Shares that carry the same rights are categorised as being in the same ‘class’ of shares. Companies often have different classes of share capital for a variety of reasons, for example if the company wants to give some shareholders shares that do not have voting rights, or if the company wants some shares to carry additional rights that entitle them to preferential treatment. This will be important to a number of investors, not least institutional funders, banks or shareholders that want to capitalise on their investments or benefit from available tax treatments. This article provides an overview of how and why it is necessary or desirable for different classes of members of a company to hold class meetings that only relate to that particular class of shares rather than all of the shareholders of the company.
- What is a class meeting?
- What is the difference between a class meeting and other general meetings?
- When would you hold a class meeting?
- Amendments to classes of shares
- Who can speak at a class meeting?
- Who can vote at a class meeting?
- The voting process at class meetings
- How to prepare for a class meeting
- What happens after a class meeting?
What is a class meeting?
A general meeting is a meeting of the shareholders of a company that can be held at any time in order to pass decisions that the law requires all of the shareholders’ approval for or where a meeting of the shareholders is desired by the company or its board, or the shareholders themselves.
A class meeting, by comparison, is a meeting of some of the company’s shareholders that are part of a particular class of shares and that is held because the law (usually the Companies Act 2006) or a company’s articles of association (its rule book for its operation and constitution) requires them to make a decision. This could be to exercise some of the rights particular to that class, or where the company wants to vary the rights of the class.
A company’s articles of association or a shareholders’ agreement between the shareholders of the company will usually set out the rights attached to classes of shares. Classes of shares will usually have different names and it is common to see shares referred to as ‘ordinary shares’ (these are usually the ‘base’ shares of the company) or ‘preference shares’ or to be given different letters (‘A Shares’, ‘B Shares’) to differentiate between the different classes, but the name alone cannot be the only differentiator between classes – the types of shares and rights attached to those shares need to be different too. It is important before making or trying to pass any decisions to ensure that all necessary consents have been considered in the planning of meetings and general operational timetables. If a company does not have any shares (such as a company limited by guarantee) it can still have different classes of members in a similar way to companies with classes of shares.
What is the difference between a class meeting and other general meetings?
As stated above, a class meeting is a meeting of certain group of shareholders or members of the company with rights that are specific to that group. If the decision that is being discussed relates to all of the shareholders or members of the company, then a general meeting will need to be held. If the matter only affects one class of shareholders and their rights, then a class meeting can be held. Whether or not this is the case will often be a matter of fact depending on the circumstances of the decision to be considered.
Under the Companies Act 2006, there are explicit provisions for when class meetings are able to be held for public (including traded) and private companies that have shares, and several of the provisions relating to who can call a general meeting and in what circumstances a general meeting can be held does not apply to class meetings (for example, the provisions in the Companies Act 2006 that allow members of a company and the court to call a general meeting do not apply to class meetings). In summary:
- The quorum (this is the minimum number of members that must be present at the meetings to make the proceedings of that meeting valid) for a class meeting is different to that of general meetings and for a meeting to vary the rights of a class of members, the quorum is two people attending the meeting that hold at least one-third in the nominal value of the issued shares of the class in question (excluding any shares of that class held as treasury shares). The nominal value of a share is the book value of the share, which is the arbitrary value allotted to the share at the time of its issuance;
- The quorum for an adjourned class meeting is one person present holding shares of the class in question;
- Where a member is present at the meeting by proxy or proxies, they are treated as holding only those shares that those proxies are authorised to exercise voting rights with;
- At a class meeting that has been called to vary the rights of the shares, any shareholder eligible to be present in the meeting may demand a poll vote instead of a show of hands. See The voting process at class meetings for more information;
- Any amendment or addition to the company’s articles of association to vary or repeal the rights of a particular class of shares of the company is considered in itself to be an act that varies the rights of that class and such an amendment would require the shareholders in a general meeting to pass a special resolution (a decision requiring not less than 75% of the votes of eligible shareholders that can vote at the meeting), as well as the class procedure required under the Companies Act 2006 for varying share rights; and
- For companies that do not have a share capital, the quorum for a class meeting is two members of the class present (in person or by proxy) who together represent at least one-third of the voting rights of the class. For an adjourned class meeting the quorum is one member of the class present (in person or by proxy). Any amendment or addition to the company’s articles of association to vary or repeal the rights of a particular class of members of the company is considered in itself to be an act that varies the rights of that class.
When would you hold a class meeting?
Whether a class meeting is required will depend on the decision to be considered. The company’s articles of association or the shareholders’ agreement may include a set of reserved matters that require the explicit consent of a particular class of shareholders or members. This is a good way for minority shareholders to have a veto and therefore protection of their rights in the event of a decision being considered that will fundamentally change the constitution, ownership or operation of the company or that may affect or repeal the rights attached to the shares in their class.
