company law articles alteration and shares

Sensitivity: Internal – Articles Alteration

  • Special Resolution Requirement

    • According to Section 21 of the Companies Act (C.A.) 2006, the alteration of articles requires a special resolution.

    • Alterations can stipulate that all members must agree for a change to take place.

  • Communication to Companies House

    • Sections 26, 29, and 30 C.A. 2006 mandate that any alteration to the articles must be communicated to Companies House.

Sensitivity: Internal – Restrictions on Alteration

  • Entrenchment

    • Discussed in Section 22 C.A. 2006, entrenchment refers to provisions within the articles that safeguard certain rights from being altered.

  • Weighted Voting

    • Alterations concerning voting may be subject to weighted voting methods depending on the provisions in place.

  • Limits on Shareholder Liability

    • Section 25 C.A. 2006 states alterations cannot increase shareholder liability, thus preserving existing terms.

  • Unfairly Prejudicial Conduct/Treatment

    • Relevant under Section 994 C.A. 2006. Any alteration must not lead to conduct or treatment that is considered unfairly prejudicial to the interests of the members.

  • Bona Fide and Best Interests of the Company

    • Any alteration must be carried out bona fide (in good faith) and be in the best interests of the company.

Sensitivity: Internal – Benefit of Company

  • Relevant Cases

    • Sidebottom v. Kershaw, Leese (1920) 1 Ch 154

    • This case emphasizes the importance of alterations made for the benefit of the company.

    • Shuttleworth v. Cox (1927) 2 KB 9

    • Further explores the boundary of benefit to the company within alteration cases.

    • Greenhalgh v. Arderne Cinemas (1951) 1 ALL ER 512

    • Discussed as a significant case in determining the benefit of the company.

    • Southern Foundries v. Shirlaw (1940) AC 701

    • Examines the tests for the benefit of the company regarding alterations.

Sensitivity: Internal – Invalid Expulsions

  • Invalid Expulsions

    • Brown v. British Abrasive Wheel Co Ltd [1919] 1 Ch 290

    • This case highlighted that certain expulsions may not hold validity under the benefit of the company principle.

    • Dafen Tinplate Co Ltd v. Llanelly Steel Co (1907) Ltd [1920] 2 Ch 124

    • Another case reaffirming invalid expulsion under similar tests.

    • Shuttleworth Critique

    • Criticized Dafen, illustrating the complexities in applying the benefit of the company test.

    • Constable v. Executive Connections Ltd [2005] EWCH 3 (Ch), [2005] BCLC 638

    • Indicates that the legal area regarding expulsions remains ambiguous and complex with older case lineages frustrating clarity.

Sensitivity: Internal – Company as a Separate Entity

  • Case Reference

    • Peters’ American Delicacy Co Ltd v. Heath {1939} 61 CLR 457 at p.481.

    • Judgment by Latham CJ explores scenarios where the company, treated as a separate legal entity, may lack interest in shareholder disputes.

    • Highlights limitations of the benefit of the company as it pertains to differing classes of shareholders.

Sensitivity: Internal – Objects and Restrictions

  • Restrictions by Articles

    • Articles of the company can impose restrictions on objects, which define the company’s scope of business activities.

    • Without Restrictions

    • If no such restriction exists, the objects remain unrestricted as stipulated in Section 31 C.A. 2006.

    • Objects Clause

    • Previously included within the Memorandum of Association, essential for understanding the company’s purpose and limitations.

Sensitivity: Internal – Veil of Incorporation

  • Court Respect for the Veil

    • Investigate the extent to which the court respects the veil of incorporation, especially regarding individual abuse potential of the application.

Sensitivity: Internal – Share Capital

  • Classification of Shares

Types and Classes of Shares

  • 1. Ordinary Shares

    • Typically possess voting rights and dividend rights.

    • Do not generally hold priority for reimbursement in cases of winding up.

    • Various classes exist (e.g., Class A, B, C, D, etc.).

  • 2. Preference Shares

    • Generally devoid of voting rights but offer fixed dividends.

    • Hold priority for repayment during winding-up circumstances.

    • Classes also exist (e.g., Class 1, 2, 3, 4, etc.).

  • 3. Deferred/Management Shares

    • Rights associated with these shares are deferred.

