Shares

In Borlands Trustee v. Steel Brothers & Co Ltd. [1901] 1 Ch. 279 Farwell J offered the following definition of a share: The share is the interest of the shareholder in the company measured by a sum of money, for the purpose 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 of the shareholders inter se in accordance with (the Companies Act). Thus, shares represent the extent to which a shareholder must contribute to the companys share capital as well as the extent to which the shareholder enjoys rights exercisable against the company and the other shareholders to participate in company meetings, receive dividends etc. Classes of Shares Many companies choose to issue more than one class of shares. What distinguishes the shares in each class from others is the extent to which the shares carry rights to vote and to receive dividends, as well as to what extent the shares carry a priority right to a repayment of share capital on the winding up of the company. The language that is used is predominantly conventional rather than legal and therefore preference shares in one company do not necessarily carry the same rights as preference shares in another. However the following comments may be made in respect of the terminology used: Ordinary shares are usually the standard shares in a company and other terms used are thus usually comparative; Preference shares usually have the following features: 1. Fixed dividend: a right to a fixed dividend based on the paid up value of the issued preference shares; 2. Cumulative: A preferential right to a fixed dividend is usually cumulative i.e. unpaid dividends (where there is not enough profit) are carried forward; 3. Exhaustive: there is no right to participate in any surplus on a winding up unless the shares are described as participating. Ordinary shares are frequently also called equity shares. Pre-emption rights are rights to be offered a proportion of a proposed new issue of shares consistent with the proportion of issued shares of that class already held by the shareholder. The shareholder cannot be compelled to purchase additional shares so pre-emption rights may be described as a right of first refusal. Preemption rights are imposed by the Companies Act on equity shares unless excluded by the Articles of Association or disapplied by special resolution see s.560-572 CA 06.

Any allotments of shares made by directors without authority are voidable at the instance of the allottee and the director(s) commit an offence. Authority may be given in the companys Articles or by resolution (ordinary is sufficient) but can be for no more than five years unless the company is a private company with only one class of shares - see ss.549-551 CA 06. Variation of Class Rights It is generally not enough to merely pass a special resolution to alter the Articles of Association where such an alteration would amount to a variation of class rights. The statutory requirements are now found in ss.629-635 CA 06 and generally require separate meetings of each class of shareholders to approve by an appropriate majority (usually 75%) the proposal before the change itself may be implements. What amounts to a variation of class rights may in itself be difficult to define the courts have been notoriously pedantic in their recognition of what amounts to a variation see eg Greenhalgh v. Arderne Cinemas Ltd [1946] 1 All ER 512, White v. Bristol Aeroplane Co Ltd [1953] 1 All ER 40 and House of Fraser plc v ACGE Investments Ltd [1987] AC 387. S.663 CA 06 provides a minority protection safety valve allowing dissenting members who hold at least 15% of the shares of any class to object to the court. An example of a successful objection may be seen in Re Holders Investment Trust Ltd [1971] 2 All ER 289. Transfer of Shares Shares may be transferred in accordance with the companys Articles of Association. Note that transfers of shares in a private company are strictly regulated so as to prevent a private companys shares from being traded by members of the public at large. The transferee does not acquire shareholder rights against the company unless and until the relevant details are entered onto the Register of Members by the board of directors. The board of directors to refuse to register a transfer of shares where that is inconsistent with the Articles; in many companies the Articles appear to give the board of directors a wide discretion to refuse to register a transfer of shares. This has been a fertile area for case law. However, two developments implemented by the Companies Act 2006 enhance the accountability of directors: 1. Directors now must inform a transferee of a refusal to register a transfer and must also provide reasons for their refusal to register the transfer s.771 CA 06; 2. A person to whom shares have been transferred or transmitted by operation of law may, notwithstanding that they have not been entered on the Register of Members, bring the new statutory derivative claim under s.265 CA 06 against the director(s) in question.