Amendments to classes of shares
The rights attached to a class of shares or given to a class of members can only be varied in accordance with the process or provisions set out in a company’s articles of association that state which rights can be varied. If the articles do not contain any of these provisions, then the shareholders of that class must consent to the variation as follows:
- In the case of a private company, written consent from shareholders holding of at least three-quarters in the nominal value of the issued shares of that class (excluding any shares held as treasury shares); or
- a special resolution passed at a separate class meeting of the holders of that class, permitting the variation.
Shareholders can object to a variation of the rights attaching to the shares of their particular class once consent has been given, provided that they hold not less than 15% of the issued shares of that class. For companies without a share capital, the member objecting must represent not less than 15% of the members of the class. The procedure for objecting involves those eligible applicants applying to the court within 21 days of consent being given or a resolution being passed (see above). The variation will then be approved or rejected by the court and the variation has no effect until the court has made its decision. The court will take into account the extent to which the variation unfairly prejudices the members of the class represented by the applicant, but it will be for the applicant to prove that this is the case. If a shareholder feels that the company is acting in a way that is unfairly prejudicial to the shareholders, then it can always bring a statutory unfair prejudice claim under a separate process in section 994 of the Companies Act 2006.
Apart from as set out above in 'What is the difference between a class meeting and other general meetings?' the provisions of the Companies Act 2006 relating to general meetings also apply to class meetings.
Who can speak at a class meeting?
Under the Companies Act 2006 shareholders who are named on a company’s register of members may attend and speak at meetings. At a class meeting, only the shareholders in that class may speak and only matters involving that class of shares may be discussed – any other matters involving the wider shareholder body need to be discussed at a general meeting of shareholders. If more than one person holds the shares, then all holders can attend and speak but only the person named first on the register of members will be entitled to vote. Proxies of shareholders are also permitted to attend and speak. The company’s directors and auditors can also attend and speak at a class meeting.
Who can vote at a class meeting?
Usually there will be provisions set out in the company’s articles of association setting out who can vote at a class meeting – these are usually shareholders of fully paid up shares of the class that are registered in the company’s register of members, proxies of those shareholders and representatives of corporate shareholders in the class.
The voting process at class meetings
Shareholders voting at a class meeting can vote on a decision in two ways - on a show of hands or by poll voting. The difference between the two methods of voting is the way that the votes are counted. If shareholders vote on a show of hands, the votes of the shareholders present at the meeting are counted. The result will be declared by the chairman of the meeting and this declaration will usually be considered final and binding. Shareholders can attend in person, or can appoint a proxy or corporate representative to represent them. When a decision is voted by a poll then the votes are counted based on the number of shares that each shareholder that is attending (whether themselves, or by proxy or corporate representative) the meeting owns. With poll voting, a member does not have to vote all their shares in the same way.
How to prepare for a class meeting
The appropriate process for the preparation of a class meeting will often be set out in the company’s articles of association or a shareholders’ agreement between the shareholders of the company. If there is no process specified in these documents, the notice of the meeting, the quorum requirements (unless the meeting relates to a variation of shares), the appointment of a chairman of the meeting, provisions relating to proxies and corporate representatives; and the prior circulation of a statement about the matters to be considered at the meeting should follow the requirements set out in the Companies Act 2006 in relation to general meetings. These will differ depending on whether the company is a private, public, quoted, traded or listed company.
What happens after a class meeting?
What happens after a class meeting will depend on the business discussed and the decisions made and approved at the meeting itself. The company will produce minutes that will be kept at the company’s office and will update or amend any registers that it needs to. The company secretary (if the company has one) or the company’s directors will send the requisite resolutions or supporting documentation to the necessary regulators (for example Companies House so that the Registrar of Companies can update the Companies’ Register).
The company also needs to file information relating to:
- any name or designation (or new name or designation) assigned to any class or description of shares or, to any class of its members within one month from approving such assignment;
- any variation of the rights attached to any shares or, to any class of members within one month from the date on which the variation is made including the special resolution that made the variation effective;
- rights attached to a new class of members created by a company without a share capital within one month from the date on which the new class is created;
- a statement of capital containing information on the classes of shares and the various voting rights, dividend rights and rights to a distribution of capital on the liquidation of the company as well as whether the shares are redeemable or not.
In the case of public, listed or traded companies, the company will update their website and if necessary, notify the relevant press or announce any updated information to the relevant markets if required. There may also be additional obligations for these companies under market rules such as the Listing Rules or the Disclosure and Transparency Rules.