Shares

Move from external stuff to internal stuff. 

Borlands Trustee v Steel 1901- Share is 3 things- 1) defines a persons interest in the company. Property interest. 2) measured by sum of money. Has a value. Delinates interest and liability to pay. 3) Carries number of mutual covenants between member and company. Covenants are articles (s33). 

Not a debt. Not a creditor. A member. Piece of property. Gives rights, can sell, mortgage it etc. Intangible- cant touch it. Is a concept. Bundle of rights.

What are shareholder rights? Depends entirely on articles. There are no prescriptive rules. Certain common rights as a framework. 1) right to return of your investment and if solvent on liquidation, to get money back. 2) right to share surplus assets on liquidation. Creditors need to be paid first. Right to have any dividend that is declared. 3) Right to vote on resolutions. 

Presumption in law- all shares are equal (unless articles state otherwise). Not uncommon to have more than one class of share- need to distinguish the rights.

Preference shares and ordinary shares. Fulfill different functions. 

• Ordinary shares- nominal. 
• Preference- way of raising short term finance. Probably just short term outside investors. Say dividends get fixed at 6%. 6% preference shares. Preference so they will get that first from the profits. If only enough to pay them, then theyre the only ones who get paid. They are cummulative. If there is no money in year 1, then the 6% is added to year 2. Presumed to be non participating- if company makes huge profit then they still only get 6%. Safe but not exciting. Dont get to benefit from good year, but do better in a bad year. Not really given general voting rights. Normally can only vote if their dividends are in arrears.

Re Bradford Investments 1990- dividend was not paid as no profit. Argued didnt give right to vote. Court said that not being paid enough triggers the voting rights. 

What if dont pay and in liquidation? Dividends disappear on liquidation. Articles may say, if after creditors have been paid and enough money then they get their arrears. 

Paid creditors, then arrears of preference dividends- then articles probably give priority to preference shareholders capital, the ordinary shareholders capital. 

What happens to surplus assets?

Scottish Insurance v Wilsons 1949- rich companies wound up to be nationalised. Had bought preference shares in company. Who was to get share of surplus assets? HoL said articles gave them priority to everything else and exhaust their rights. Don't get share of surplus assets or they wouldve included it. 

Re Isle of Thanet Supply Co 1950- electricity nationalisation. Articles had normal preference rules. However they also had full voting rights and controlled the company. Had built up a large capital reserve/surplus. Judge said tough and followed the line. All P gets is normal preference but not surplus assets from what they had built. 

Not very common. Not many liquidised companies with assets remaining. 

What happen if brings petition to get rid of preference shareholders to reduce capital? 

Prudential Assurance v Chatterly 1949- reduction of capital. HoL said not unlawful to pay off preference shares whenever you want. Have no right to be long term. All have to give them is what they would've got on winding up. Just the basic, no premium. 

Re Saltdean Estates 1968- company was going to pay off P shareholders at a slight premium.

Company was very prosperous so P said this was unfair. Judge said no, being paid off first is part of the bargain. Must expect to be first to go. Always been a characteristic of the shares. Still good law. 

Re William Jones and Sons 1969- not winding up but not very prosperous. The articles allowed for share in surplus assets on winding up. Proposed to pay off P's at part and P's said not fair as not what they would get on winding up. Judge said no, only true if liquidation was imminent. Winding up was too far away and they got what was expected. 

House of Fraser 1987- applied Saltdean without question. P's can be kicked out at anytime.

Why do people still buy them? Can protect yourself against Saltdean if the articles are written correctly.

Re Northern Engineering Industries 1994- make any petition to reduce capital by paying off shares a 'class right'. Can only be varied by class itself= 75% would have to say yes to selling off. Ringfence it. Could do by shareholders agreement. 

Re Hunting 2005-  straight Saltdean as hadnt made it a class right. 

How do you become a shareholder?

If subscriber to memorandum, automatically become a shareholder. Everyone else has them issued by the company or acquisition from an existing shareholder. Evidence of share ownership in the register of members s113. Kept at the registered office and that is evidence of legal ownership. Need to be the registered member. Equitable owner might be somone else. Legal title has to be registered. Can challenge ownership by rectification of the register s116.

