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Issuing Class B Shares: Legal Analysis

   

Added on  2020-03-13

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Issuing Class B Shares: Legal Analysis_1

COMPANY LAWPart AIssueThe major concern is to ascertain whether the issuer (Grand Ltd.) can raise incrementalcapital by issuing 5,000 new preference shares.LawAs per s. 124 Corporations Act 2001, a company can issue shares belonging to differentclasses which includes preferences shares also (Cassidy, 2013). However, a necessarycondition for issuance of preference share is outlined in s. 254A which advocates that rightsassociated with preference share need to be outlined in company’s constitution or a specialresolution enacted for this purpose. These rights can include information about linked votingrights, distribution of surplus profits and assets, repayment of capital, dividend being non-cumulative or cumulative and priority with regards to capital payments & dividends (Austlii,2017a). Further, it is noteworthy that if preference shares are issued having the same rights asthe current preference shares, then as per s. 246C, the current preference shares holders rightsare altered which requires consent from existing preference shareholders (Austlii, 2017b). Ifthis consent lacks unanimity, then s.246D applies which provides right for aggrievedpreference shareholders to approach court if 10% of shareholders of a particular class deemso (Austlii, 2017c).ApplicationGrand Ltd has already 5,000 preference shares issued and wishes to issue 5,000 more to raiseincremental capital without increasing leverage. Since, the company’s constitution lacks theprovisions related to issue of preference shares, hence in order to issue the new preferenceshares a special resolution of equity shareholders would be required which should not be aworrying aspect. It is noteworthy that the company wants that the new preference sharesshould have the same terms as existing and hence, the existing preference shareholders’approval would need to be sought as this issue would impact their rights. However, thisapproval would be hard to come by as with incremental preference shares, the ability of thecompany to pay dividends and capital repayment to existing preference shareholders in caseof financial distress may be adversely impacted. Thus, the requisite consent by currentpreference shareholders would not be given and hence the company cannot issue theseConclusionThe company cannot issue new preference shares on the same terms as the existing issue as itadversely impacts the rights of the current preference shareholders who are unlikely toprovide their requisite consent.1
Issuing Class B Shares: Legal Analysis_2

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