Section 98 of the Companies Act 1997 is the protection that stands behind every set of share rights.
Sections 37 and 38 — the rights a share carries
(a) the right to one vote on a poll at a meeting of the company on any resolution — including one to appoint or remove a director or auditor, adopt a constitution, alter the constitution, approve a major transaction, approve an amalgamation under section 234, or put the company into liquidation; and
(b) the right to an equal share in dividends authorised by the board; and
(c) the right to an equal share in the distribution of the surplus assets of the company.
(2) Subject to section 51, those rights may be negated, altered, or added to by the constitution.
Under section 38, different classes may be issued: shares may be redeemable within the meaning of section 59, confer preferential rights to distributions of capital or income, confer special, limited, or conditional voting rights, or not confer voting rights. And under section 39, a share shall not have a nominal or par value.
Section 97 — classes and interest groups
A “class” is a class of shares having attached to them identical rights, privileges, limitations, and conditions.
An “interest group”, in relation to any action or proposal affecting rights attached to shares, is a group of shareholders (a) whose affected rights are identical; (b) whose rights are affected by the action or proposal in the same way; and (c) who comprise the holders of one or more classes of shares.
One or more interest groups may exist in relation to any action or proposal. And where (i) action is taken in relation to some holders of shares in a class and not others, or (ii) a proposal expressly distinguishes between holders of shares of the same class, holders of shares in the same class may fall into two or more interest groups.
The interest group is defined by the effect of the particular proposal, not by the share class register. A proposal that treats two ordinary shareholders differently creates two interest groups, each of which must approve.
Section 98 — alteration of shareholder rights
A company shall not take action that affects the rights attached to shares unless that action has been approved by a special resolution of each interest group.
(a) the rights, privileges, limitations, and conditions attached by this Act or the constitution, including voting rights and rights to distributions;
(b) pre-emptive rights under section 45;
(c) the right to have the procedure in this section, and any further procedure required by the constitution, observed by the company;
(d) the right that a procedure required by the constitution for amending or altering rights not itself be amended or altered.
The right to have the section 98 procedure followed is itself a right attached to the share. So a company cannot sidestep the requirement by first altering the machinery: changing the entrenched procedure is action affecting rights, which needs a special resolution of each interest group.
The issue of further shares ranking equally with, or in priority to, existing shares — whether as to voting rights or distributions — is deemed to be action affecting the rights attached to the existing shares, unless —
(a) the constitution expressly permits the issue of further shares ranking equally with or in priority to them; or
(b) the issue is made in accordance with the pre-emptive rights of shareholders under section 45 or under the constitution.
Dilution by issuing new shares is therefore treated as an alteration of rights unless the constitution has authorised it in advance, or the existing holders were offered the shares first. This is why section 44 requires notice of a share issue to the Registrar, and why the section 45 pre-emptive right matters so much in a private company.
Section 99 — the dissenter’s buy-out right
Where (a) an interest group has approved the action by special resolution under section 98; (b) the company becomes entitled to take the action; and (c) a shareholder who was a member of the interest group (i) casts all the votes attached to the shares registered in that shareholder’s name and having the same beneficial owner against approving the action, or (ii) where the resolution was passed under section 103, did not sign it —
that shareholder is entitled to require the company to purchase those shares in accordance with section 92.
A partial vote is not enough. The shareholder must cast all the votes attached to shares registered in their name with the same beneficial owner against the resolution — the same requirement as in section 91 for major transactions and amalgamations, and the same theme as the creditor’s unfair prejudice ground in section 246(3)(c).
The buy-out then runs through sections 92 to 96: written notice within the prescribed time, the board fixing a fair and reasonable price, arbitration if the price is disputed, and the Court’s power to grant an exemption under section 95, or under section 96 where the company would be rendered insolvent.
Section 100 — the action is still valid
The taking of action affecting the rights attached to shares is not invalid by reason only that the action was not approved in accordance with section 98.
Section 100 protects third parties and preserves transactions. A shareholder whose rights were altered without the required approval must look to the personal remedies instead:
- Section 142 — an injunction restraining the company from acting in breach of the Act or the constitution. This is the remedy to seek before the action is taken.
- Section 152 — conduct that is oppressive, unfairly discriminatory, or unfairly prejudicial, with the wide range of orders in section 153.
- Section 149 — a personal action against the company for breach of a duty owed to the shareholder, and section 32, under which the constitution is binding as between the company and each shareholder.
The practical lesson is to act early. Once the action is taken, section 100 means it stands.
Sources
- Companies Act 1997 — ss 32, 37–39, 44, 45, 51, 59, 91–96, 97–100, 103, 142, 149, 152, 153, 234
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.