Facts
- House of Fraser plc instituted a plan to buy back a substantial number of its own ordinary shares.
- ACGE Investments Ltd, owner of a different share class, opposed the plan, asserting that the buyback diminished the power of its class through a reduction in share numbers.
- The main dispute centered on whether the buyback, targeting a specific class, constituted an alteration of the rights attached to that class.
- The case concerned the interpretation of the Companies Act 1985, which governed changes to class rights and provided safeguards for shareholders in particular classes.
Issues
- Whether the reduction of the number of shares in a particular class through a buyback constitutes a variation or abrogation of the rights attached to that class under the Companies Act 1985.
- Whether the approval of the affected class was required when only the number of shares (not the nature of rights attached) was reduced.
- Whether the buyback plan as implemented impacted the rights to dividends, voting, or other class-specific entitlements of ACGE Investments Ltd.
Decision
- The House of Lords held that a reduction in the number of shares in a given class did not by itself amount to a variation of class rights.
- The Court found that class rights refer to the rights attached to the shares (such as voting or dividend rights), not the numerical strength of the class.
- Since the proposed buyback did not alter the substantive rights of the shares held by ACGE Investments Ltd, class approval was not required.
- The company could proceed with the buyback plan without being obliged to obtain approval from other classes affected only in numbers, not in rights.
Legal Principles
- Class rights under company law relate to the explicit legal rights attached to shares (including voting and dividend rights), rather than the proportion or number of shares held by a class.
- A buyback that merely reduces the number of a class’s shares does not, without more, amount to a variation of those class rights.
- Each buyback plan must be assessed against the company’s articles of association and the actual impact on the rights attached to the remaining shares.
- The protection of minority or specific class shareholders centres on whether their legal entitlements per share are directly impacted by any company action.
- Current company law—including the Companies Act 2006—continues to uphold the critical distinction between numerical reductions and variation of rights.
Conclusion
The House of Fraser decision established that a share buyback reducing the number of shares in a class does not, by itself, constitute a variation of class rights as long as the rights attached to remaining shares are unchanged, granting companies greater flexibility in capital management while maintaining protection for genuine class rights.
