Australia: what is a preference share?

The New South Wales Court of Appeal gave judgment last week in Weinstock v Beck [2011] NSWCA 228. The case concerned the validity of the purported issue of redeemable preference shares at a time when the company had only issued preference shares. At first instance - see [2010] NSWSC 1068 - the trial judge held the shares were not preference shares and could not be regarded as such unless at the time of their issue there were other shares that had been issued over which they had a preference.

Opinion in the Court of Appeal was divided. Young JA, in the minority, supported the position taken by the trial judge and, in his judgment, considered various definitions of preference share, referring to authorities from Delaware, England, Canada and Singapore. Young JA took the view that preference shares were those that had rights over and above other shares in the company which actually existed. The majority disagreed. Handley AJA (with whom Giles JA agreed) held that the directors' power to issue new shares, as contained in the articles of association, was exercisable at all times and was not affected by the state of the company's share register. As such, the preference shares in question were validly issued and conferred the preferential rights defined in the articles. These rights were, Handley AJA noted, potential only and would lack effective content until ordinary shares were issued. This did not, however, mean that preference shares could not be issued.