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Corporate Law 2010

Lecture 8: Classes of Shares

The Power to Issue Shares  

A company has the power to issue shares in itself: s 124(1)(a). The power to issue shares includes the power to issue:  

Bonus shares (shares issued for no consideration) Preference shares (including redeemable preference shares): s 254A(1).

Who can exercise the power? 

Most company constitutions give the power to issue shares to the board of directors When exercising the power, directors are subject to certain duties which will be discussed later in the course. 

Terms of Issue 

A company may determine the terms on which its shares are issued and the rights and restrictions attaching to them: s 254B(1) There is a rebuttable presumption that all shares issued by a company have the same rights and liabilities: Birch v Cropper (1889) 14 App Cas 525. 

Classes of Shares 

Where the terms of issue of shares indicate that they carry rights or restrictions which differ from those attached to the company s existing shares, the new shares constitute a separate class of shares.

Examples of Differing Rights
Some shares may carry the right to exercise one vote on a poll while others may carry no voting rights, or the right to exercise more than one vote per share.  Some shares may have the right to receive a dividend of no more than X cents per share while other shares may have unrestricted dividend participation rights. 

Example of a Restriction The right to transfer some shares may be restricted while other shares may be freely transferable.

Main Classes of Shares
shares (known as common stock in North America) 
Ordinary  Preference

shares

Ordinary Shares 
Most

shares are ordinary shares 

If

a company only has one class of shares on issue, those shares will be ordinary shares

Usual Rights of Ordinary Shareholders 
   

To attend and speak at a general meeting To vote on all resolutions put to a general meeting To exercise one vote per fully paid up share on each resolution that is decided on a poll To receive a proportionate amount of all dividends paid by the company to ordinary shareholders To participate on a pro-rata basis in the prodistribution of any surplus assets of the company when it is wound up

Voting Rights of Members of ASXASX-Listed Companies
At present, all holders of ordinary shares must have, on a poll:  one vote per fully paid up share; and  a fraction of a vote, equivalent to the proportion of the issue price that has been paid on partly-paid shares: partlyASX LR 6.9

NonNon-Voting Ordinary Shares
In 2007, the ASX issued a discussion paper on whether non-voting shares should be nonadmitted to quotation on its market: see ASX Public Consultation Paper Non-Voting NonShares , 2007. http://www.asx.net.au/about/pdf/non_voting _shares_public_consultation.pdf  After considering widely varying submissions on the question, it decided not to change its rules.  

    

NonNon-voting shares can be quoted for trading on overseas markets such as those in: the United Kingdom, the USA, France, Italy, Switzerland and Canada.

SuperSuper-Voting Shares 

It is possible to have super-voting ordinary supershares quoted for trading on markets in the United Kingdom, the USA, France, Italy, Switzerland and Canada. It is not currently possible to have supersupervoting shares quoted for trading on the ASX. 

News Ltd   

In 1993 News Corp wrote to the ASX seeking approval to make a bonus issue of supersuper-voting shares on a 1-for-10 pro-rata 1-for- probasis, with each new share carrying 25 votes rather than one. After a protracted deliberation, the ASX decided not to accede to the request. Under the News Ltd proposal, the supersupervoting rights attached to the shares would lapse when the shares were sold.

Dividend Rights of Ordinary Shareholders   

Each share of a public company has the same dividend rights unless the company s constitution, or a special resolution of the company, provides otherwise: s 254W(1). Dividends paid by a listed public company (other than a no liability company) must be proportional to the amount of the issue price of the share that has been paid up: ASX LR 6.11. Dividends paid by a no liability company must be proportional to the number of shares each member holds irrespective of the amounts paid up on the shares: s 254W(4).

Preference Shares: Common Characteristics   

Their holders are entitled to receive a stipulated annual dividend in priority to other shareholders. They can only be voted at general meetings on prescribed resolutions or in prescribed circumstances. Their holders usually have the right, in a winding up of the company, to receive their paid up share capital back in priority to other shareholders.

Dividend Rights of Preference Shareholders   

The dividend right may be expressed as a number of cents per share or as a percentage of the paid up issue price of the shares held. The dividend right may be cumulative or nonnon-cumulative. No dividend can be paid unless the company has profits available for the purpose [see s 254T] and the company decides to pay the dividend.

Restricted Voting Rights 
  

Read the definition of voting share in s 9 of the Act. Under that definition, most preference shares are considered to be non-voting nonshares for the purposes of the Act. This is because most preference shares can only be voted in the circumstances referred to in that definition. The holder of a preference share of an ASXASX-listed company must be able to vote in all of the circumstances referred to in that definition and in no others: ASX LR 6.3.

Preference Shareholders of a Listed Company Can Vote Only: 
 

When any part of a preference dividend is unpaid; On a proposal: (a) to reduce the company s share capital; (b) to approve the terms of a share buy-back buyagreement; (c) that affects rights attached to the share; (d) to wind up the company; (e) for the sale of the whole of the company s property, business or undertaking; and During the winding up of the company.

