The Problem of the Preference Share
| Published date | 01 September 1963 |
| DOI | http://doi.org/10.1111/j.1468-2230.1963.tb00727.x |
| Author | Murray A. Pickering |
| Date | 01 September 1963 |
THE PROBLEM
OF
THE PREFERENCE
SHARE
THE
legal rights attached to the preference share of the modem
limited liability company, where these have not been set out
comprehensively in the provisions which create this class of share-
holding, have not always had the same character. Rather these
rights have been developed, and in certain instances changed, in
the course of a lengthy process of legal evolution. The result at
the present day is a company security which
it
is probably widely
considered has
a
number of somewhat unsatisfactory features.
The general background of these features is that of the law
relating to the rights of classes of shareholders
inte7
se
and in
particular to the creation, interpretation, and variation of class
rights. The legal rights, which may be and normally are attached
to all shares, are broadly classifiable into three groups
:
(i)
rights in relation to the payment of dividend (income rights);
(ii) rights of voting
at
company meetings (voting rights);
(iii) rights to the return of capital
on
an
authorised reduction of
Classes of shares are created where all
or
some
of
the general
rights of shareholders within a company are varied
in
relation to
some part of the total share capital. The most important classes
are usually those created where preferential rights are conferred, in
which case the shares concerned may be termed preference shares.'
Almost invariably the main rights varied
on
the creation of prefer-
ence shares are income rights and the preference given is such as to
provide for a fixed percentage dividend
in
priority to the payment
of
any dividend
on
the other shares.
A
company under English law has practically unlimited freedom
to create the capital structure it desires for itself, and in the
course of doing
so
to compound the rights of each of its various
classes of shares in an almost infinite possible variety. These rights
are established by the terms of the company's memorandum
or
articles of association,
or
from resolutions passed under the articles,
or
by the terms of issue.2 Questions of construction may arise
when class rights in any of the above categories have been created,
but are inadequately defined. The courts have adopted principles
to determine most of the questions which have arisen with
capital
or
on
a
winding up (capital rights).
1
Whether shares are ordinary or preference shares may
be
a question of
construction:
Alliance
Perpetual
Building
Society
v.
Clifton
[1967] 1
W.L.R.
1270; [1962]
3
All
E.R.
828.
2
Class rights
may
be created
by
any
of
these Bources, together or separately.
These are hereinafter referred to as the
"
regulations
"
of
the company.
499
500
THE
MODERN
LAW
REVIEW
VOL.
86
any degree of frequency, and the main issues concerning preference
shareholders’ dividend and voting rights in particular are now
clearly settled.
As
problems of this nature have become apparent,
companies
in
many cases have dealt with them in advance
by the adoption of more explicit and comprehensive regulations,
which in turn usually have the effect of obviating any need
for
recourse to the common law rules.
The nature and extent of class rights is, first, determined
primarily as a question of the construction of the relevant regula-
tions of the company. In
Scottish Insurance Corporation
v.
Wilsons
Clyde
Coal
Co.,
Ltd.s
Lord Simonds expressed this as follows
‘
:
“
It
is clear from the authorities, and would be clear without
them, that, subject to any relevant provision of the general law,
the rights
Linter
se
of preference and ordinary shareholders
must depend
on
the terms
of
the instrument which contains
the bargain that they have made with the company and each
other.
This
means, that there
is a
question of construction to
be determined.”
Secondly, where specific provision in the nature of preferential
rights is made such provision
will
normally
be
construed as definitive
of the whole of the rights of the class in respect of that provision.
This proposition was clearly stated in
Re Isle
of
Thanet Electdcity
Supply
Co.
Ltd5
where
Wynn-Parry
J.
said
8:
“. . .
the effect of the authorities
as
now
in
force
is
to establish
. .
.
[the principle] that, where the article sets out the rights
attached
to
a class of shares to participate in profits while the
company is
a
going concern
or
to share in the property of the
company
in
liquidation, prima facie, the rights
so
set out are in
each case exhaustive.”
Thirdly, in the absence of specific provisions the rights of all
shareholders are deemed to be the same. This was decided, also
by the House of Lords, in
Birch
v.
Cropper,s
and Lord Macnaghten,
dealing with the adjustment
of
rights among members of different
classes in
a
winding up, expressed the view of the House as
follows
9:
‘‘
Every person who becomes
a
member of
a
company limited
by shares of equal amount becomes entitled to a proportionate
part in the capital of the company, and, unless
it
be otherwise
provided by the regulations
of
the company, entitled, as a
necessary consequence, to the same proportionate part
in
all
the property of the company, including its uncalled capital.”
In
theory these three basic principles should together be adequate
to provide a solution to any question relating to shareholders’
s
[1949]
A.C.
462.
4
Ibid.
at p.
488.
7
Although particular income and capital rights only are, mentioned
in
this
8
(1889) 14
App.Ca8.
626.
9
Ibid.
at
p-
643.
5
[1950]
Ch.
161.
6
Ibid.
at p.
171.
context the principle applies generally
to
all shareholders rights.
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