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Company Law Reform Bill

This amendment is concerned with the conditions that should apply to a variation of class rights in companies having a share capital. New Section 125 of the 1985 Act, inserted into that Act by Clause 556, provides that the rights attached to a class of a company’s shares may be varied if, and only if, the holders of at least three-quarters in nominal value of the shares in that class consent to the variation or the class members pass a special resolution. It prescribes the minimum requirement for a variation of class rights, but the provisions of new Section 125 are subject to the qualification contained in subsection (3) that this statutory scheme is without prejudice to any other restriction on the variation of rights. The qualification in subsection (3) has two important effects. First, if and to the extent that a company has adopted a more onerous regime in its articles—for example, by requiring the consent of the holders of 90 per cent of the class—the company must comply with the more onerous regime. Secondly, if and to the extent that the company has protected the rights attaching to any class of shares—for example, by making provision for the infringement of those rights in its articles under Clause 23—that protection cannot be circumvented by a variation of class rights under new Section 125. The amendment proposed by the noble Lord would amend the qualification in subsection (3) of new Section 125. It would enable the members of a company to make provision for less as well as more onerous conditions to apply to a variation of class rights than those prescribed in a statutory scheme. Thus the amendment would, for example, allow a company’s articles to require the consent of a simple majority of the class. While I note that existing Section 125 permits a company to adopt in its articles less onerous provisions regarding the variation of class rights—a 75 per cent majority of the class—the circumstances in which it can do so are somewhat constrained. For example, if the rights are attached to the memorandum, the provision must have been included in the articles at the time of the company’s original incorporation and the variation may not be connected with the giving of an authority under Section 80 or with a reduction of share capital under Section 135. When considering the subject of variation of class rights, we took the view that the provisions of Section 125 were unduly complicated, in that they set out a number of permutations which depend on: first, the origin of the class rights, whether they are contained in the memorandum, the articles or elsewhere; and, secondly, whether any specific provision has been made for their alteration. We therefore sought to simplify the provisions and, in doing so, considered that there should be imposed a minimum requirement for a 75 per cent majority of the class in question. We are conscious of the fact that, according to legal commentators, companies which opt to include provisions in their articles prescribing the mechanism for a variation of class rights tend in any event to replicate the statutory requirement, which means that the option to adopt less onerous requirements is rarely taken. We consider that a variation of class rights is a serious matter. Such a variation may reduce the power of one class of a company’s shareholders in comparison with another and, in the worst-case scenario, may amount to a fraud on minority shareholders. I hope therefore that noble Lords will agree that it would not be desirable to reduce the protection offered by new Section 125. I hope that that addresses specifically the inquiry of the noble Lord.