Used to not need to know beneficial owner. Was dangerous as led to money laundering. Small Business and Enterprise Act- all companies are now required to keep register of persons with significant control. s21(a) CA introduced last year. Exceptions= banking companies. 

What is significant control? 

• 25% of the votes- directly or indirectly holding them.
• If they can appoint or remove directors, or majority of them
• If you control someone with the above powers (very wide)

Government guidance- absolute power over business plan, borrowings, absolute veto or 

any power to vary share structure. 

Company obliged to find out this information, but also people are obliged to inform the company. If company suspects there are people behind a registered owner, can serve notice to find out who really owns. If they dont respond you can freeze the shares. Can go to any company and see PSC register. This applies to all companies. 

Registered owner- share certificate- company obliged to issue this. Shares held in certificated form. Share certificate is not the share, the share is a bundle of rights. 

How do we transfer shares? 3 stage process-

• 1) A needs to draw and 'proper instrument of transfer' s770. Anything that indicates desire to transfer. No prescribed form. Re Paradise Motor Co 1968- dont need specified form but has to be in writing. Nisbet v Shepherd 1994- didnt put value on the instrument but still valid. Has to be something that the stamp duty office can use. In return for any purchase price, if there is one, transfer to B. That is enough to give B equitable interest. 
• 2) B signs 'proper instrument of transfer' and sends with share certificate to company. 
  

• Dempsey v Celtic Football 1993- transferee didnt sign. This didnt invalidate the transfer. If fully paid already, the signature doesnt matter.
• 3) Stage 3- company registers B as a member and issues a new share certificate in B's name. 

B now has legal title. Always the procedure even if its a gift.

When a company gets certificate under s771 needs to issue new one in 2 months. Unless they have power in the articles to refuse registration. Private companies like to keep shareholders they want. Unless they have that power it is criminal to not issue in 2 months. 

Things go wrong- 

When C issues share certificate, states B is shareholder of a number of shares and they are fully paid. Say to the world B owns. Statement intended to be relied upon so company cannot deny (estopped.)

Share certifcate estoppel- Re Bahia and San Fran Railway 1868- gives the principle. Liable to anyone who acts on it to their detriment. Classic estoppel. 

If a person presents a forged transfer for registration, which causes the company to issue a new share certificate, that person must indemnify the company for any loss it incurs as a result. Sheffield Corp v Barclay 1905- anyone who presents forged share certificate has to indemnify the company. 

Londman v Bath Electric 1905- no fraud. A sold shares to B. B sent share certificate to company. Company issued B share certificate. Process was fine. They sent old one back to A. A goes to bank and uses certificate as security for a loan. He doesnt repay it so bank sues company for share certificate estoppel. The bank lost. Share certificate says owner at date of issue, not that they still are. Not necessarily up to date. Check the register. The bank was negligent. 

Forged share certificates are a nullity. Ruben v Great Fingall 1906- company not liable for these. 

How do companies restrict transferability? 2 ways. 1) traditional way- give directors power to refuse to register. Very common. Didnt need to give reasons. 2) 2006 Act changed balance of power- s771- power must be exercised in 2 months or is lost, and have to give reasons for refusal. 

Re Copal Varnish Co 1917- two shareholders with equal number of shares. No majority. Both directors but one was chairman and had casting vote. He wanted to transfer some shares, other member didnt want to but knew he would lose if there was a meeting. He didnt turn up to the meetings so chairman couldnt do vote. Passive veto. Court said they'd order a meeting of one to pass the resolution. Had to get on with it. 

Re Bedes Steam Shipping 1917- small company and one member fell out with the others. Transferred shares to someone outside the company. Directors refused transfer and gave reasons. Said outsider would make too expensive and secretarys job too onerous. In court said they didnt mind transferee. Bound by reasons given and they were inadequate.  

Village Cay Marina v Acland 1998- the reasons are the clear evidence and you have to stick with what you said. 

Popely v Planarrive 1997- where directors acting bona fide in the interest of the company? In small company likely to have conflict of interest. That doesnt invalidate as long as they can show acted bona fide. 

