AIMS AND OBJECTIVES
After reading this chapter you should be able to:
Understand the nature of a share and the rights and liabilities of a shareholder
Explain the concept of a class of shares
Distinguish equity and non-equity shares
Discuss what is and what is not a variation of rights
Explain the difference between the old regime of authorised share capital and the new regime of share capital statements
Use the language of share capital accurately
Discuss why and how a company may increase its share capital
Discuss the role of pre-emption rights and when they are applicable
Identify which companies may offer shares to the public and when a prospectus is required
This chapter is divided into six sections. The next section examines the fundamental financial entitlements of ordinary shareholders and the corresponding risk of losing the value of their investment in a company. The third section examines the legal nature of a share, the rights attached to different classes of shares and variation of class rights. The fourth section examines the language and structure of the share capital of a company and section five examines how to increase a company’s share capital. Reducing a company’s share capital is a far more problematic step than increasing it and is dealt with in the next chapter, as part of our study of capital maintenance. The final section outlines offering shares to the public.
A company operating a business for profit owns the business assets. In Salomon v A Salomon and Co Ltd  AC 22 (HL), the company owned the shoe manufacturing business. A company that operates a successful business makes profits and those profits belong to the company. Profits may be retained and re-invested to expand the business. This increases the value of the company’s business assets and allows the company to generate bigger profits. If this happens, the company becomes wealthier. Yet the company is an artificial person. As an artificial entity it cannot enjoy that wealth and the question arises, what happens to the wealth generated by the company? To whom does the benefit of the generated wealth accrue?
The term ‘residual wealth of the company’ is used here to mean the value that would remain were all sums legally owed by the company paid in full. It is sometimes referred to as the ‘net worth’ or the ‘net assets’ of the company. It is held by the company for the benefit of its shareholders and is also referred to as ‘shareholders’ equity’.
A shareholder cannot demand that the company pay him the value of his shares out of the assets of the company.
‘[T]the essence of the association [the company] is that the investment made by each shareholder is permanent.’
Hannigan 2007 at p. 490
Even in the context of a ‘quasi-partnership’ company, without more, a shareholder is unable to unilaterally withdraw from the company by requiring either the company or the other shareholders to buy him out (O’Neill v Phillips  2 BCLC 1). The permanency of the capital contribution made by a shareholder, or, put another way, the retention of share capital by the company vis-à-vis the shareholder, is a fundamental principle of company law.
Not only can an individual shareholder not demand his share of the company’s wealth from the company (which can be seen as protecting the majority of shareholders from individual shareholders who could otherwise jeopardise the finances of the company) but, under the rationale of creditor protection, the courts established the principle that the company is prohibited from returning share capital to shareholders: a prohibition that operates regardless of the wishes of the majority of shareholders.
In support of this ‘capital maintenance’ principle, elaborate statutory procedures have been enacted in an effort to ensure that various mechanisms used by companies for legitimate purposes cannot be misused to remove share capital from the company when it is not in the creditors’ interest for this to be done. Sealy has described the statutory provisions as ‘byzantine obfuscation’. Moreover, evidence exists that creditors do not place great reliance on the share capital of a company when deciding the creditworthiness of a company. Although the 2006 Act has taken steps to deregulate this area in relation to private companies, the second European Company Law Directive prevents significant deregulation in relation to public companies. Consequently, the capital maintenance laws, which are considered in the next chapter, remain complex.
As its name implies, the capital maintenance principle, and the rules enacted to support it, apply to the sums of money paid by shareholders to the company: the share capital. The share capital of a company is discussed further at section 7.4. The capital maintenance principle is not intended to prevent the distribution to shareholders of that part of the wealth of the company that has been achieved by the company generating profits.
Profits may be paid out, or distributed, to shareholders and this typically occurs by the payment of annual or bi-annual dividends. An individual shareholder may not insist on receiving his share of retained profits. The power to pay out profits is for the company to exercise and rules governing exercise of the power are set out in the company’s articles. As under the model articles for both public and private companies and Table A before them, the board of directors is typically empowered to recommend dividends which are then approved, or declared, by resolution of the shareholders. The shareholders may declare a smaller dividend than the board recommends but cannot by ordinary resolution declare a dividend higher than that recommended by the board. As a part of managing the business of the company, and before recommending a dividend, the board of directors must ask: which use of the profits is most likely to promote the success of the company?
