Company Law - Shares and Dividends (Part 2)

Potential to circumvent class protection

Under the topic of "Share capital and issuing shares", c
lass right-holders are given additional protection to prevent the overall majority of shareholders removing class rights (s.125/s.127 Companies Act 1985 and s.630/s.633 Companies Act 2006). However, it may be possible to circumvent this protection by creating extra shares with the same class rights following the procedure outlined above. If enough shares are issued, it is possible to push the original class shareholders into a minority of less than 15% thereby rendering the extra protection useless.

The reason why this is possible is that the statutory protection applies to a ‘variation’ or ‘abrogation’ of class rights. However, the courts have held that diluting the original class shareholders’ voting power (by creating more shares with the same rights) is NOT a variation or abrogation, and so the consent of the class is NOT required to issue the extra shares:

“There is to my mind a distinction, and a sensible distinction, between an affecting of the rights and an effecting of the enjoyment of those rights” – White v Bristol Aeroplane Co Ltd ([1953] Ch 65).

Once the extra shares are issued to a party who agrees to vote in favour of abolishing the class rights (this agreement can take the form of a shareholders’ agreement, rendering it contractually binding – Russell v Northern Bank [1992] 1 WLR 588, it is possible to call a class meeting under s.125 Companies Act 1985/s.630 Companies Act 2006. Because this class meeting is now under control of the party in favour of the abolition or variation, the resolution will succeed.

Furthermore, provided the original class shareholders have been pushed into a less than 15% minority, the additional protection of s.127 Companies Act 1985/s.633 Companies Act 2006 will be unavailable.

Reduction of share capital

In contrast to the above example, there may be times when a company wishes to reduce the number of shares. This could occur where it has a surplus of assets – essentially it is possible to hand some of this back to the members in exchange for their shares. Alternatively, it could reflect a diminution in the value of its assets.

Maintenance of share capital

There is a general rule that a company must ‘maintain’ its share capital. This doctrine was developed to protect creditors. “The creditor… gives credit to the company on the faith of the representation that the capital shall be applied only for the purposes of the business, and he has therefore a right to say that the corporation shall keep its capital and not return it to the shareholders, though it may which he cannot enforce otherwise than by a winding up order” – Re Exchange Banking Co., Flitcroft’s Case (1882) 21 Chd 519. It ensures that capital is maintained as a secure fund which cannot be distributed to shareholders except on winding up – essentially, the liability of members is limited but not absolute – i.e. members are still liable up to the amount they paid for the shares.

However, there are limits on this doctrine:

- capital need only be maintained so far as ordinary business risks allow. If it is lost through bad luck or even negligence, there has been no breach of the doctrine;

- there is no requirement that debt is taken in proportion to capital – therefore, a company with an authorised share capital of 1,000 shares of £1 each could, in theory, take out a loan of £1,000,000;

- there is no basic requirement that the company is adequately capitalised.

The practical effect of this is that there are times where capital may be paid to, or returned to, members.

One such example is found in the companies legislation:

Reduction of share capital

s.135 (1) Companies Act 1985: “Subject to confirmation by the court, a company limited by shares or a company limited by guarantee and having share capital may, if authorised to do so by its articles, by special resolution reduce its share capital in any way”.

Art.34 Table A: “Subject to the provisions of the Act, the company may by special resolution reduce its share capital in any way”.

The phrase ‘in any way’ gives the company wide powers of reduction:

British and American Trustee v Couper [1884] AC 399

“The statute has not prescribed the manner in which the reduction is to be carried out, nor has it prohibited any method of effecting that object”.

Ex Parte Westburn Sugar Refineries Ltd [1951] AC 625

“The general rule is that the prescribed majority of the shareholders are entitled to decide whether there should be a reduction of capital and if so in what manner and to what extent it should be carried into effect”. 

See further, textbooks:
Related Posts Plugin for WordPress, Blogger...
Need Law Introduction ... click HERE
Private Policy About Us Contact Us Content References

LAW (LLB) NOTES is intended merely as an informational and educational resource and is not intended to offer legal advice, nor does it offer legal advice. The exchange of information, by electronic mail or otherwise, relating in any way to LAW (LLB) NOTES is not intended to create an attorney-client relationship, nor does it create an attorney-client relationship.