Pre-emption clauses are todays law.

Restricting transfers- pre-emption clauses- if want to sell shares, others in company can buy first. Required to give transfer notice and some indication of price. Price to be agreed by accountants. To compnay secretary who will give to members who can accept or not. Court happy to imply procedure- Tett v Pheonix Property 1986. Members have a time limit. No effect on transfer to existing members. 

When do you trigger a pre-emption clause? Lyle and Scott v Scott's Trustees 1959- applied to anyone who was desirous of shares. Only if rejected could they sell outside. Take over offer from outside. Majority accepted. Recieved purchase price. Company sought to invoke pre-emption clause. HoL- said had gone too far. Had agreed to transfer and had taken money. How can you argue youre not desirous. High water mark.

Safeguard Industrial v Natwest 1982- shareholder died. In will he left shares to non members. All property rests in executor. Knew if transferred to ABC it would fall foul of exemption clause. Executor declared himself trustee and kept legal title. He hadn't infringed pre-emption clause as no share transfer, it was just assignment of equitable interest. 

Re Coroin No 1 2012- company had corporate shareholder owned by A, wanted to get hold of X but had pre-emption clause. Bought A's shares in Y so they now owned shareholder...

and indirectly had control over X so no transfer.

Theakston v London Trust 1984- T, family owned but W wanted to take over. T was black sheep, who wanted to sell shares to W. Pre-emption clause. He entered contract with W, agreeing to issue transfer instrument if requested to do so. He got money. Court said pre-emption clause not triggered yet. Under no unequivocal obligation to transfer legal title. Not interested in beneficial title. Only trigger on unequivocal obligation. 

Re Macro 1994- transferor had done all except send the certificate and documents. Under obligation to deliver on request. Had triggered pre-emption clause. 

Hard to see distinction between Theakston and Macro. Maybe not principled at all. 

Re Sedgefield Steeplechase 2001- general principle of 'a shareholder who has done nothing inconsistent, with an intention to comply at the appropriate moment with the subsisting provisions of the articles, cannot be required to sever a transfer notice at an earlier stage.' CoA upheld the decision but said theres no single principle. A matter of construction in every case. 

Coroin No 2 2013- What if you go ahead and ignore pre-emption clause? Directors shouldnt register a transfer in breach. If they did what would happen? Void transfer. Arden thought would be valid until challenged. 

Variation of class rights-

comes with different varities of shares- law sought to protect class rights. Ringfence class rights. Courts have expanded to attach rights that arent attached to share class.

Cumbrian Newspapers v Herald 1986- 2 equal members. In articles, if one wanted to leave the other had a right to buy out. Proposed to remove that from the articles. Said no, this is a fundamental class right, even though all shares were the same. This was fundamental to the ownership of the company. 

BML Group 1994- wasnt in articles, was in a shareholder agreement. 1 person had a right to be a member of the quorum, meetings not allowed without him. Fundamental right in nature of class right. Rights couldnt be altered. 

Protection in s630- class right alteration has to be approved by a special resolution of the class. 

Articles can make the threshold higher. 

S633- even if 75% approve, the other 15% can petition to have it stopped. Minority right. Protection can be vulnerable. 

Subdivision trick- Greenhaigh v Arderne Cinemas 1946- G had been outside investor. He had 10p shares. M family had 50p shares. M had 3/5 of shares and he had 2/5. M cant pass special resolution. Can pass ordinary resolution to subdivide shares. For each 50p share, have 5 10p shares. Multiply their votes by 5. Gave them 86% of the vote. G said variation of class rights. CoA said his vote was the same as it always had been. Havent halved his vote.

HoL trick- White v Bristol Aeroplane 1953- company had 6'600'000 ordinary shares. 600'000 preference shares. Had provision on variation of class rights. O shareholders wanted to amend P's rights. Had power to issue new shares. Issued additional 660'000 P shares to themselves. Can now outvote exisiting P shareholders. P said varied class rights. Hadnt been affected as a matter of law. P's were still the same as before. (now this might be unfairly prejudicial conduct.) 

P shareholders have no class right to be permanent- Saltdean. (Unless they make any attempt to pay them off a class right.