Transferability of shares
Whilst a shareholder cannot withdraw his capital from the company, he may realise the value of his shares by selling them to a third party who becomes a shareholder and member of the company in his place. Without more, a share is freely transferable. This key characteristic of a share is now stated in s 544(1). Buckley LJ explained the core company law position in Re Discoverers Finance Corporation Ltd, Lindlar’s Case  1 Ch 312 at 316:
‘The regulations [articles] of the company may impose fetters upon the right of transfer. In the absence of restrictions in the articles the shareholder has by virtue of the statute the right to transfer his shares without the consent of anybody to any transferee.’
The ability to restrict transferability by inserting provisions in the articles is regularly exercised by private companies. Although the model articles for private companies limited by shares do not contain any such restrictions, this is because there are a number of ways in which transfer may be restricted and it was not considered appropriate to select one particular restriction formula for inclusion in the model articles as a default rule.
In contrast, and with rare exception, securities regulation provides that no restrictions may be placed on the transferability of listed shares (Listing Rule 2.2.4(1)). Restrictions on transfer are inconsistent with the operation of stock markets where shares are bought and sold without reference to the articles.
Special rules govern the sale, or legal transfer/assignment of shares. The process depends upon whether the shares are certificated or uncertificated shares.
Dematerialised or uncertificated shares
Shares traded on stock exchanges, listed shares, are uncertificated, also known as ‘dematerialised’ shares. The legal title to a dematerialised share is recorded in, and transfers are made by, CREST, the national computerised securities depository and electronic transfer system first established in 1996. Buyers and sellers of uncertificated shares must have access to the CREST system. They may be a member of CREST or access CREST through a broker. Many share transfers take place in the name of nominee brokers who hold legal title to the shares on trust for the beneficiary seller/buyer.
If all shares of a company are uncertificated, the company’s register of members will be maintained by CREST. If some shares are uncertificated and some certificated, the company’s register of members will be kept in two parts; the uncertificated share part will be maintained by CREST and the certificated share part will be maintained by the company. A buyer (or his nominee) normally becomes the legal owner of shares when those shares are credited to his (or his nominee’s) CREST account and his name is entered in the register of members maintained by CREST. The Companies Act 2006 contains provisions enabling the Treasury and the Secretary of State to make regulations governing the transfer of title to uncertificated shares (see ss 783 to 790). The current governing regulations are the Uncertificated Securities Regulations 2001 (SI 2001/3755) as amended (most recently by the Uncertificated Securities (Amendment) Regulations 2013 (SI 2013/632)).
An electronic holding and settlement system in which legal title to a dematerialised share is recorded and by which share transfers are made. Shares held and transferred in this way are called ‘dematerialised’
A paper-based system of holding shares, represented by share certificates
The documentary evidence issued by a company and held by a shareholder to indicate the ownership of shares
stock transfer form
The form completed by the transferor of certificated shares to transfer the shares to the transferee
Certificated shares are transferred by the seller, or transferor, executing a stock transfer form prescribed by the Stock Transfer Act 1963. In relation to fully paid shares, a stock transfer form may be used even if the articles provide for a different form or procedure but the provisions in the articles will take precedence in relation to partly paid shares as the 1963 Act does not apply to them. The stock transfer form is sent, together with any share certificates that may have been issued, to the registered office of the company. Legal title normally vests in the buyer, or transferee, when his name is entered in the company’s register of members. A stock transfer form is not a ‘proper instrument of transfer’ for the purposes of s 770(1)(a) of the Companies Act 2006 unless it has been stamped, indicating that stamp duty has been paid on it. Consequently, as a company may not register a transfer of shares unless a proper instrument of transfer is presented, transfer of the legal title to shares is conditional upon the payment of stamp duty on the value of the transfer. Some transfers are exempt from stamp duty, such as transfers the consideration for which is no more than £1,000. In such a case, the transferor signs an exemption certificate, which appears on the back of a standard form stock transfer form, and the form is sent directly to the company without the need for it to be sent to the Stamp Office.
