Section 88 of the Companies Act 2014 – Variation in class rights
In drafting section 88 of the Companies Act 2014, each reference to ‘memorandum of association’ and ‘articles of association’ was replaced with a single reference to ‘constitution’, which had unintended consequences in relation to the variation of class rights. (Regulation 3 of part 1 of Table A, which deals with variation of class rights, was not migrated to the Companies Act 2014.)
This creates an issue for a company that has shares of different classes, but the constitution of which does not provide for variation of class rights. The effect of section 88(5) is that such rights may only be amended with the approval of all members, including the holders of non-voting shares.
A constitution may be amended by a special resolution to insert provisions dealing with variation of class rights. However, under section 88(7), the insertion of any such provision would itself be treated as a variation of class rights.
Section 88(4) also has to be considered. The effect of section 88(4) is that, even if a constitution is amended post-incorporation to include provisions dealing with variation in class rights, the default provisions of section 88(5) would still apply in certain circumstances.
The Company Law Review Group has recommended that the legislation be amended. In the meantime, practitioners should keep the provisions of section 88 in mind in advising on the incorporation of LTDs, the creation of new share class(es) in LTDs, and the level of consent that might be required to a variation in class rights at any time.