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Shifting shareholder preferences in smaller family-based companies receives High Court attention

Company Law News | August 2013

The small company of LW Furniture (Australia) Pty. Ltd. which was operated by two families has been receiving its fair share of attention from the High Court of Australia in recent past. The company was in liquidation. In the recent decision of the High Court of Beck v. Weinstock [2013] 93 ACSR 251 the High Court was required to consider whether the shareholders of the company were entitled to receive the surplus assets of the company once the liquidation was completed. The distinguishing feature of this company was the only shareholders which remained on the company’s share register held redeemable preference shares. There were no holders of ordinary shares at that stage. “Redeemable Preference Shares” are a handy means of raising capital for a company when the company does not wish or is unable to borrow funds or raise capital through the more usual means. In order to issue Redeemable Preference Shares a company will issue this special class of shares with special rights and entitlement, including the preferential right to a dividend [over the rights of other shareholders] and often at a better rate than the rate of the dividend offered to other shareholders. The other attraction to Redeemable Preference Shares is that the shareholder will be paid a return on their investment in priority to other shareholders on the completion of a liquidation, although the value of the return will be limited to the face value of the shares.

In this case the Court found that the only issued shares were Redeemable Preference Shares issued to one of the 2 families and no shares had been issued to the other family! The “other family” who had no shares argued that it was impossible to issue redeemable Preference Shares in a company and not to have first issued “ordinary shares”. Section 254A(3) of the Corporations Act defines  Redeemable preference Shares and the Court judgements provide an interesting history of corporate law in England and in Australia. Suffice it to say that the High Court concluded that there is no requirement in the legislation nor in case law to support any assertion that a company must have other classes of shares issued before it can rely on having only Redeemable Preference Shares.

This case may serve as a timely reminder for companies, and in particular long-held family companies to review their shareholdings to ensure the shareholding and the classes of shares issues reflect a just and equitable share of the assets of the company.

Annette Fontana of Forum Law has had extensive experience advising companies on shareholdings and revising and drafting the constitutions of companies to reflect the agreed intentions of all the members of a company, contact Annette at Forum Law to discuss what your company may require.

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