Equitable title to certificated shares can arise at an earlier stage in the transfer procedure, when the transferor has done everything equity requires of him to transfer the shares. This principle, applied and developed in Re Rose  Ch 499 and Pennington v Waine  All ER (D) 24 (Mar) (CA), is one that you are likely to come across in property or trusts law.
Winding up the company
Shareholders can obtain the company’s residual wealth by having the company wound up. Note that the power to wind up the company does not lie with an individual shareholder. Shareholders with 75 per cent or more of the votes must pass a special resolution to voluntarily wind up a company (Insolvency Act 1986, s 84(1)(b)).
Winding up the company is a terminal step. The company ceases to trade, all the assets of the company are sold and the proceeds distributed to creditors and shareholders, the company is removed from the register of companies and, at that point, the company ceases to exist (the dissolution). If a company is profitable it is rare for shareholders to wish to wind it up as this would be to kill the goose that lays the golden eggs.
The reverse side of the coin to the question of entitlement to share in the wealth generated by a company is: who is responsible (directly and indirectly) for the debts of a company? If, rather than generating wealth, a company not only dissipates, or loses, the money paid to it by shareholders in return for shares (the share capital), but also borrows money and loses that money in poor trading so that it cannot pay it back, the company has no residual wealth, but rather has unpaid debts. Just as the wealth, above, is owned by the company, the debts are owed by the company.
Creditors of the company cannot sue the shareholders to obtain payment, as the creditors’ legal rights of action are against the company. The obligations of shareholders to contribute to the assets of the company in such circumstances to enable the company to pay its debts have been examined above, when we considered the limitation of liability principle in Chapter 3. In essence, the liability of a shareholder to pay money to the company is limited to payment for his shares. If his shares are fully paid, he cannot be required to contribute any further. Shares and share capital play an important role in limiting shareholder liability.
A share in a company is a legally complex concept. The limited statutory definition of share in s 540 is far from illuminating.
‘540. In the Companies Acts “share”, in relation to a company, means share in the company’s share capital.’
The Act confirms that a share is a piece of personal property (s 541), and the House of Lords in Colonial Bank v Whinney (1886) 11 App Cas 426 confirmed that a share is a chose in action. Classification as a chose in action is usually relevant to determine the rules governing legal transfer: assignment of a chose in action is governed by s 136 of the Law of Property Act 1925. As special rules govern the transfer of legal title to most shares (see section 7.2.2), the status of a share as a chose in action is of limited practical relevance.
Both the entitlement (‘interest’) and liability aspects of a share mentioned in section 7.2 of this chapter and the contractual nature of the relationship between a shareholder and the company explored in Chapter 5 are identified in Farwell J’s classic judicial statement of the nature of a share in Borland’s Trustee v Steel  1 Ch 279:
‘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 the shareholders inter se in accordance with section  of the Companies Act . The contract contained in the articles of association is one of the original incidents of the share. A share … is an interest measured by a sum of money and made up of various rights contained in the contract.’
This statement does not stress the rights of a shareholder to vote and thereby participate in decision-making, or the exercise of powers, by the company. This decision-making, or voting participation, aspect of share ownership is focused on in Chapter 9.
There is a legal presumption that each share in a company provides the owner with the same rights and liabilities as every other share. This is called the ‘presumption of equality’ (see Birch v Cropper (1899) 14 App Cas 525 HL).
The presumption can be displaced by the company issuing shares with different rights attaching to them. Shares with the same rights and liabilities are called a class of shares. A new class of shares is created by a company issuing shares with rights or liabilities that differ in some respect from all existing shares in the company. There is no legal limit to the number of classes of shares a company may have.
