Obtaining class consent – that is, a separate consent from a particular class of shareholders – can be easily overlooked. We outline some tips to ensure you never forget to consider whether class consent is needed to make a decision binding on your company.
More than one class of shares?
Firstly, consider whether the company has more than one class of shares. There will be a separate class of shares if the rights attached to it differ from the rights attached to other shares of the company. Remember that a class of shares will not be created by simply giving a different name to a sub-group of shares with the same rights as the other shares. It’s the rights of the shares, not their name, which matters.
Rights attached to shares?
There is no guidance as to what a ‘right attached to a share’ is, but classic examples include voting rights, dividend rights and rights to capital on a winding up. But the concept of rights can sometimes be construed much more widely.
In one case, company A issued ordinary shares to company B. The articles of company A were amended so that company B had a right of pre-emption over unissued shares and the right to appoint a director. The court concluded that these additional rights were ‘rights attached to a class of shares’ even though the rights were given to company B by name rather than to a different named class of shares. The only shares in issue were ordinary shares.
The general rule is that specific rights will be a class right if they attach:
- to one group of shares distinct from another group; or
- to a particular shareholder (in their capacity as a shareholder – as was the case with company B above).
When is class consent required?
A requirement for separate class consent will arise:
- through an express requirement in the company’s articles of association or another contract; or
- via statute which requires class consent to be obtained for a matter which varies the rights attached to a class of shares (unless the articles of association provide otherwise).
A company’s articles should always be checked along with any other agreement to see whether the consent of the holder(s) of a particular class of shares is required for a particular matter. It may be that the articles or another agreement gives the class members a veto over the specified matter and therefore their consent to proceed will be required.
Variation of class rights
There is little guidance as to what constitutes a ‘variation’ of class rights but a narrow interpretation has been given. The courts have drawn a distinction between a variation which affects the rights of the holders of a particular class of share and a variation which simply affects the enjoyment of those rights. If the proposal does not alter the rights but just affects their enjoyment then there will be no variation.
For example, the issue of preferred ordinary shares which rank ahead of ordinary shares but behind preference shares would not be a variation of the rights of either class. The change affects the value of the rights of the ordinary and preference shares, and therefore their enjoyment, but it does not vary the actual rights themselves.
Rights attached to a class of shares may generally only be varied in accordance with the company’s articles of association. If there is no specific provision in the articles , a variation will require either:
- consent in writing from at least three-quarters of the members of the class; or
- a special resolution passed at a separate general meeting of the members of that class.
If a company has separate classes of shares, with different rights, then any transaction requiring the approval of the shareholders may also require separate class consents. For example, if the company wants to alter the rights attaching to the shares in its articles of association, it will need to obtain class consent (unless the articles states otherwise) in addition to obtaining a special resolution from the shareholders generally to alter the articles.
What’s the downside?
The law is clear that a variation of class rights can only take place with the appropriate consent of the relevant class. So if that consent is not obtained, the purported variation (for example, the transaction or matter which gave rise to the variation) is invalid.
If your company has separate classes of shares, remember to consider class consents for any transaction to avoid any unwelcome consequences due to lack of consent.