A&L Goodbody LLP
  November 1, 2005 - Ireland

Company Law – Reduction in Share Capital – Whether Company Entitled to Cancel Preference Shares

Re Hunting plc [2004] EWCH 2591 (Ch) Facts: The company’s issued share capital consisted of ordinary shares and convertible preference shares. Under the company’s Articles of Association, the preference shareholders were not entitled to attend at or vote at general meetings of the company, unless, among other things, a resolution was to be proposed at that meeting which modified any of the rights attaching to the preference shares. The preference share certificates stated that preference shareholders would be entitled to attend at and vote at a meeting where a resolution was proposed “reducing the capital of…or modifying or abrogating any special rights attaching to the preference shares.” Therefore, there was a conflict between what was stated in the company’s Articles, and what was stated on the share certificates. The company decided to purchase the preference shares at par value as a way to reduce the company’s share capital, which was permitted by section 135 of the UK Companies Act 1985 and the company’s Articles. A resolution authorising this was made at a meeting of ordinary shareholders only. The preference shareholders challenged this resolution on two grounds: 1. the share certificates stated that the preference shareholders should be present and vote at meetings concerning a reduction in share capital, and 2. it was unfair that the shares could be purchased at par value, when the shares were trading above par value on the market. Held: 1. The preference share certificates had misstated the terms of the Articles by incorrectly summarising the voting rights of the preference shareholders. These terms could not override the Articles’ restrictions on attendance and voting at meetings. 2. Reducing the share capital to relieve the company from the cost of maintaining preferred shareholdings is a proper purpose for the reduction, if doing so is in the best interests of the company. Receiving par value for the shares was all that the preference shareholders were entitled to receive under the company’s Articles. The court stated that “the company is not entitled out of feelings of sentiment…to hand over part of its share capital to a class of shareholder which has no entitlement to it under the Articles of Association.” In short, the court held that the company could proceed with the share purchase to reduce its share capital.


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