Registered and bearer shares

Shares can be registered or bearer, although it is more normal for them to be registered and a company must have a power in its articles to enable it to issue bearer shares.

In the case of the registered share, title depends on the entry of the holder’s name in the Register of Members and transfer of title involves the substitution of the name of the transferee for that of the transferor. The share certificate is prima facie evidence of title. In the case of bearer shares, the holder is issued with a share warrant which may include coupons for the payment of future dividends. This warrant is a document of title for the shares which are transferable by mere delivery of the warrant. The warrant is therefore a negotiable instrument and a transferee for value, obtains a good title as holder in due course. A person holding bearer shares is not automatically a member of the company. This will depend upon the articles.

Mortgages of shares

Shares can be mortgaged as a security for a loan.

Classes of share

Prima facie, all shares enjoy equal rights and where a company divides its shares into different classes, the presumption of equality must be specifically displaced. All shares may now be issued as redeemable shares. The most usually encountered classes are ordinary shares, preference shares and deferred shares.

Ordinary shares.

Unless otherwise indicated, all shares issued by a company are presumed to be ordinary shares. The rights of an ordinary shareholder implied by law are (i) to be paid on unlimited, non-cumulative dividend where the company makes a profit and a dividend is declared; payment will be after payment of any preference dividends; (ii) to receive notice of and attend and vote at general meetings of the company; and (iii) to the return of capital and share in any surplus capital in the event of winding up.

Preference shares.

Preference shareholders always have priority over ordinary shareholders to payment of a fixed dividend. In addition there may be a preferential right to a return of capital on winding up. There is a presumption that the right to a dividend is cumulative.

A preferential right to a fixed dividend means there is no right to participate in further dividend distributions to ordinary shareholders. Similarly, the right to a preferential return of capital on winding up excludes a claim against surplus assets of the company on winding up: Scottish Insurance Corporation Ltd v. Wilsons & Clyde Coal Co. Ltd [1949]. In this case, the House of Lords stated: ‘Whether a man lends money to a company at 7% or subscribes for its shares carrying a cumulative preferential dividend at that rate, I do not think that he can complain of unfairness if the company . . . proposes to pay him off.’

Deferred shares.

Also known as management or ‘founders’ shares, they usually carry multiple voting rights with the right to an unlimited dividend deferred until a fixed minimum percentage is paid to the ordinary shareholders. Capital repayment is usually deferred, in which case the deferred shareholders have exclusive rights to surplus assets. They are rarely issued and most have been converted into ordinary shares.

Variation of shareholders’ rights

The power to vary the shareholders’ rights depends on whether there is one class or two or more classes of shares. In the first case the shareholders have membership rights and in the second they have class rights.

Variation of class rights.

Where the rights are contained in the articles or the terms of issue, there is a procedure for variation either with the written consent of three-quarters of the shareholders of that class, or the sanction of an extraordinary resolution passed at a separate class meeting.

If the memorandum prohibits variation, then the rights are unalterable except by way of a reconstruction under s.425. If there is no procedure stipulated in either the memorandum or the articles, variation of rights requires the unanimous consent of all the members of the company.