto

; • conduct which is oppressive, unfairly prejudicial, discriminatory or contrary to the interests of the members as a whole: Pt 2F.1; and • conduct which contravenes the provisions of the Act: s 1324.

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Legal Procedure for Varying Class Rights

The date on which an authorised variation or cancellation of class rights takes effect depends on whether or not the variation was unanimously agreed to by members of the effected class.

The company must notify the members of the affected class within seven days after the variation or cancellation of class rights: s 246B(3).

The company must also provide details to ASIC of any division or conversion of shares within 14 days: s 246F.

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