Question 1

Utopia plc has a share capital of two million £1 ordinary shares and one million £1 7 per cent cumulative preference shares. The preference shares have the following rights under the articles:

• to participate rateably with the ordinary shareholders in the profits of the company,
• a preferential right to dividends and repayment of capital on winding up, and
• no right to attend meetings and to vote.

Following the sale of its chain of ‘Paradiso Hotels’, the company has capital surplus to its requirements and the directors of Utopia plc decided that, operating a reduced business following the disposal, it will be difficult to support the payment of the preferential dividend. The board decided, therefore, to formally reduce the company’s capital by buying in and cancelling the preferential shares.

In accordance with the procedure under Companies Act 2006, s. 645, Utopia plc passed a resolution to reduce the issued share capital by repaying the preference shares at par. The preference shareholders did not receive notice of the meeting and the vote was passed by the holders of the ordinary shares. The preference shareholders have not yet received a dividend in respect of the previous financial year.

Advise the preference shareholders, who are unhappy about being bought out through the reduction of capital, particularly without receiving the arrears of cumulative dividend.

Answer guidance

This question focuses on class rights, and in particular the rights of preference shareholders. You will need to consider the interpretation of class rights as set out in the articles, whether what is proposed is a variation of those rights, and when the right to a dividend arises.

Start with the principle that where preferential rights are given, these are treated as exhaustive in relation to that matter: Will v United Lankat Plantations Ltd [1914] AC 11. This has been applied to the reduction of capital, so preference shareholders have no right to a share of surplus assets. You need good knowledge of cases such as Scottish Insurance Corporation Ltd v Wilsons & Clyde Coal Co Ltd [1949] 1 All ER 1068, Re Chatterley-Whitfield Collieries Ltd [1948] 2 All ER 593 and Prudential Assurance Co Ltd v Chatterley-Whitfield Collieries Ltd [1949] AC 512. What is more, a selective reduction of capital such as this is not considered to be a variation or abrogation of the preference shareholders’ class rights, and so the protections of CA 2006, s. 630 are not triggered. Look in particular at Re Saltdean Estate Co Ltd [1968] 1 WLR 1844 and House of Fraser plc v ACGE Investment Ltd [1987] AC 387.

On the final point you could note that, subject to the terms of issue, preferential dividends are presumed to be cumulative (Webb v Earle (1875) LR 20 Eq 556), but remain payable only when declared. So arrears of dividend will not be payable on winding up (and thus on reduction of capital) unless declared, or otherwise provided. Consider Re EW Savory Ltd [1951] 2 All ER 1036 and Re Wharfedale Brewery Co Ltd [1952] Ch 913.

Question 2

‘Suspended midway between true creditors and true members … [preference shareholders] may get the worst of both worlds, unless the instrument creating the preference shares is carefully drafted.’ (Davies, P. and Worthington, S., Gower’s Principles of Modern Company Law (9th edn, London, 2012))

Discuss.

Answer guidance

In this question you will need to draw comparisons between preference shareholders and ordinary shareholders, and between preference shareholders and creditors.

You should consider the key characteristics/rights of preference shares, focusing on dividends, capital and voting, and drawing explicit distinctions with ordinary shareholders and creditors as appropriate. On dividends you should consider at least the presumptive right to a cumulative dividend (Webb v Earle [1875] LR 20 Eq 556), while on capital you will need to explain and explore the usual right to priority of return. In both areas it is important to discuss the exhaustive nature of a statement of preference and its significance (see eg Re National Telephone Co [1914] 1 Ch 755; Will v United Lankat Plantations Ltd [1914] AC 11; Scottish Insurance Corporation Ltd v Wilsons & Clyde Coal Co Ltd [1949] AC 462).

Consider also the extent to which a preference shareholder’s rights are protected. Recognise the importance of statutory protections (CA 2006, ss. 630–40), but also how these protections are limited by the restrictive interpretation of ‘variation’, eg House of Fraser plc v ACGE Investment Ltd[1987] AC 38.

Remember to consider the importance of drafting as this is explicitly raised by the question. This could include protecting dividend payments (Re Roberts and Cooper Ltd [1929] 2 Ch 383), ensuring capital priority extends to premiums paid, and deeming early repayment of capital to be a ‘variation’ (Re Northern Engineering Industries plc [1994] 2 BCLC 704). You should also consider, reflecting on both legal and practical points, why people do choose to invest through preference shares rather than through ordinary shares or debt, despite their apparent drawbacks.