Shares

What is Shares?

• Definition and nature of shares

- S4 (1) CA
a) Shares means share in the capital of a corporation.

b) It includes stock unless express or implied distinction is made between stock & shares.

- S98 CA
a) Shares are movable property.

b) It is transferable as per terms provided for in the manner under the articles.

- S2 Sales of Goods Act

a) Shares are goods within the meaning of S2 of SOGA.

- Farwell J in Borland’s Trustee v Steel Brothers

a) Shares is the interest of shareholders in the company measured by a sum of money.

b) The nature of interest of shares is for the purpose of liability, interest of the holders in
the company, and also as a series of mutual covenants entered into by all shareholders
inter se.
i. In the aspect of liability, for a company limited by shares, generally, shareholder
will be liable for the liabilities of the company to the extent of its/their shares.
E.g; S214 (2) (d) where a member does not need to contribute for liabilities of
companies upon winding up of the company, exceeding the amount of the
member’s unpaid shares.

ii. The nature of shares in the aspect of interest in the company can be best be
understood from the case of Prudential Assurance Co Ltd v Newman Industries
(No 2) where it was stated that shares can be said so as to confer a right of
participation to the shareholders in the company on the terms of AOA.

iii. In the aspect of mutual covenants inter se, this can be illustrated through the
strength of Section 33 of CA, whereby, shareholders within the terms of MOA &
AOA are bound by it as if they had entered into such covenants by each member
and will observe the terms of MOA & AOA. Each member have a right and
duties against each other, if the meaning of the Section 33 were to be simplified
in this aspect.
 c) In conclusion, it could be understood that shares may be regarded as a bundle of rights
and obligation.
i. Section 55 – voting rights
ii. Fourth Schedule; Article 98-105 – right of dividend
iii. Fourth Schedule; Article 112 – right to return of capital upon winding up of
companies subjects to MOA & AOA.
iv. Fourth Schedule; Article 13 – obligation of shareholders to pay the value of
unpaid share capital upon being called by the directors.
v. Section 214 – liabilities as contributories.

Characteristic of shares

• Rights to dividends
- Re Chelsea Waterworks Co & Metropolitan Water Board [1904]
a) In its ordinary meaning, dividends is a share of profits whether at a fixed rate or
otherwise, allocated to the holders of its shares in a company.

- Re Holben, Hubbard & Co [1983]

a) There is no obligation on a company to pay dividends when profits are available unless
the AOA provided otherwise. Thus, it can be said, the right to dividends does not
automatically comes with a subscription of shares unless provided otherwise by the
AOA & MOA.

• Rights to vote
- S55 (a) CA
a) The general rule is that each equity share shall come with the right to vote.
b) S4 provides that equity share is shares which are not preferences shares.

- S148 CA
a) Members generally have the right to attend meetings and vote on any resolution during
the meetings subject to restriction by the CA and the MOA/AOA.

• Rights of return for capital

- Fourth Schedule; Article 112
a) The liquidator may pass a resolution to divide the surplus of the assets upon the winding
up of the companies.
b) Find authorities
 • Liability to subscribe the due capital
- Fourth Schedule; Article 13, S214 CA
a) Outline the liability of shareholders to make payment of unpaid capital and until such
payment is made shall be liable for the amount of unpaid capital value upon cases such
as when the company wounds up.

• Rights of membership as found in the AOA

- Prudential Assurance Co Ltd v Newman Industries (No 2)
a) It was stated in this case that shares can be said so as to confer a right of participation to
the shareholders in the company on the terms of AOA.

Classes of Shares

From the wording of Art 2 Table A of Fourth Schedule and S4 of CA, it could be understood that there
are two types of shares, which is ordinary shares/equity shares and preferences shares. The classes of
shares may be provided for under the MOA or AOA.

However, there is no provision in CA that made it compulsory for the company to issue different classes
of shares.

