Types of class right
Essentially, a class right is any right enjoyed by some members but not others. The case of Cumbrian Newspapers v Cumberland ([1986] 2 All ER 816) has identified three different types of class right, but only two of these are enforceable:
1) rights or benefits which are annexed to particular shares. For example:
- The right to a preferential dividend (aka ‘preference share’);
- The right to a preferential dividend plus a share of the ordinary dividend (aka participating preference share);
- The right to a preferential return of capital upon winding up.
2) rights or benefits conferred on individuals not in the capacity of members [invalid as an ‘outsider’ right as per Hickman];
3) rights or benefits that, although not attached to any particular shares are nonetheless conferred in the capacity of member
- this includes Bushell v Faith and Cumbrian Newspapers clauses.
Protection of class rights
Often, the holders of a preference share represent a minority within the company, or may even hold shares which do not have the right to vote (this will depend upon the specific terms of the class, most likely set out in the articles). Despite this, they may be treated in a preferential manner compared to the ‘ordinary’ majority.
As a result, there is a big incentive for the majority to remove these class rights. Ordinarily, the alteration of the articles requires a special resolution (s.9 Companies Act 1985/s.21 (1) Companies Act 2006) done bona fide in the interests of the company as a whole (Allen v Gold Reefs [1900] 1 Ch 656).
Therefore, in order to provide greater protection, if the variation involves varying or abrogating a class right, then the consent of the class is required (s.125 Companies Act 1985/s.630 Companies Act 2006). Generally, this requires a special resolution of that class.
Even if this is passed, a class minority of 15% or more may still apply to the court to have the variation disallowed if it can be shown that it would ‘unfairly prejudice’ the class (s.127 Companies Act 1985/s.633 Companies Act 2006).
Voting rights
Unlike directors, shareholders are not subject to fiduciary duties when voting:
“The shareholders are not trustees for one another and, unlike directors; they occupy no fiduciary position and are under no fiduciary duties”. (Dixon J, Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457)
As a result, they may vote in their own interests:
“The right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owner’s personal advantage”. (Dixon J, Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457)
In addition, the shareholder is not subject to the ‘no conflict’ rule:
“Every shareholder has a perfect right to vote upon any… question, although he may have a personal interest in the subject matter opposed to, or different from, the general interests of the company”. (North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589) Indeed, it has been said that “a man may be actuated in giving his vote by interests entirely adverse to the interests of the company as a whole”.(Pender v Lushington (1887) 6 ChD 70)
Limits
Despite the above, there are some limitations on how a shareholder may vote on a particular issue:
- When exercising the power to amend the articles under s.9 Companies Act 1985/ s.21(1) Companies Act 2006, it must be done bone fide in the interests of the company as a whole;( Allen v Gold Reefs [1900] 1 Ch 656)
- An appointment of a director must be made for the benefit of the company as a whole and not for an ulterior purpose;( Re Harmer Ltd [1959] 1 WLR 62)
- At a class meeting, the majority must vote for the benefit of the class as a whole; (Re Holder’s Investment Trust Ltd [1971] 1 WLR 583)
- When voting on whether the company should take legal proceedings regarding an illegal, fraudulent or ultra vires matter, the vote must be bona fide in the interests of the company and not for some other purpose (e.g. to protect the proposed defendant). (Taylor v NUM (Derbyshire) [1985] BCLC 237)
Essentially, a class right is any right enjoyed by some members but not others. The case of Cumbrian Newspapers v Cumberland ([1986] 2 All ER 816) has identified three different types of class right, but only two of these are enforceable:
1) rights or benefits which are annexed to particular shares. For example:
- The right to a preferential dividend (aka ‘preference share’);
- The right to a preferential dividend plus a share of the ordinary dividend (aka participating preference share);
- The right to a preferential return of capital upon winding up.
2) rights or benefits conferred on individuals not in the capacity of members [invalid as an ‘outsider’ right as per Hickman];
3) rights or benefits that, although not attached to any particular shares are nonetheless conferred in the capacity of member
- this includes Bushell v Faith and Cumbrian Newspapers clauses.
Protection of class rights
Often, the holders of a preference share represent a minority within the company, or may even hold shares which do not have the right to vote (this will depend upon the specific terms of the class, most likely set out in the articles). Despite this, they may be treated in a preferential manner compared to the ‘ordinary’ majority.
As a result, there is a big incentive for the majority to remove these class rights. Ordinarily, the alteration of the articles requires a special resolution (s.9 Companies Act 1985/s.21 (1) Companies Act 2006) done bona fide in the interests of the company as a whole (Allen v Gold Reefs [1900] 1 Ch 656).
Therefore, in order to provide greater protection, if the variation involves varying or abrogating a class right, then the consent of the class is required (s.125 Companies Act 1985/s.630 Companies Act 2006). Generally, this requires a special resolution of that class.
Even if this is passed, a class minority of 15% or more may still apply to the court to have the variation disallowed if it can be shown that it would ‘unfairly prejudice’ the class (s.127 Companies Act 1985/s.633 Companies Act 2006).
Voting rights
Unlike directors, shareholders are not subject to fiduciary duties when voting:
“The shareholders are not trustees for one another and, unlike directors; they occupy no fiduciary position and are under no fiduciary duties”. (Dixon J, Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457)
As a result, they may vote in their own interests:
“The right to vote is attached to the share itself as an incident of property to be enjoyed and exercised for the owner’s personal advantage”. (Dixon J, Peters’ American Delicacy Co Ltd v Heath (1939) 61 CLR 457)
In addition, the shareholder is not subject to the ‘no conflict’ rule:
“Every shareholder has a perfect right to vote upon any… question, although he may have a personal interest in the subject matter opposed to, or different from, the general interests of the company”. (North-West Transportation Co Ltd v Beatty (1887) 12 App Cas 589) Indeed, it has been said that “a man may be actuated in giving his vote by interests entirely adverse to the interests of the company as a whole”.(Pender v Lushington (1887) 6 ChD 70)
Limits
Despite the above, there are some limitations on how a shareholder may vote on a particular issue:
- When exercising the power to amend the articles under s.9 Companies Act 1985/ s.21(1) Companies Act 2006, it must be done bone fide in the interests of the company as a whole;( Allen v Gold Reefs [1900] 1 Ch 656)
- An appointment of a director must be made for the benefit of the company as a whole and not for an ulterior purpose;( Re Harmer Ltd [1959] 1 WLR 62)
- At a class meeting, the majority must vote for the benefit of the class as a whole; (Re Holder’s Investment Trust Ltd [1971] 1 WLR 583)
- When voting on whether the company should take legal proceedings regarding an illegal, fraudulent or ultra vires matter, the vote must be bona fide in the interests of the company and not for some other purpose (e.g. to protect the proposed defendant). (Taylor v NUM (Derbyshire) [1985] BCLC 237)
See further, textbooks:
