House of Fraser plc v ACGE Investments Ltd [1987] AC 387

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

1. 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.
2. Whether the approval of the affected class was required when only the number of shares (not the nature of rights attached) was reduced.
3. 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.