Variation of Shareholders' Rights: Section 48

Variation of shareholders' rights under section 48 of the Companies Act, 2013 is how a company changes what a class of its shares is entitled to. It needs three-fourths of that class behind it, either in writing or by special resolution at a separate class meeting. A ten per cent minority can then take the variation to the Tribunal, and the variation stops working until the Tribunal confirms it.

When does variation of shareholders' rights under section 48 apply?

Variation of shareholders' rights under section 48 applies where a company's share capital is divided into different classes of shares. The sub-section then sets a gate before the consent question is even reached, and it has two limbs:

• (a) provision with respect to such variation is contained in the memorandum or articles; or
• (b) in the absence of any such provision, the variation is not prohibited by the terms of issue of the shares of that class.

If neither limb is satisfied, the class consent does not help. The constitutional documents or the terms of issue have to leave room for the variation first.

The two routes to a three-fourths consent

Section 48(1) gives the company a choice, and either route carries the same weight:

The two routes are not measured the same way, and that is worth reading closely. The written-consent route is measured against the issued shares of the class, so a holder who does nothing counts against it. The other route is a special resolution, and section 114(2) measures a special resolution on the votes cast at the meeting. The written route is therefore the harder of the two to clear on a widely held class.

The proviso extends the section sideways. If a variation by one class affects the rights of any other class of shareholders, the consent of three-fourths of that other class must also be obtained, and the provisions of the section apply to that variation too. A change dressed up as affecting only preference holders cannot be pushed through if it reaches the equity class as well.

What the ten per cent minority can do

Section 48(2) is the minority protection, and it is unusually strong for a shareholder remedy in the Act.

Two features are worth reading closely. First, the qualifying group is holders of not less than ten per cent of the issued shares of the class who did not consent to the variation or did not vote in favour of the special resolution, so an abstention counts as much as a vote against. Second, the effect of filing is immediate: where any such application is made, the variation "shall not have effect unless and until it is confirmed by the Tribunal". The company does not get to implement and then litigate.

The proviso fixes the clock at twenty-one days after the date the consent was given or the resolution was passed, and permits a collective filing: the application may be made on behalf of the shareholders entitled to make it by one or more of their number appointed in writing for the purpose.

Section 48(3) makes the Tribunal's decision binding on the shareholders. What is the National Company Law Tribunal covers the forum the application goes to.

What reaches the public record

Section 48(4) is the disclosure limb: the company shall, within thirty days of the date of the Tribunal's order, file a copy of it with the Registrar. That is the point at which a variation dispute becomes checkable from outside the company.

Section 48 no longer carries a penalty of its own. Sub-section (5) was omitted by the Companies (Amendment) Act, 2020 (Act 29 of 2020), section 8, with effect from 21 December 2020. What remains as the discipline on the section is structural rather than monetary: a variation that a ten per cent minority challenges simply does not operate until the Tribunal says it does.

• Alteration of the articles, section 14 covers the constitutional change that often has to happen alongside a variation.
• Restriction on voting rights covers section 106 and the section 47 default voting right a variation reshapes.
• Ordinary resolution vs special resolution sets out the special-resolution threshold section 48(1) borrows.
• What is section 117 filing of resolutions covers the resolution filings that land at the Registrar.

Variation of shareholders' rights is a legal process, not a view on a company. Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.