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Articles of Association (Members) - Coggle Diagram
Articles of Association (Members)
Members rights
Where all members are to have equal rights, the company need only have one class of share (CA2006 s.629)
It is only where members or groups of members are to have different rights that the company's membership will need to be divided into different classes
Companies limited by guarantee will usually only have one class of member
Where the company LBG is a membership organisation such as a sports club, it is quite possible that by laws will have been adopted whereby the underlying members who are not guarantors have rights to elect the directors which may differ according to the type of membership they hold
Classes of shares
The articles will set out the division of shares into different classes with the respective rights of each of the classes being stated
There is no statutory naming convention for share classes. CA2005 s.560 defines ordinary shares as 'shares other than shares that as respects dividend and capital carry a right to participate only up to a specified amount in a dsitrubtion'
Ordinary shares
Must have rights to participate in distributions with no upper limit on that participation
Where a company's share capital is divided into two or more classes, the basic/default share class with full rights will most often be called the ordinary share class with the rights of the other class(es) being enhanced, fettered or removed when compared to the corresponding rights of the ordinary shares
Carry full rights to participate in dividends, this does mean that they will rank behind other classes that have a preferred or fixed dividend entitlement as otherwise it would be necessary to limit the distribution applicable to the ordinary shares to allow for the dividend on the fixed income shares which is contrary to CA2006 s. 560
These shares constitute the company's risk capital
Ordinary non-voting shares
Such shares are usually distinguished from the voting shares by calling them non-voting or 'A' shares
Some companies have classes of ordinary shares which have restricted voting rights
The shares otherwise have similar rights to those of the other ordinary shares
Preference shares
These are shares which carry a preferential right to a fixed rate of dividend and on winding up, to return of capital, with or without a premium together with arrears of dividend
They constitute part of the company's share capital and repayment of capital on prefer shares would rank ahead of repayment of capital on the orindnary shares in liquidation
The fixed rate of dividend is usually expressed as a percentage of the nominal value of the shares and not the issue price
Holders of preference shares get the same rate of dividend year in and year out unless in any year, the profits of the company are insufficient to pay the preference dividends
Alternatively the preference dividend might be expressed as a fixed percentage of the distributable profit in any financial year
Deferred shares
These shares have one or more deferred rights
Might have no rights to dividends either at all or not until a specified level of profit is reached
In situations where a company has made significant losses and new investors have been identified the majority of the existing ordinary shares might be converted to deferred shares in order to provide greater ownership for the new investors without the costs and complexity of undertaking a reduction of capital
Cumulative preference shares
Has an additional right that if in any year the profits are insufficient to pay the preference dividend in full or at all, any part of the dividend not paid will be carried forward to be paid when the company's fortunes improve
The payment of such arrears would rank ahead of payment of dividends on the companys shares
Redemeeable shares
Be redeemed by the company at a future date or on the achievement of a particular event
The redemption terms will be set out in the Articles or determined by the directors at the time of allotment
Amount might be a fixed amount or may be determined according to a formula
Debentures and loan stock
Not shares but loans to the company carrying a fixed rate of interest
Generally debentures are secured loans on the assets of the company whereas loan stocks are normally unsecured
Rights attaching to a class of shares
Right to vote
The right to attend and vote at meetings may be restricted or enhanced or the shares might be non voting except in certain circumstances
Right to receive dividend
The right to dividends can be excluded completely or a class may be granted a preferential right to a dividend up to a specified amount with no further participation
CA2006 s.560 requires that ordinary shares have an unrestricted right to dividends
Dividend right may be cumulative and in absence of any express provision, dividends are non-cumulative
Right to capital
This right refers to the rights to participate in a distribution of surplus capital on a winding up or on a return of capital
Such rights are to a preferential right to a return on cpaital
Share classes with enhanced dividend rights may have preferential rights to return of capital although this is frequently restricted to the amounts paid for the shares
Where external investors contributed significant amounts of capital to grow the business they may well have enhanced rights to return of capital in excess of the amounts originally contributed and these are sometimes on a racket so that the greater the sale price or company valuation the greater the return, although at a decreasing overall percentage of the valuation
