Shares – varying class rights

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Many of us practicing in company law are asked to vary share rights. Frequently, this is permitted subject to checking the articles of association for authority or prohibition, any existing shareholders’ agreement and obtaining the requisite shareholder approval. However, existing legislation and case law prevents one particular share right from being varied – that of changing an ordinary or non-redeemable share into a redeemable share.

Historically, a company has been able to issue redeemable shares (s. 46 Companies Act 1929) and alter its share capital, for example through consolidation and sub-division, converting shares to stock and cancelling shares (s. 50 CA 1929). There was also the inferred right of a company to vary share rights, given the explicit right of shareholders to apply to the court where rights had been varied without the proper procedure being followed.

These powers were considered in the case of Re St. James’ Court Estate Limited [1944] Ch.6. The company petitioned the court to sanction a scheme of arrangement, under which its issued preference shares were to be converted into redeemable preference shares. The judge found that: The conversion of issued preference shares into redeemable preference shares seems to me to be clearly not within s. 46, sub-s. 1 . A conversion of that kind can take place only if the steps appropriate to a reduction and simultaneous increase of capital have been taken’

The Companies Act 2006 s. 684 reinforces this, whereby a company ‘may issue shares that are to be redeemed or are liable to be redeemed at the option of the company or the shareholder’. The historic wider powers to alter the share capital contained in s. 50 CA 1929 are also mirrored in the CA2006 at s. 617 and there is the inferred power to vary share rights given the procedural filing requirements stipulated at s. 636 and s. 637 of CA 2006.

On review, in these respects, the statutory position as considered in 1944 is applicable today. Therefore, it’s reasonable to conclude that a company still cannot vary ordinary shares into redeemable shares, but rather that they must be issued as such at the outset.  

If you have any concerns or have clients requiring assistance with variation to a company’s share capital, please contact Katy Poole in our company commercial team.

01733 888836