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Hi!
I have a question:
In 20X5 two newspaper companies, Kudos Co and Lux Co, entered into an agreement in an attempt to safeguard their independent positions.
Under the agreement, Kudos Co purchased 20% of Lux Co’s preference shares, — which carry a preferred dividend of 10%.
The board of directors of Lux Co have recently become disenchanted with their link with Kudos Co and want encourage Kudos Co to sell its preference share in the company. To do this, the board of Lux Co proposes a resolution to reduce the dividend on all preference shares to 5%.
Can Kudos Co prevent the reduction of the preference dividend and why?
Answer: No – because it does not have enough votes to block the resolution and the court is unlikely to uphold a request from it to have the variation cancelled.
As the effect on Kudos is relatively minor and it effects all shareholders equally, it is likely that the court would uphold the variation.
————————————————————-Why would the court not uphold the request? The court distinguishes between variation of value derived from rights and the rights themself.
Another question in the book says that changing the amount of dividend payable of a class of preference shares is considered “Variation Of a Class Rights”
Thank you!
The resolution to vary the preference dividend will be put to a meeting of the company at which only the equity shareholders will have a vote. If / when that resolution is passed, then preference shareholders owning more than 15% of the preference shareholders might consider approaching the Court to appeal against that resolution
But the preference shareholders cannot require the removal of the resolution from the meeting’s agenda
As their only viable course of action, they might consider asking the Court to set aside the resolution
You actually have written in your post that ‘No – because it does not have enough votes to block the resolution’. But, again as you have written, ‘the court is unlikely to uphold a request from it to have the variation cancelled’.
Apparently, the printed solution doesn’t identify WHY the Court would not likely uphold the objection. I think it’s probably because companies tend to be run for the benefit of their equity shareholders – they are the ones that risk the most in their investments. And a reduction of a preference dividend is surely going to benefit those equity shareholders
OK?
But with respect to the variation of a ‘specific class’, the book says variation needs special resolution of ‘the class’.
In this case, is this not the preference shares? They are only voting with respect to their right of ‘that share.
I understand that they would need 75% but why would equity shareholders vote on the rights of another class?
Thank you.
You write ‘But with respect to the variation of a ‘specific class’, the book says variation needs special resolution of ‘the class’.
In this case, is this not the preference shares? They are only voting with respect to their right of ‘that share.’
Totally agreed!
I think that this is a poor question! There is no indication that the holders of the remaining preference shares have voted / will vote in favour of the resolution. The suggested solution states that Kudos cannot block the resolution – that’s correct. To block it, Kudos would need 25%+ of the preference shares
But, in a simple answer to a (poor) simple question, no, Kudos cannot block the resolution because they don’t hold greater than 25%
In reality, bear in mind that, of the remaining 80% of the preference shares (ie those preference shares that are not held by Kudos) not fewer than 60 out of that 80 must vote in favour of the resolution for a special resolution to succeed ie 60+% compared with Kudos’s 20%
Is that better?
Yes that makes sense! Thank you. I guess with more practice it will become easier 🙂
Thank you!
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