Residual ordinary shares
Most companies have only one class of shares, called here ‘residual ordinary shares’. The rights of a residual ordinary shareholder are found in company law (common law principles and statutory provisions) and in the constitution of the company (principally the articles). As has been noted above, shareholders are entitled to share the wealth generated by a company. Residual ordinary shares carry the same right to share in the profits of the company as every other residual ordinary share. Should the company be wound up, each residual ordinary share will carry the right to share in the residual wealth of the company as every other residual ordinary share. The third right attached to a residual ordinary share is the right to vote on shareholder resolutions. Without more, every residual ordinary shareholder has one vote in respect of each share on a resolution on a poll (s 284 and see Chapter 9 for the meaning of poll).
Other classes of shares
A company is only able to issue shares with restrictions or rights different from the shares already in issue if it is permitted to do so by its articles of association. The model articles for both private and public companies contain such an article (articles 22 and 43 respectively). Different classes of shares usually arise from the creation of shares differing from residual ordinary shares (and any other already existing classes) in one or more of the following key respects:
nominal value (Greenhalgh v Arderne Cinemas Ltd  1 All ER 512 (CA));
rights to participate in declared dividends;
rights to participate in residual wealth on a winding up;
That said, a new class of shares may be created when a share is issued with rights differing in any way from the residual ordinary shares and any other classes of shares the company already has. The precise range of rights that are in law ‘class rights’ becomes important when a company seeks to vary the rights of one class of shareholders. Unless provision is made otherwise in the articles, class rights may be varied only with the consent of holders of 75 per cent of the class. To understand when consent of the class is needed, it is necessary to know what is and what is not a class right. This issue is explored further under class rights and variation.
The specific rights of second and subsequent classes of shares are found in the articles or the shareholders’ resolution authorising their issue. Those rights may override or be supplemented by common law principles and statutory provisions. Following the issue of new shares, the rights and liabilities attaching to them must be stated in the amended statement of capital that must be sent, along with the return of allotment, to the registrar of companies (s 555).
The specific rights of new classes of shares should be stated clearly in the articles or authorising resolution. This avoids the need to depend upon presumptions or implied terms in determining those rights. Current practice is for the rights to be set out very clearly in the articles but this has not always been the case. The courts have regularly been called upon to determine the rights and liabilities attached to a class of shares that have been issued without the precise rights intended to attach having been captured in the articles or authorising resolution.
In the course of deciding these cases the courts have developed a number of rules or ‘canons’ of construction for the purposes of working out the rights of shares issues with inadequately stated rights and liabilities. The main canons of construction are:
All shares have the same rights and liabilities unless the company and the shareholder have agreed otherwise (Birch v Cropper (1899), above).
If new shares are issued those shares will carry the same rights and liabilities as the residual ordinary shares except to the extent provided otherwise.
If voting rights have been specified, those rights are presumed to be exhaustive: the shares carry no right to vote on a resolution on any matter beyond those matters (Re Bradford Investments Plc  BCLC 224).
If dividend rights have been specified, those rights are presumed to be exhaustive: the shares carry no rights to participate in dividends beyond the expressly stated rights (Will v United Lankat Plantations Co  AC 11 (HL)).
If capital participation rights have been specified, those rights are presumed to be exhaustive: the shares carry no rights to participate in capital beyond the expressly stated rights (Scottish Insurance Corporation Ltd v Wilsons & Clyde Coal Co Ltd  AC 462 (HL)).
If shares carry a right to receive a dividend of a specified amount before other shares (known as a ‘preferential dividend’), such as 10 per cent of the nominal price per year, the dividend rights are presumed to be cumulative: if 10 per cent is not paid in one year, 20 per cent will be payable in the second year and, if not paid, 30 per cent will be payable in the third year, etc.) (Webb v Earle (1875) LR 20 Eq 566).
A preferential dividend is presumed to be not payable unless it has been declared by the company. Whilst this presumption will be rebutted by language suggesting otherwise, such as provision in the articles or authorising resolution that, subject to distributable profits being available, dividends are automatically payable on 1 May of each year, it would be courting negligence on the part of a solicitor to allow the terms of issue not to deal clearly with this matter as the legal presumption does not reflect commercial reality (Re Roberts & Cooper Ltd  2 Ch 383 and Re Bradford Investments Plc (No 1)  BCLC 224).