This provides an incentive for the existing management who typically retain the ordinary shares as they will achieve a greater return the higher the valuation, a win/win situation for both investors and managers
Pre-emption rights on transfer
Ensure existing shareholders have the ability to purchase shares from selling shares in priority to any third party purchaser but can effect the shareholders ability to realise their investment if the pr emption rights contain a price mechanism or a cap on the number of shares that can be offered in one year
Rights of pre-emption on allotment
Give protection from dilution in the event of an issue of shares of the same class by requiring that all new shares to be allowed are offered to the existing shareholders pro rata to their existing holding
Any untaken shares can then be offered to external investors
Right of redemption
Normally given to shares carrying enhanced dividend rights but no right to capital
Redemption rights allow investors to realise their investment at a pre-determined date, upon the achievement of a pre-determined event or following a stipulated formula
Right to conversion
Conversion rights are often used in conjunction with enhanced dividend rights to provide greater incentive for investors to invest in a company
The conversion rights will allow the conversion of shares normally into ordinary shares
The conversion rights will include not only the exchange rate for their conversion into the new class but also the trigger criteria
The trigger might be the passage of a set period, a particular company valuation or an event such as the listing of sale of the company
The exchange right might be 1:1 but can also be on a multiple and can like redemption criteria be on a ratchet providing greater return in the event of a higher valuation hurdle being attained
A company can create classes of shares with as many or few rights as it wishes. The rights will often depend on the investor where new capital is being invested to enable an existing business to expand. Although the majority of rights attaching to shares can be altered whether the shares have been issued or not, it is not possible to convert issued shares that were not redeemable into redeemable shares
Variation of rights
The Act provides that the rights attached to a class of shares or members can only be varied in accordance with the provisions of the companys articles, or if the articles do not make provision for the variation of class rights, in accordance with the provisions of CA2006 ss. 629 - 640
CA2006 s.630 provides that class rights may only be varied by the written consent of the holders of at least three quarters in nominal value of the issued shares of the relevant class (or if a special resolution is passed)
Provisions restricting the right to vote of a particular class only apply to general meetings of shareholders and not to class meetings of that class
CA2006 s.631 provides that for companies without a share capital capital, consent in writing from at least three quarters of the members of that class and a special resolution passed at a separate class meeting of the members of that class sanctioning the variation will be required to vary class rights
Holders of not less than the aggregate of 15% of issues shares of a class (or 15% of the members) who did not consent to the variation may apply to the court for it to be cancelled within 21 days of the resolution being passed. The variation will not be able to take effect until it is confirmed by the court.
The application may be made by one or more of these shareholders (or members)
The court will disallow the variation if it is satisfied that the variation would unfairly prejudice the holders (or members) concerned, otherwise the court will confirm the alteration
A copy of the court order must be filed with the Registrar within 15 days of it being made
A variation of class rights will usually also require an amendment to the company's Articles and accordingly a special resolution of the members entitled to attend and vote at general meetings will also be required in addition to the class consent
The Registrar needs to be notified within one month of the date of variation
Entrenchment of Articles
The concept of entrenchment has been introduced by CA2006 s.22
Companies will no longer be able to provide that a certain provision can never be repealed or amended
The government has decided that there is some uncertainty that CA2006 (22) might have unintended consequences as regards changes to class rights that are subject to separate regime set out in CA2006 s.630
A company must give notice to the Register when an entrenching provision is included in its Articles (whether or formation or subsequently) or where the companys articles are altered by order of a court or another authority so as to restrict or exclude the power of the company to amend its articles to amend or remove those powers
Where a company amends any entrenched provisions in its articles, it must send to the Registrar the resolution or court order making or evidencing the amendment together with a statement of compliance on Form CC01 or CC02.. This must certify that the amendment has been made in accordance with the company's articles (including any provision for entrenchment) or where relevant in accordance with any other order