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A company has two types of shares- ordinary and preferential shares. There are 1,000 000 OS and 1 000 000 PS. The ordianry shares are owned by 25 members of the company and PS are owned by 26 memebers. One member owning 250 000 PS and the remainingbeing owned by ordinary shareholder. The company passes a special resolution to amend the articles so as to reduce the dividend from 25 to 10%. The only preferential shareholder objects saying it is not fair. is the aliteration valid or not?
Mike, why is it not valid???
Why would the preference shareholder object? The preference shares will carry a fixed rate of dividend and the profits to be retained in the company will be improved by the resolution to pay only a 10% dividend to the equity shareholders instead of an outrageous 25%
IF you’re considering a variation of class rights and a reduction of the preference dividend from 25% down to 10%, that has to be approved by the majority of the members of that affected class (in this case, the preference shareholders)
I don’t understand the significance of the 25 members holding equity shares and 26 members holding reference shares! Are the numbers important to you in this hypothetical scenario?
Sorry I forgot a little thing.
THe resolution passed was to reduce the PREFERENCE dividend from 25% to 10%
My second paragraph addressed that issue
And my third paragraph still applies – what’s the significance to you of 25 and 26?
But still the majority of the one preference shareholder is 25% and the others having those are 75%, and even though it is a majoirty the articles alteartion is not valid, but why?
The significance is that the one having preference has no ordinary shareholders.
Your question is very confusing!
Let me get this straight …
There are 1 million equity shares and these are owned by just 25 members
Those same 25 members own 750,000 of the 1 million 25% preference shares and the remaining 250,000 preference shares are owned by another person
This other person, unlike our original 25 members, owns no equity shares … just 250,000 preference shares
Am I right so far?
And the 25 members wish to amend the articles to reduce the coupon rate of the preference dividend from 25% to 10%
Of course, our 250,000 preference share owner objects to this and why wouldn’t (s)he?
The articles of the company will set out the rights attached to each class of share and to vary those rights will require a vote in favour of the alteration by a majority of not less than 75%
The equity shareholders, according to your scenario, have passed a special resolution to vary the rights but the variation must also be approved by the holders of that class of share
Again a 75% majority is required
If ALL the other holders of the remaining 750,000 vote to amend the articles, then the 75% majority will be reached
However our 25% holder can then apply to the court to have the resolution set aside on the grounds that it is unfairly prejudicial
That’s the only way I can see that the resolution would be disallowed (but if I were the judge in the court that hears that appeal, I would almost certainly uphold the appeal on the grounds that the amendment IS grossly unfairly prejudicial!)
Yes mike, you got it correct. I came across this statement in bpp not sure what it means but I feel its the answer to my doubt
an alteration of a the articles which varies the right attached to a class of shares may be only made if a correct rights procedure variation has been applied to obtain the consent of the class. A 15% minority may apply to the court to cancel the variation ( in my case it is 25%)
Does it sorta make sense to not have the alteration?
No … the 25% holder may agree to the variation (unlikely, but it could happen) so the variation would have to be done properly
But why did you not give me the full quote in the first place? That would have made it so much easier for me to understand your problems with the sentence and for me to explain it to you!
But I still cannot understand why the alteration is unvalid? I mean they have 75% majority, so why not?
Because the 15% (in this case, 25%) would object to the court on the grounds of “unfairly prejudicial”
It could even be the case that the articles provide for a greater percentage to approve the alteration
It could even be that you have mis-typed the scenario and our 25% holder has in fact got 26%
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