Conversion of shares: variation or abrogation of rights attaching to class of shares
The High Court considered the question of whether the special rights attached to a class of preferred shares can be extinguished by the simple procedure of converting those shares into ordinary shares without the consent of the preferred shareholders, who had invested £44 million in the company in reliance on those special rights.
The Claimants, before investing in the company, had negotiated and acquired a number of valuable preferential rights attached to the shares they were purchasing which were additional to the rights enjoyed by the holders of ordinary shares in the company. These additional rights were ultimately recorded in amended articles of association and an amended shareholders' agreement.
Subsequently, various ordinary shareholders signed a letter to the company purporting (pursuant to the company’s articles) to give notice in writing requiring the preferred shares to be converted into ordinary shares (with the same nominal value) at the date of the notice. The company's solicitors then wrote to the Claimants informing them that the company was in receipt of the conversion notice, that their shares had been "converted into Ordinary Shares", and that the register of members had been amended accordingly.
The Claimants challenged the conversion.
The judge held that a conversion of preference shares into ordinary shares constituted a variation or abrogation of the rights attached to the preference shares, and granted a declaration that the conversion was invalid, void and of no effect on the basis that the procedure for varying class rights set out in the articles was not complied with.