Issue Of Preference Shares Is Corporations

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Issue Of Preference Shares Is Corporations

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Question:

What Is The Issue Of Preference Shares Is Corporations?

Answer:

Introducation
The central issue in the given case is to determine if Grand Ltd can issue 5,000 new preference shares on the same terms as existing preference shares.
The relevant statute governing the issue of the preference shares is Corporations Act 2001. In accordance with section 124 of this Act, the company has the right to issue various classes of shares including the preference shares (Cassidy, 2013). However, as per section 254A Corporations Act 2001, the preference share issue may be conducted by the company only if the rights related to the same are clearly defined either in the constitution of the company or have obtained approval through a special resolution. The various aspects on which there must be objective clarity are outlined below (Austlii, 2017a).

Capital Repayment

Surplus assets and profits related participation

Nature of dividends (i.e. cumulative or non-cumulative)

Voting rights associated

Priority in relation to dividend and capital payment when compared with other class of shares

Also, in accordance with section 246C, issuance of preference shares on the same terms would alter the rights of the current preference shares (Austlii, 2017c).

Application
In light of the given facts, it is apparent that Grand Ltd (the “issuing entity”) has already issued 5,000 preference shares after the registration through the special resolution route which has defined the rights of preference shares. In line with s. 254A, one possible manner of issuance of preference share is based on the rights mentioned in the Constitution of the company which is not valid in the given case as the issuing entity’s Constitution is silent on future preference share issue. Thus, the company using special resolution of the members for issuance of incremental 5,000 preference shares can go ahead with the transaction exhibited the right granted by s. 124.However, since the company intends to issue them on same conditions as existing preference shares, thus the rights of the current preference shareholders may be adversely impacted particularly at the time of bankruptcy or liquidation. Also, dividend payment may be adversely impacted and hence the approval from the existing shareholders would not be unanimous. Thus, it is highly likely that the permission may not be granted (Austlii, 2017b).
Based on the above discussion, it may be concluded that Grant Ltd can issue incremental preference shares by passing a special resolution of members but taking unanimous permission of the existing preference shareholders could be difficult which can put the plan in jeopardy.
Whenever, there is splitting of the shares into various classes, then variation of rights may happen which is determined by s. 246C. As per this, if the division of shares into more classes, then there is variation of rights if the shares belonging to the different classes do not carry the same right while earlier they enjoyed the same rights. Thus, in such a situation since rights of certain shareholders are adversely impacted, it is imperative to seek the written consent of the existing shareholders (Ciro and Symes, 2013). With regards to resolution or consent, there needs to be unanimous support. In the absence of the same, s. 246D would be applicable. This advocates that when the approval is not unanimous, then the matter may land in court if a minimum of 10% of the shareholders lodge a complaint (Austlii, 2017d).
As per the given facts, it is apparent that there would be variation of rights as the Audax family which owns about 60% shares would get two votes per share (Class A) while the remaining shareholders would only get one vote per share (Class B). As a result, the interests and rights of the minority shareholders would be adversely impacted and hence it is imperative that a unanimous approval of the shareholders would be required. However, in this given case it would fail to come as there is no incentive for the 40% minority shareholders to agree to the given scheme of division. If the Audax family does push the resolution through the support of some other shareholders, still it is likely that the matter will land up in court and the judge will nullify the proposed scheme.
The relevant rule is s. 246C as per which if the company tends to issue a new class of shares which currently does not exist, then issuance of the same may impact the rights of the existing shareholders if the rights available to the new shareholders are not same as the current shareholders (Austlii, 2017c). Thus, in such a situation since rights of certain shareholders are adversely impacted, it is imperative to seek the written consent of the existing shareholders. With regards to resolution or consent, there needs to be unanimous support. In the absence of the same, s. 246D would be applicable. This advocates that when the approval is not unanimous, then the matter may land in court if a minimum of 10% of the shareholders lodge a complaint (Austlii, 2017d).
In the given case, since the majority shareholder Audax family wants to raise additional capital in the form of equity but without dilution of their control, then they wish to issue class B shares to new investors. This may impact the rights of the existing shareholders particularly considering that these are also being issued at $ 5. In the given case, the existing shareholders would not allow of class B shares as it results in the Audux family keeping control instead of diluting their stake in case they do not wish to assume incremental debt. Thus, it is likely that the resolution would not be passed unanimously and hence it could potentially be annulled through legal intervention.
Conclusion
Based on the above, it is apparent that the Grant Ltd would not be able to issue class B shares at $ 5.

References
Austlii (2017a). CORPORATIONS ACT 2001 – SECT 254A, Power to issue bonus, partly-paid, preference and redeemable preference shares. [online]. Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s254a.html [Accessed 10 Aug.2017].
Austlii (2017b). CORPORATIONS ACT 2001 – SECT 254B, Terms of issue. [online]. Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s254b.html [Accessed 10 Aug.2017].
Austlii (2017c). CORPORATIONS ACT 2001 – SECT 246C, Certain actions taken to vary rights etc. [online]. Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s246c.htmln [Accessed 10 Aug.2017].
Austlii (2017d). CORPORATIONS ACT 2001 – SECT 246D, Variation, cancellation or modification without unanimous support of class. [online]. Available at: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s246d.html [Accessed 10 Aug.2017].
Cassidy, J. (2013) Corporations Law Text and Essential Cases. 4th edn. Sydney: Federation Press.
Ciro, T. and Symes, C. (2013) Corporations Law in Principle. 9th edn. Sydney: LBC Thomson Reuters

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