Division 5 of Part VII of the Companies Act 1997 protects shareholders whose rights are about to be changed — whether or not they hold a majority.
Section 97 — two different concepts
A class of shares having attached to them identical rights, privileges, limitations, and conditions.
(a) whose affected rights are identical; and
(b) whose rights are affected by the action or proposal in the same way; and
(c) subject to subsection (2)(b), who comprise the holders of one or more classes of shares.
A class is a permanent feature of the share structure. An interest group is defined by reference to a particular action or proposal, and changes from one proposal to the next.
Section 97(2) makes this explicit: (a) one or more interest groups may exist in relation to any action or proposal; and (b) where action is taken in relation to some holders of shares in a class and not others, or where a proposal expressly distinguishes between holders of shares of that class, holders of the same class may fall into two or more interest groups.
So a proposal that treats some ordinary shareholders differently from others splits the ordinary class into separate interest groups, each of which must approve.
Section 98(1) — the rule
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.
Note that this is in addition to whatever the Act otherwise requires. An alteration to the constitution needs a special resolution of the shareholders under section 33(2); if it affects class rights it needs a further special resolution of each affected interest group under section 98. Section 33(2) is expressly stated to be “without limiting section 98”.
Section 98(2) — what “rights attached to shares” includes
(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 arising under section 45;
(c) the right to have the procedure set out in this section, and any further procedure required by the constitution for the amendment or alteration of rights, observed by the company; and
(d) the right that a procedure required by the constitution for the amendment or alteration of rights not be amended or altered.
They make the protection itself a right attached to the share. So a company cannot first amend away the class-approval machinery by an ordinary alteration, and then change the rights. Removing the procedure is itself action affecting rights, requiring interest group approval.
Paragraph (b) is equally important: negating or limiting pre-emptive rights is action affecting rights, even though section 45(3) allows the constitution to vary them.
Section 98(3) — issuing shares is deemed to affect rights
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, those shares; or
(b) the issue is made in accordance with the pre-emptive rights of shareholders under section 45 or under the constitution.
A board proposing to issue shares that rank equally with or ahead of existing shares must satisfy one of three things: express permission in the constitution; compliance with pre-emptive rights; or a special resolution of each interest group under section 98(1).
That is why most constitutions drafted for companies expecting to raise capital contain an express permission under paragraph (a) — otherwise every funding round becomes an interest group exercise. Note also section 44A(4): obtaining shareholder approval to issue despite a constitutional restriction does not remove the need for interest group approval under section 98.
Section 99 — the dissenter’s exit
(a) an interest group has, under section 98, approved by special resolution the taking of action affecting the rights attached to shares; and
(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 shares registered in their 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.
The machinery is the same as for the general buy-out right: written notice within one month, the board’s four options under section 92(2), price nomination and arbitration under section 93, and the company’s ability to seek exemption under sections 95 and 96.
Section 100 — the action is still valid
The taking of action by a company affecting the rights attached to shares is not invalid by reason only that the action was not approved in accordance with section 98.
The Act repeatedly saves the transaction and directs the remedy inwards — compare section 18(1), section 44A(5) and section 63A(1). Third parties who deal with the company are protected; the consequences fall on the company and its directors.
So an aggrieved shareholder cannot simply say the issue or alteration was void. The remedies are:
- an injunction under section 142 — before the action is taken, which is why speed matters;
- the section 152 prejudiced shareholder remedy, and section 153 where the constitution was altered;
- a derivative action or a personal action against a director under sections 143 and 147; and
- proceedings against the directors for breach of section 114, which requires them not to act, or agree to the company acting, in contravention of the Act or the constitution.
Checklist before taking action affecting rights
- Identify the classes from the constitution and the terms of issue — remembering that under section 43(3)(b) terms of issue are deemed part of the constitution.
- Map the interest groups for this particular proposal, applying section 97(2)(b) where holders of one class are treated differently.
- Check section 98(3) for any share issue — express constitutional permission, pre-emptive compliance, or interest group approval.
- Hold separate meetings or obtain separate written resolutions for each interest group, each requiring 75%.
- Budget for section 99 buy-outs from dissenters in each group.
- Do not rely on section 100. It protects the transaction, not the board.
Sources
- Companies Act 1997 — ss 18, 33, 43, 44A, 45, 63A, 92–96, 97–100, 103, 114, 142, 143, 147, 152, 153
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.