Redeemable Preference Shares  

Redeemable preference shares are preference shares that are issued on the terms that they are liable to be redeemed: s 254A(3). They may be redeemable:  



At a fixed time or on the happening of a particular event; At the company s option; or At the shareholder s option.

Redemption of Redeemable Preference Shares 

A company may only redeem redeemable preference shares:  

on the terms on which they are on issue: s 254J(1); and if the shares are fully paid up: s 254K(a).

The funds used to make the redemption can only be profits of the company or the proceeds of a new issue of shares made for the purposes of the redemption: s 254K(b). 

Statement of Preference Shareholder Rights 

A company can only issue preference shares if the rights attached to them with respect to certain matters are set out in the company s constitution or have been otherwise approved by special resolution of the company: s 254A(2).

What rights must be dealt with?
Rights relating to:  Repayment of capital;  Participation in surplus assets and profits;  Cumulative and non-cumulative dividends; non Voting; and  Priority of payment of capital and dividends in relation to other shares or classes of preference shares.

Is it necessary to clearly define the relevant rights?
Case law indicates that a company may comply with s 254A(2) by merely indicating when and how the relevant rights will be determined : see TNT Australia Pty Ltd v Normandy Resources NL (1989) 1 ACSR 1 at 25-26 per 25O Loughlin J, SC (SA, Full Court).   

To expect a company to set out, in its articles, inflexible details of dates of redemption would be unduly restrictive . Commercial circumstances, such as volatile interest rates, demand that a company be given a measure of flexibility . As a matter of practice (and by way of example) one rarely sees in modern articles of association a stipulated rate of dividend despite the requirements in [s 254A(2)] . It has always been regarded as sufficient to allow the company to determine the rate of dividend from time to time .

Some Other Classes of Shares 

Deferred shares: Carry the right to be paid a dividend after a designated minimum dividend has been paid on the company's ordinary shares. Deferred shares may be issued to promoters or founders of a company. The aim is usually to encourage investment in the issuer.

Performance shares
Performance shares are shares that will convert to ordinary shares if their employee holders meet designated performance criteria.

How Can Class Rights Be Altered?
If the rights are stated in the company s constitution, a special resolution of the company in general meeting will be required: see s 136(2).  However, the passage of a special resolution will usually not in itself be sufficient.  The constitution will usually indicate that a further requirement must also be satisfied: cf s 136(3). 

The Variation of Class Rights Procedure 

A company s constitution usually contains a variation of rights clause. Most clauses state that class rights cannot be modified or abrogated unless the members of the class approve of the change by special resolution at a meeting of the class. 

Section 246B
Section 246B purports to regulate the variation or cancellation of: (a) Rights attached to shares in a class of shares in a company with share capital [ie all types of companies other companies limited by guarantee]; and (b) Rights of members in a company without a share capital [ie a company limited by [ie guarantee]. 

The Need to Comply With the Procedure Stated in Constitution
The effect of s 246B(1) is that:  Class rights may only be varied or cancelled in accordance with the procedure stated in the company s constitution; and  To alter the existing variation procedure, the current procedure must itself be observed.

Where Constitution Does Not Have a Variation of Rights Procedure The effect of s 246B(2) is that class rights may only be varied or cancelled with the approval of:  A special resolution of the company; and  A special resolution passed at a meeting of members of the class. Instead of passing a special resolution, the holders of at least 75% of the votes in the class may consent to the change in writing.

Right to Seek to Have a Variation or Cancellation of Rights Cancelled   

Section 246D(1) allows members with at least 10% of the votes in a class to apply to a court to have a variation or cancellation of rights set aside Such an application must be made within a month of the variation or cancellation occurring. A court can set aside the variation or cancellation if it satisfied that would unfairly prejudice the applicants: s 246D(5).

Examples of Variations of Class Rights   

A change to a preference share dividend rate. A change to the voting rights attached to a class of share. A change in the redemption date of redeemable preference shares.

Example of an act which does not alter or abrogate class rights  

An issue of shares in one class with full voting rights will dilute the relative voting power of shareholders in another class at a general meeting. However, because there has been no change to the voting rights of the other class of shareholders, their rights cannot be said to have been varied: See White v Bristol Aeroplane Co Ltd [1953] Ch 65; [1953]1 All ER 40, CA.

Obligation to Notify ASIC
All companies must notify ASIC of details of:  Share issues: s 254X;  A division of shares into separate classes: s 246F(1)(a);  A conversion of shares in one class into shares in another class: s 246F(1)(b);  A resolution splitting or consolidating shares: s 254H(4). A public company must also give ASIC a copy of each document or resolution that attaches rights to shares, or varies or cancels class rights: s 246F(3).