In this case, in circumstances where no terms and conditions were specified on the issue of A and L class shares, the Supreme Court of New South Wales construed the company’s constitutional documents to find that the holders of such shares were entitled to participate equally with ordinary shareholders in the distribution of surplus on a winding up. 

The share capital of Nadel Investments Pty Ltd (Nadel) comprised 2 ordinary shares, 2 A class shares and one L class share.  The relevant provisions in the Nadel Memorandum and Articles of Association provided the following:

  • any shares may be issued “with such right of preference whether in respect of dividend or of repayment of capital or both” and “with any special or restricted rights or without any right of voting and generally on such terms and subject to such conditions and provisions as may from time to time be determined in accordance with the articles of association” (clause 5 of the Memorandum);
  • holders of A to L class shares are not entitled to vote, the A to L class shares conferred the right “only to such dividends as the directors from time to time as they think fit determine” and holders of A to L class shares are “entitled to such voting powers and to such dividends and rights on winding-up and otherwise as the directors may at the time of issue of each particular class determine” (clause 5 of the Articles);
  • the directors may allot shares “on such terms and conditions, as they see fit” and “without prejudice to any special rights previously conferred. any share may be issued with such preferred, deferred or other special right….as the company may from time to time by ordinary resolution determine” (clause 6 of the Articles); and
  • on a winding up “the excess [assets] shall be distributed amongst the members in proportion to the capital at the commencement of the winding-up, paid up or deemed to be paid up or which ought to have been paid up on the shares held by them respectively.  But this clause is to be without prejudice to the rights of the holders of shares issued upon special terms and conditions” (clause 120 of the Articles).

The resolution of the directors allotting the A and L class shares did not impose any special rights, privileges or restrictions in respect of those shares. 

In light of the above, the question before the Supreme Court of New South Wales was whether, on a winding up of Nadel, the A and L class shares were entitled to share equally with the ordinary shares in the distribution of surplus, or only the ordinary shares were entitled to a distribution as no right to participate had been expressly conferred on the A to L class shares. 

Brereton J held that:

  • in the context of clause 5 of the Memorandum and clause 6 of the Articles, there was a “general flavour” that special rights (ie respects in which particular classes of shares might differ from ordinary shares) would be specified in a resolution at the time of issue;
  • clause 120 of the Articles set out a prima facie position that surplus would be distributed amongst members in proportion to the capital and an exception that is subject to the rights of holders of shares issued upon special terms and conditions;
  • as no shares were issued upon special terms and conditions, clause 120 of the Articles encompassed all 5 issued shares, not just the ordinary shares; and
  • to find otherwise would mean either that:
    • the A and L class shares were only entitled to a return on the amount paid up, but that would be a special term and condition, and nothing indicated any such terms or conditions were attached to those shares; or
    • the A and L class shares were entitled to nothing at all such that they were shares without any rights at all (not to vote, receive dividends nor even to be returned paid up capital) which would be a remarkable position that the Court would not embrace unless compelled to do so.