In the case of Birch v Cropper; Re Bridgewater Navigation Co (1889), it was stated that in the absence
of express provision of the terms of any issue, MOA, AOA, there is a presumption of equality amongst all
the shareholders in respect of rights relating to dividends, return of capital, & voting. An express
preference in respect of any one of those right does not confer preference in respect of the other rights.

• Preference Shares (PS)

- S4
a) Defined PS as a share which does not entitle the holder the right to vote at general
meeting or to participate beyond a specified amount in any distribution whether by way
of dividend, redemption, winding up or otherwise.

b) It is wise to note that there is a slight difference with the England and Australian law in
relation to the definition of preference shares. The England/Australian law defined
preference share as a share that confers upon its holder some preference in relation to
payment of dividends or return of capital in a liquidation.
• Rights of PS holder
- S66 (1)
a) Provides that a company, in issuing a PS must set out the rights attached to the PS either
in MOA or AOA. The rights attached to the PS must be specified in regard to
i. Its voting rights.
ii. Whether it comes with cumulative or non cumulative dividends.
iii. Priority of repayment of capital & dividend in relation to other shares
iv. Participation in surplus assets and profits
v. Repayment of capital

b) From the wording of S66, it should be noted that in certain circumstances, even the PS
holders may have the right to vote. This further strengthened the effect of S142 (2) that
stated PS holder may attend meeting and may vote in some circumstances, although
such rights may be suspended.

c) From here, it could be observed that there is an inconsistency between the definition of
PS set out in S4 and the rights that CA actually allowed PS holder to have by virtue of
S66 & S148.

d) This inconsistency was explained by Phillip N Pillai in his books that such inconsistency
was due to the fact that S66 of CA was borrowed from the Australian CA where in
Australian CA, there is no equivalent provision as regard to the definition of PS in
Malaysia, S4.

e) This provision is designed to make it easier to determine what are the rights attached to
PS.

- Re Hume Industries (FE) Ltd

a) This case is where it was stated by Tan Ah Tah J that there is a presumption that the
rights set out in MOA/AOA for PS are exhaustive.

b) If it is not stated in MOA/AOA, the PS holders are prima facie does not have such
rights.

- S66 (2)
a) If the PS is issued without the rights of its holder specified in MOA/AOA but only on the
term of the issued share, the officer in default shall be liable for a penalty.

b) Be that as it may, even if the S66 (1) is not complied with; nothing in CA provides that
the additional right not specified in MOA/AOA to be invalid. It perhaps is enforceable
under contract law.
 - Re Sheffield Manufacturing & Plating Co
a) This is because, as suggested by Roper CJ, the right of PS holder can be ascertained
from the MOA/AOA of company & also the terms upon which the preference shares
were issued.

- Walter Woon in his book suggested that such additional rights would be valid but the PS
holder shall be the one to bear the burden of proof to prove such rights does exist.

• Cumulative PS
- Cumulative PS holders are entitled to received a fixed cumulative dividend right.

- Birch v Cropper
a) If in any year PS holder did not received his dividend, the amount due shall be brought
to the next year as cumulative PS holder are entitled to the fixed dividend. The amount
brought forward will be added to the amount of dividend for the next year.

- Mosgiel v Mutual Life & Citizen Assurance

a) Until the deficiency of the dividends is paid in full, other shares holders, ordinary share
holders may receive no dividends.

• Non cumulative PS
- Non cumulative PS entitles the holder to a dividend at a fixed rate where dividend is
declared & paid. If the company fails to pay a dividend to non-cumulative PS holder, the
non-cumulative PS holder is not entitles to bring forward such due dividend for the next
year.

- If a company did not declare any dividend at that particular year, the holder cannot claim it
as rights. This law can be seen from the position of common law.

- Webb v Earle
a) It was held that PS is presumed to be issued with cumulative dividend right unless the
contrary is shown.