If any dividend due is not paid, it accrues to the shareholder and is payable with the next dividend due at the next payment date. Usually associated with preference shares
The presumption that stated class rights are deemed to be exhaustive was set out in Re National Telephone Company  1 Ch 755.
‘[E]ither with regard to dividends or with regard to the rights in a winding up, the express gift or attachment of preferential rights to preference shares, on their creation, is prima facie, a definition of the whole of their rights in that respect and negatives any further or other right to which, but for the specified rights, they would have been entitled.’
Shares giving the holder preferential rights, usually in respect of dividends and/or return of capital on a winding up
The names given to certain types of shares with certain key characteristics are not always legally significant. They may be merely descriptive, whether of one or more characteristic of the shares, such as ‘preference shares’ or of those to whom the shares are typically issued, such as ‘employees’ shares’ or ‘founders’ shares’. The name ‘preference shares’ is simply a name indicating that the shares have some degree of preference versus other shareholders in relation to either, or both, dividends and capital participation.
‘Redeemable shares’, on the other hand, is not only a name but also a legal description (s 684(1)) of shares that are liable to be redeemed at the option of the company or the shareholder and must be so redeemed in accordance with the Companies Act 2006 (ss 684–689). Difficulties can arise when shares that are not redeemable shares for the purposes of the 2006 Act are nonetheless given the name ‘redeemable shares’.
Fully paid-up shares that either will be redeemed (bought back by the company), or may be redeemed at the option of the company or the shareholder, on such date or dates and subject to such terms as are stated in the articles or company resolution
Equity and non-equity shares
Where a company has a class of shares that ‘neither as respects dividends nor as respects capital, carries any right to participate beyond a specified amount in a distribution’, those shares are part of the share capital of the company but they are not equity shares and do not form part of the equity share capital of the company (s 548). The distinction between equity and non-equity shares reflects the fact that some shares are in many ways fulfilling the role of debt. One typical type of preference shareholder, in return for the first bite of the company’s wealth after the creditors in the form of preferential rights to a fixed rate dividend and receipt of the sum they paid to the company back in priority to other (equity) shareholders receiving any capital back, foregoes the right to participate to any greater extent in the wealth generated by the company and is a non-equity shareholder.
Equity share capital connotes:
an unlimited opportunity to share in the financial success of the company, which opportunity becomes a right in the event of a solvent winding up;
the first layer of capital at risk and to be lost in the event of insolvency.
equity share capital
The issued share capital of a company excluding any part which, neither as respects dividends nor as respects capital, carries any right to participate beyond a specified amount in a distribution
Class rights and variation
A company may seek to vary the rights attaching to a class of shares. Shares entitled to a 10 per cent preferential dividend, for example, may be considered a very expensive way to access capital. The company may wish to either reduce the rate of preferred dividend or reduce the share capital and get rid of the preference shares altogether.
The statutory procedure to be complied with before class rights may be varied is set out in the Companies Act 2006 (ss 630–640). The articles may provide less protection than is provided by the statute (s 630(2)(a)). Alternatively, more onerous restrictions on the variation of rights than those in the statute may be imposed and these may be in the articles or in the authorising resolution of the class of shares.
Essentially, under the statute, holders of 75 per cent by nominal value of the shares in the affected class must approve a variation in advance (s 630(4)). Even if 75 per cent of the holders approve the variation, the holders of 15 per cent may, within 21 days of approval, apply to the court to have the variation cancelled (s 633(1)). The court may disallow the variation if it is satisfied that, having regard to all the circumstances of the case, the variation would unfairly prejudice the shareholders of the class represented by the applicant (s 633(5)). The minority shareholders believing themselves to be unfairly prejudiced by a variation supported by a majority of the class may, as an alternative course of action, petition the court under s 994 (considered below). In view of the broad-ranging remedies available to a court under s 994, it is likely to be a preferable route for disaffected minority shareholders, which may explain why there appears to be only one reported case on what is now s 633 (Re Sound City (Films) Ltd  Ch 169).
The strength or weakness of the protection given to holders of classes of shares by the statutory provision and provisions in the articles depends upon the breadth or narrowness of interpretation of the terms ‘variation’ and ‘class right’.