Sensitivity: Internal – Consideration on Allotment

  • Consideration Forms

    • Explorations of whether the consideration is in cash only.

  • For Public Company

    • Section 585 CA 2006 does not allow for services/work as consideration for shares; Section 591 CA 2006 provides a right to enforce the same.

    • Sections 593-596 CA 2006 consider non-cash consideration in the form of undertakings or property.

    • A report six months prior to allotment must be filed.

  • For Private Company

    • Contract law principles apply, including:

    • 1. Past consideration recognizing previous conditions.

    • 2. Adequacy/sufficiency of transaction.

    • 3. Consideration must not be deemed illusory.

Sensitivity: Internal – Alteration of Share Capital

  • Permitted Actions

    • As per Section 617 CA 2006, both increases and reductions to capital are allowed.

    • Section 618 CA 2006 allows for consolidation and subdivision of shares.

  • Reduction of Capital

    • Section 641 CA 2006 differentiates requirements for private versus public companies regarding alterations.

    • For private companies: Articles of Association must permit a special resolution.

    • For public companies: Articles of Association must permit a special resolution along with court approval (to protect creditor rights).

  • Possible Elements with Reduction

    • The return of capital may be at a premium as discussed in Re: Saltdean Est. Co. Ltd. (1968) 1 WLR 1844.

    • Reductions can entail share transfers in other companies to members.

    • In cases of capital loss, all members should ideally suffer equally, though preference shareholders may be impacted differently.

Sensitivity: Internal – Creditor Rights

  • Creditor Rights to Object

    • Creditors can object if there is a cancellation of shareholder liability or payment directed towards shareholders.

    • Court discretion is stipulated under Section 646 CA 2006 ensuring that creditor rights are safeguarded.

Sensitivity: Internal – Varying Class Rights

  • Procedures for Variations

    • To comply with articles or under Section 630 CA 2006, 75% support of the class is necessary for approval.

    • A minimum of 15% minority of the class can object to the variation within 21 days after the resolution is passed (under Section 633 CA 2006).

  • Implications on Class Rights

    • Examined through cases such as Greenhalgh v. Arderne Cinemas Ltd. [1946] 1 ALL ER 512, noting subdivision of shares as a point of contention.

    • White v. Bristol Aeroplane Co. [1953] Ch 65 illustrates concern over distributing shares exclusively to ordinary shareholders.

Sensitivity: Internal – Provision of Financial Assistance for Share Acquisition

  • General Rule

    • Set forth in Section 678 CA 2006 addressing the nature of financial assistance.

    • Special conditions apply to private companies as per Section 682 CA 2006.

    • Financial assistance is broadly defined in Section 677 CA 2006, encompassing gifts, guarantees, and loans.

    • Notable case: Re Hill & Tyler Ltd [2004] EWHC 1261 (Ch) [2005] where a company borrowed money specifically for share purchases.

Sensitivity: Internal – Implications of Crime

  • Director Liability Under C.A. 2006

    • Section 680 indicates that directors guilty of a crime are triable either way, incurring financial penalties that lack limit.

    • Re: Continental Insurance Co of London plc [1997] BCLC 48 illustrates a case involving illegal financial assistance, leading to disqualification of a chairman and managing director for 9 years due to a £2 million transaction.

Sensitivity: Internal – Varied Circumstances Identified

  • Legal Precedents

    • Anglo Petroleum Ltd v. TFB (Mortgages) Ltd [2007] EWCA Civ 456 [2008] showcases a company debt unrelated to financial assistance being repaid, which was not deemed illegal as the recipient utilized the funds for share acquisition in the company.

    • It is also acknowledged that the repayment of borrowed money should not be classified as illegal financial assistance.

Sensitivity: Internal – Principal Purpose Legislation

  • Primary Focus of Section 678 CA 2006

    • Specifies that the principal purpose of financial action must not primarily revolve around share acquisition; assistance must be incidental to a broader purpose.

    • Notable case: Brady v. Brady [1989] AC 755 in supporting this emphasis.

Sensitivity: Internal – Further Exceptions

  • Exceptions Listed in Section 681 CA 2006

    • Outlines transactions applicable for dividends, bonus shares, capital redemptions, and creditor arrangements.

    • Additional considerations include lending companies, bonus share issues, and creditor arrangements.