- S66 (1) & Re Hume Industries Ltd

a) The position in Malaysia is different as under the provision and the case law, the right
of a PS holder shall be presumed to be as exhaustive as what was provided under the
MOA/AOA. It is for the claimant to discharge such presumption.
• Redeemable PS
- S61 (1)
a) Allows company with share capital, so long as authorized by the AOA, to issue a
redeemable PS.

- Re Dexine Patent Packing & Rubber Co Ltd

a) The wording of the provision stated that in order to issue such share, there must be a
provision in AOA to allow for such an act. Hence, MOA alone is not an adequate
authority to issue a redeemable PS.
b) It should be noted this authority is only persuasive in nature. It is not binding as it is a
foreign case.

- Re St James Court Estate Ltd

a) It was held that it is not possible to convert an existing class of shares which were
issued into redeemable PS.

- S66 (1)
a) Redeemable PS may be redeemed at a specified date or the company is given a right to
repay the capital within a specified period. In any case, the redemption must be done in
accordance to the provision of AOA that authorize the issuance of such shares.

• Rights that can be attached to PS

- S66 (1)
a) Right with respect to repayment of capital
b) Participation in surplus of assets and profits
c) Cumulative or non cumulative dividend right
d) Voting rights
e) Payment of capital & dividend in respect of other classes of shares.

• Construing PS & Ordinary shares

- Re London India Rubber Co
a) A preference on dividend does not imply preference to return of capital & vice versa. If
there is no express provision on the rights of class, there is a presumption of equality
with the holder of ordinary shares.
 - S66 (1) & Re Hume Industries Ltd
a) Rights of PS holders set out in MOA & AOA is exhaustive. If PS holders claim additional
rights other than what were stated in AOA/MOA, the burden of proof is on the
claimant.

b) If a statement is made about the right of PS holder, the statement is exhaustive as far
as the matter is concerned.

- Scottish Insurance v Wilson & Clyde Coal Co

a) If preferential right is given in relation to a return of capital, they are presumed to be
non-participating in surplus assets. The same goes in situation where if there is a fixed
rate of dividend set out for PS holder, they have no right to claim for further amount
than what was provided for in MOA/AOA.

• Ordinary Shares (OS)

- CA does not provide for definition of OS, S4 (1) vaguely defined the other types of shares
a) Any non-PS is an equity shares. Hence, OS can be said as an equity shares because it is a
non-PS.

- Re Isle of Thenet Electricity Supply Co Ltd

a) Holder of OS whom has paid up the value of the shares is entitled to the return of
capital in the event where the company wounds up only after all creditors have been
paid in full and any preferential share capital has been returned.

- Gower & Davies’ Principles of Modern Company Law

a) OS confer right in equity in the company. If the members can be said so as to own the
company, OS holder can be said to be the proprietors.

b) This is because, OS holder bear the highest risk among other class of shareholders, and
because of that, it is they whom should be entitled to the profit proportional to the risk
they bore.
Variation of rights

In Birch v Cropper, the general rule is that all shares are presumed to be equal to one another in the
aspect of rights & liabilities unless the contrary is proven.

A company share capital may be divided into different classes. The classes of shares may be provided for
in AOA/MOA. However, it is not obligatory for a company to do so. S65 (1) impliedly allowed for a
company to issue or create different classes of shares.

Neasey J in Clements Marshall Consolidated v ENT Ltd stated that a class of shares refers to a category
of shares in the capital structures of a company which differs sufficiently in respect of rights, benefits,
disabilities, or other incidents so as to make it distinguishable from other category of shares.

• CA allowing for variation of rights

- Article 2 of Table A; Fourth Schedule
a) Directors may issue different classes of shares subject to the restriction by CA.

- S65 (1)
a) A company may provide for different classes of shares and varies it subject to the Act,
MOA/AOA.

