31 May
31May

Introduction / Types of Shares in a Company with Share Capital What is a class right? / Rights Attaching to Shares or Held by Members / Variation of Class Rights / Procedures for Variation of Class Rights / Creation of class rights / What kind of class rights can be created? / Restrictions and Reversal of Variation of Class Rights / Companies House Filings / Conclusion 

Introduction

In company law, class rights refer to the different rights attached to different classes of shares or members in a company.  

These rights can only be varied as permitted by the Companies Act 2006 (CA 2006).  This article provides a guide to class rights and the variation of class rights in private limited companies.  

Types of Shares in a Company with Share Capital:  

A company with a share capital may allot different types of shares, each with different rights.  These shares will always have a fixed nominal value and are usually given a designation or name.  

The most common designations used for shares are ordinary shares, preference shares, deferred shares, and redeemable shares.  

It is important to note that the designation alone does not determine the class of share; it is the rights attached to the shares that define the class.  

What is a class right? 

A class right refers to the specific rights that are attached to a particular class of shares or held by a particular class of members in a company.  In other words, it is the set of privileges, entitlements, and benefits that are unique to a specific group of shares or members within the company. 

These rights may include, but are not limited to, voting rights, dividend rights, capital rights, redemption rights, and the right to appoint directors to the company's board.  

It is important to note that the designation or name given to a share or member does not automatically determine the class right.  

The key consideration is whether the rights attached to a particular share or group of shares, or held by a particular member or group of members, are different from those attaching to other shares or held by other members.  Only when there are distinct differences in the rights can they be classified as class rights.  

The existence of class rights is significant because it allows for differentiation and customisation of rights within a company.  It enables companies to offer different classes of shares or members with varying privileges and benefits, catering to the specific needs and preferences of different shareholders or members. 

Rights Attaching to Shares or Held by Members:  

The rights attaching to a type of share or held by a type of member are usually set out in the company's articles.  Other documents, such as shareholders' resolutions or agreements between members, may also specify these rights.  It is important to insert these rights into certain Companies House forms as well.  

Variation of Class Rights:  

A variation of class rights refers to any change in the rights attached to a class of shares or held by a class of members.  The Companies Act 2006 provides little guidance on what constitutes a variation of class rights.  

However, case law has established that a variation of class rights involves a change in legal rights rather than a mere affect on the enjoyment of rights.  

Certain actions, such as a capitalisation issue or cancellation of shares, may not constitute a variation of class rights.  

Procedures for Variation of Class Rights:  

The variation of class rights must be done in accordance with the company's articles or the statutory procedure outlined in the Companies Act 2006.  

If the articles contain provisions for the variation of class rights, those provisions must be followed.  If there are no such provisions, the consent of the shareholders or members of the relevant class is required.  

The statutory procedure requires written consent from at least three-quarters of the shareholders or members of the relevant class, or a special resolution passed at a separate general meeting.  

Creation of class rights: 

Class rights are created in a company through the process of issuing different classes of shares or designating different classes of members.  

The creation of class rights is typically governed by the company's articles of association, which outline the rules and regulations for the company's internal operations.  

For a company with a share capital, the creation of class rights involves issuing shares with differing rights.  

The articles of association must contain provisions that authorise the company to issue shares with different rights.  These provisions may specify the types of rights that can be attached to each class of shares, such as voting rights, dividend rights, or redemption rights.  

By issuing shares with distinct rights, the company establishes different classes of shares, each representing a separate class of rights.  

In the case of a company without a share capital, the creation of class rights involves designating different classes of members.  The articles of association may provide for different designations or qualifications for members, indicating the specific rights that each class of members holds.  

These rights may include voting rights, appointment rights, or other privileges. The designation of members and the rights attached to each class determine the existence of class rights.  

It is important to note that the creation of class rights must comply with the provisions of the Companies Act 2006 and any other relevant laws or regulations.  

The company's articles of association should clearly outline the procedures and requirements for creating and maintaining class rights.  

What kind of class rights can be created? 

The types of class rights that can be created in a company depend on the specific provisions outlined in the company's articles of association.  

While the exact rights may vary from company to company, here are some common types of class rights that can be created:  

  1. Voting Rights: Different classes of shares or members may have varying voting rights. For example, one class of shares may have multiple votes per share, while another class may have only one vote per share. This allows for differential voting power among shareholders or members.
  2. Dividend Rights: Class rights can include different entitlements to dividends. Certain classes of shares or members may have priority in receiving dividends or may be entitled to a fixed dividend rate, while others may have no dividend rights or receive dividends at a lower rate.
  3. Capital Rights: Class rights can also include rights related to the company's capital. This may involve preferences in the distribution of assets upon liquidation or the right to receive a specific amount of capital upon redemption of shares.
  4. Redemption Rights: Some classes of shares may have the right to be redeemed or repurchased by the company at a predetermined price or on specific conditions. This allows for the flexibility to offer different options for shareholders to exit their investment.
  5. Appointment Rights: Class rights can include the right to appoint directors to the company's board. Certain classes of shares or members may have the privilege of nominating individuals to represent their interests on the board.
  6. Transferability Rights: Class rights may also govern the transferability of shares or membership. Different classes may have restrictions or requirements for transferring ownership or membership, ensuring control or stability within the company.

It is important to note that the specific class rights that can be created are subject to the provisions of the Companies Act 2006 and any other applicable laws or regulations.  

The company's articles of association should clearly outline the rights attached to each class and any limitations or conditions associated with those rights.  

Restrictions and Reversal of Variation of Class Rights:  

The variation of class rights may be subject to additional restrictions imposed by the company's articles.  Provisions for entrenchment in the articles may protect class rights from being circumvented. 

 Shareholders or members who believe that a variation of class rights is unfair or not in their best interests may bring a petition alleging unfair prejudice or apply to the court to have the variation cancelled.  

The court may disallow a variation if it is satisfied that it would unfairly prejudice the holders or members of the relevant class.  

Companies House Filings:  

Various filings must be made at Companies House in relation to a variation of class rights.  These include sending copies of special resolutions or written consents to Companies House, as well as filing specific forms such as SH10 or SH12. Failure to comply with these filing requirements may result in criminal offenses. 

Conclusion

Understanding class rights and the variation of class rights is crucial in company law.  The rights attached to different classes of shares or held by different classes of members can only be varied in accordance with the Companies Act 2006 and the company's articles.  

It is important for companies to carefully follow the prescribed procedures and make the necessary filings at Companies House to ensure compliance with the law.  

Legal Notice: Publisher: Atkins-Shield Ltd: Company No. 11638521
Registered Office: 71-75, Shelton Street, Covent Garden, London, WC2H 9JQ
 

Note: This publication does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. The information contained in this document is intended to be for informational purposes and general interest only. 

E&OE 

Atkins-Shield Ltd © 2024

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