Changes to Share Class Rights

Your company’s name is Rod, and he likes to party. You’re throwing a big bash to celebrate the grand opening of Rod. To make things fun, you’ve whacked a theme (set of rights) onto the owners of your company (share classes) based on what types of shares they have - those rights tells them what they can and can’t do. If you’re wondering what on earth share classes are, check this page out.

The party is a hit, but then for whatever reason (open bar perhaps?), you decide that there needs to be some ch-ch-ch-ch-chaaaanges to the theme you've given each kind of owner. AKA, you want to make variations on the rights each share class had been initially sold with. Low and behold, a wild David Bowie appears. As with all ch-ch-ch-ch-chaaaanges (last time, promise), there will be winners and losers. Some variations will improve the privileges of the class and for some less fortunate, their existing entitlements will be undesirably affected.

Section 246B of the Corporations Act 2001 (Cth) is that token police officer that comes around at 2:00am and makes sure everything is orderly. The procedure to make variations rests on whether there is a provision to make changes in your company’s constitution. If your constitution has already got provisions to make changes to rights for certain share classes, life’s pretty gooood. 246B will just make sure you follow the constitution’s requirements. Pretty straight forward stuff.

If your company’s constitution doesn’t deal with changes to rights for share classes things could be a bit trickier - but don’t worry, you’ve still got this. You’ll need to gather all of your shareholders of all of your classes in order to vote for the proposed variations or cancellation of rights you had in mind. It’s pretty reasonable that some people might not want to change or give up their costumes half way through a party.

For this little party go Rod’s way, you’ll either need to have a special members resolution passed in favor of the modifications (that’s more than 75% of shareholders, check out this handy diagram), or have 75% of the attendees in the ‘concerned class’ declare their unwavering love and support for the proposed changes.

The company must then spread the word to the members of the classes affected by changes or cancellation of rights (section 246B(3)).

Cue the protestors.

As with all change, there will be those that can’t handle it. I like to call them the ‘Not Happy Jan’s (NHJ’s) of the company. Members with at least 10% of the votes in a class who do not agree with a variation or cancellation may apply to the court to have the variation or cancellation set aside. The court will usually only side with NHJ’s if it is convinced that there would be unfair prejudice to them, should the changes be made. There’s a bunch of timing regulations that can all be found under section 246D(2-5) of the Corporations Act 2001 (Cth). Protestors aside, unhampered variations to class rights are usually effective from the date the resolution was voted for or a date that was proposed at time of voting.