• Variation of classes of share in MOA & AOA

- Class right contained in MOA appears to be unalterable unless if a procedure to vary the
class right is also provided for in the MOA.
a) S21 (1) provides that MOA of company may only be altered or modified in manner
consistent to the Act.

b) S21 (1A) extended the company’s power to amend its MOA though such power to
amend is restricted by S21 (1B).

c) S21 (1B) restrict alteration or deletion of a provision of the MOA that relates to rights
which only members of a specific class are entitled to.

- If the class right is provided for in AOA, it appears that it may be altered by passing a special
resolution.
a) S31 (1) provides that AOA may be altered by the passing of resolution by the members
of company in the meeting.
• Variation of rights
- Clerk L.J in Re House of Fraser plc
a) Variation of right presupposes the existence of rights, the variation of such right, the
subsequent continued existence of the rights as varied.

- White v Bristol Airplane

a) Evershed M.R. made a sharp distinction between variation of the rights and variation of
the enjoyment of shareholders to make use of the rights attached to the share.

b) In this case;
i. AOA contain a variation of class right clause
ii. Class members of the affected class must pass an extraordinary resolution at a
separate meeting allowing the variation
iii. Variation clause applicable if the act purported to modify, vary, or abrogated,
affecting the current class member in any manner
iv. The board of directors (BOD) proposed to make bonus issue of PS to its OS
holder ranking equally with the current PS holder.
v. The current PS holder challenge the proposal
vi. Court held that there is no variation of class right
vii. The current PS holder is not affected in any manner except in the aspect of the
dilution of voting power, if any.
viii. To the current PS holder, their right remain intact, no changes.
ix. It is their enjoyment to exercise the rights as PS holders that are affected due to
the watering down by the company.

- Greenhlagh v Arderne
a) This case applies the same reasoning as in the case of Bristol.
i. There are two classes of OS holders.
ii. 10s & 2s OS ranking apri passu
iii. Greenhalgh hold the bulk of 2s shares, hen ce controlling the company.
iv. A resolution was passed to subdivide the 10s shares to 2s shares, each ranking
pari passu with the original 2s shares.
v. From the resolution, Greenhalgh voting power was watered down as the other
sharesholder voting power was increased by 5 times.
vi. Lord Greene MR applies the same reasoning, no variation of right. Outcome of
judgment will be different if the resolution is to grant the 10s shareholders five
votes per share.
 - S65 (6)
a) The principle in Bristol & Greenhalgh is not applicable under CA
b) The issue of PS ranking pari passu with the existing PS shall be deemed to be a variation
of rights
c) Unless if there is an authorization by the company’s AOA or by the terms of the existing
PS

- Case study – Re Saltdean estates; Re Mackenzie

• Procedure for variation of rights

- Art 2 of Table A
a) It is possible for directors to issue different classes of shares subject to a resolution of
the company. This power of directors is subject to AOA.

b) If class rights are attached to the company MOA, there cannot be a variation except in
accordance to the procedure set out in the MOA itself.

- Crumpton v Morrine Hall

a) The company provides for a variation of right clause in its AOA. The clause requires the
consent of majority of the holders of the class right.

b) Plaintiff did not consent to the modification of rights. Jacobs J stated that if such
modification of rights clause exists, it must be complied with, otherwise, modification is
ineffective.

- S65 (1)
a) Even if the procedure of the CA is complied with, CA under this provision provides for a
statutory protection to minority shareholders. For this section to apply, statutory
condition that have to be fulfilled and the effect of the application are;
i. Must be applied by shareholder/s of at least 10% of that class
ii. Application is made to cancel the variation of rights
iii. The variation of rights shall not be effective until confirmed by the court.

- Re Holders Investment Trust

a) The court in this case disallow the variation of right because;
i. Majority of PS holder are also OS holder
ii. The variation would greatly benefit the OS holder
iii. Court decline to confirm the variation as it unfairly prejudice the shareholders of
PS class as a whole.
- S65 (4)
a) This provision granted the court discretionary power to allow or disallow the variation if
an application is made under S65.