No comprehensive definition of variation exists for the purposes of s 630. A variation of rights can be a variation to improve or enhance the rights of the class as well as a variation adversely affecting those rights. Also, the Act makes it clear that an abrogation of rights is a variation for the purposes of the Act (s 630(6)). Consequently, a reduction of capital by way of repayment of capital and cancellation of shares of a particular class may be a variation.
The courts have confined the concept of variation by drawing a distinction between class rights and the enjoyment of class rights. This has resulted in it being possible to adversely affect the financial position of holders of a class of shares in a number of ways without the company having to go through the variation procedure because the change is merely a change in the enjoyment of class rights.
The dilution of voting control by the issue of more shares of the same class (in the case in hand, preference shares) to ordinary shareholders has been held not to be a variation of rights necessarily.
White v Bristol Aeroplane Co  Ch 65 (CA)
The company proposed to issue further preference shares to ordinary shareholders, to be paid for out of company reserves. This would dilute the voting control of existing preference shareholders. The articles contained a provision governing when the consent of a class was required. The articles stated that all or any rights and privileges attached to any class of shares forming part of the capital from time to time of the company might be affected, modified, varied, dealt with or abrogated in any manner with the sanction of an extraordinary resolution passed at a separate meeting of the members of that class. The preference shareholders objected to the proposed issue, arguing that the issue of the new preference shares would ‘affect’ the rights attached to their shares. Held: The issue of further preference shares would not be a variation of, or affect the rights attached to the shares and therefore preference shareholder consent was not needed. The proposed issue would affect the enjoyment of existing rights not the rights themselves.
Reduction of the absolute amount of preferred dividend payable by the company brought about by reducing the nominal value of the preference shares has been held not to be a variation of rights because the express right to a preferential dividend of 4 per cent remained the same.
Re Mackenzie & Co Ltd  2 Ch 450
Preference shareholders were entitled to a dividend of 4 per cent of the amount paid-up on their £20 shares and no priority as to capital on a winding up. The ordinary shareholders in general meeting agreed a reduction in the company’s share capital, reducing the nominal value of all shares, both ordinary and preference shares, rateably, that is, by the same proportion. Each preference share was reduced in nominal value to £12. Even though the preferential dividend expressed in percentage terms was not changed but remained at 4 per cent, the change in nominal value reduced the dividend provided for on a fully paid-up preference share from 80 pence (4 per cent of £20) to 48 pence (4 per cent of £12). Held: The reduction in share capital was not a variation of the preference shareholders’ rights. The right to a 4 per cent dividend remained the same even if the enjoyment of the right was changed.
The following three cases decide that a company may reduce its share capital by returning nominal capital to preference shareholders with priority rights to return of capital on a winding up and no further capital participation without approval of the holders of the class and the preference shareholders cannot complain about the loss of the right to share in the future wealth of the company by continuing to receive their preferential dividends.
Scottish Insurance v Wilsons & Clyde Coal Co  AC 462 (HL)
The company sought court approval for a reduction in its share capital by paying nominal share capital back to its 7 per cent preference shareholders and extinguishing their shares. Preference shareholders argued that the reduction should not be approved as it was unfair to them. Held: As a matter of interpretation of the rights attached to the preference shares, they entitled the holder to priority return of capital but no further participation in capital on a winding up. The capital reduction was fair.
House of Fraser v AGCE Investments Ltd  AC 387 (HL)
Preference shareholders were entitled to prior repayment of nominal capital ‘on a winding up or otherwise’ but no further participation in the capital. Preference share capital was not needed by the company which reduced its share capital by a special resolution of ordinary shareholders in general meeting, returning the preference share capital to the class of preference shareholders and extinguishing the shares. The articles provided for class approval if the special rights attaching to a class were ‘modified, commuted, affected or dealt with’. No class meeting was held to approve the reduction. When the company sought court approval for the reduction in capital, as required by the Act, the preference shareholders argued the court could not approve the reduction of capital in the absence of consent of the holders of the class. Held: The reduction was not a modification, etc. of the preference shareholders’ rights but an extinction of the shares in strict accordance with the contract in the articles. Applying Re Saltdean Estate Co Ltd  1 WLR 1844, the right to prior return of nominal capital on a winding up meant that the preference shares could be cancelled on a reduction of share capital.
Re Hunting Plc  2 BCLC 211
On an application by the company for confirmation by the court of a resolution to reduce its issued share capital by the cancellation of convertible preference shares, preference shareholders argued that the scheme of reduction was unfair to them. Held: The reduction was approved. A company is entitled to reduce its capital by cancelling preference shares to replace the preference share capital with cheaper capital. The reduction was not unfair to the preference shareholders because they knew when they acquired their shares they were assuming the risk of being paid off in full.
In Re Saltdean Estate Co Ltd  1 WLR 1844, Buckley J confirmed that prior payment of preference shares on a reduction of capital is part of the bargain a preference shareholder enters into:
‘The liability to prior repayment on a reduction of capital, corresponding to their right to prior return of capital in a winding up … is part of the bargain between the shareholders and forms an integral part of the definition or delimitation of the bundle of rights which make up a preference share. Giving effect to it does not involve the variation or abrogation of any right attached to such a share.’
The rights of the preference shareholders may be enhanced by provisions in the articles which specify that particular action by the company does amount to a variation of rights for which approval of the class is required.
Re Northern Engineering Industries plc  2 BCLC 704 (CA)
The company proposed to reduce its capital by way of paying off its preference shares and cancelling them. The articles provided that the rights attached to any class of shares shall be deemed to be varied by ‘the reduction of the capital paid up on those shares’ (7(b)) and for the consent of 75 per cent of the holders of a class of shares to be obtained before the rights could be varied or abrogated (6). The judge refused to confirm the reduction of capital on the grounds that it was a variation of the rights of the preference shares to which the consent of the holders had not been obtained. The company appealed. Held: Dismissing the appeal, the reduction proposed by the company was caught by article 7(b) which was inserted to protect the rights of preference shareholders and the protection required the class holders to give their consent by an appropriate class vote not only where the reduction was piecemeal but also where it involved a complete repayment of their investment.
In view of the narrow protection afforded by the statutory provisions and the often narrow interpretation of provisions in articles, those intending to become holders of class rights will need to ensure that there are sufficiently protective provisions in the authorising resolution or in the articles, requiring their consent to changes that affect the enjoyment of the rights as well as to changes to the rights themselves, or for adequate compensation to be paid when the enjoyment of rights are taken away.
A specific example of the latter has become the norm as a result of the decisions that demonstrated that it is not, without more, unfair and is consistent with the statutory protection, for a company, without securing approval of the class, to repay and remove from the company at any time the holders of shares with limited capital participation rights simply by paying them the nominal value of their shares (Scottish Insurance v Wilsons & Clyde Coal Co  AC 462 (HL), House of Fraser v AGCE Investments Ltd  AC 387 (HL)). These decisions confirmed that limited capital participation shares are, in effect, shares redeemable at the will of the company. This led to the introduction of the ‘Spens formula’, language inserted into the rights of listed shares with limited capital participation rights but full dividend participation rights, providing for payment to shareholders of the market price rather than the nominal price of their shares should the shares be cancelled before the company is wound up.
To the extent that, at the point of cancellation, a company has retained profits (rather than having paid them out as dividends), those profits are reflected in the market price of the shares. The Spens formula protects the class shareholders against losing those valuable dividend rights. The Spens formula does not offer protection from loss of the expected future profits.
There is no comprehensive definition of ‘class rights’ for the purposes of s 630. The concept was explored in Cumbrian Newspapers Group Ltd v Cumberland and Westmoreland Newspaper and Printing Co Ltd  Ch 1 which recognised as class rights for the purposes of s 630, rights not attaching to any particular shares, but exercisable only for so long as the shareholder was owner of shares in the company. The decision in the case has attracted criticism and may no longer be good law as a result of s 629(1) which states:
‘For the purposes of the Companies Acts shares are of one class if the rights attached to them are in all respects uniform.’