Discuss about the Corporate Law for ASX Listed Firms.
The main objective of this assignment is to bring out the main objective of the directors of a company and their limitation and duties regarding the issue of shares and dividends to its shareholders. This paper also throws light on the consequences in case of a second strike takes place by the shareholders if they are not content with the remuneration reports. This essay will talk about the legal issues in relation to the issue of shares and dividends, and application will be provides for the issue concerned and lastly, with the help of law we can help in bringing out a conclusion for this case study.
Do the authorities of Waldmart have the right to issue bonus shares and can the shareholders in the coming up annual general meeting oppose them not to issue the share?
In Australia, the companies act’s major legislations are from The Corporation Act 2001[1], section 254T [2] and 254A[3] are the provisions that are related to the issues of the shares and debenture[4] and the bonus shares by the directors. The Corporation Amendments[5] Bill 2011 gave scope to the consequences and circumstances which led to second strike in a company. The duties of the directors of the company are laid down under the sections 180-182 of the Corporation Act. These sections lay down that the directors should deal with the affairs of the company with utmost care and diligence[6], also these sections point out the duty of the directors is to make sure there is decorum that has to be maintained and always support the company in case there is a conflict between an individual and the company.
Section 254A[7] can be applied in the first issue of the given case and other laws that are related to bonus shares are also applied. Under section 254A of the Corporation Act, the directors in a company have the rights or power to issue bonus shares as per their discretion. The primary role of the director is to make sure that while making these discretions, he should be sure that his opinions or decisions are in the favour of the company and its shareholders and do not bring up these kind of issue when the company is insolvent or may become insolvent because of their issues. The ability and the capability of the company should be kept in mind while making the payment of the liability after such shares being issued. In this case of Waldmart Ltd. Has issued bonus share to attract the shareholders to approve the remuneration reports and so that no strikes are caused for the second time in the company. There was no best interest of the company kept in mind while imparting this issue by the directors of the company. Thus, there is breach of duty by the directors of the company under the Corporation Act. Therefore, the shareholders of the Waldmart Ltd. Have the right and the power to challenge the decisions of the directors[8] in the Annual General Meeting as well as in the court, we can see this in the case, AISC V Fortescue Metals Group Ltd.
Do the shareholders have the right to stop the directors from increasing and paying the decided dividend?
In the Corporations Act, under the section 254A[9] the directors are allowed to issue bonus shares to the shareholders, if no remuneration is is given on the basis of bonus shares section 124 of the Corporations Act will prevail. There are no changes brought in the capital structure of the company since the issued shares are for free. If the directors fail to do their duty and cause a breach in carrying out the functions of the company and carry out the position given to them by the shareholders to safeguard the company over their own interest[10], this can be seen in the case, The Bell Group Ltd V Westpac Banking Corporation (No 9) [2008] WASC 239.
The directors of the company can only allow the bonus shares to be issued, if there is no disadvantage caused to the company in giving back the pay to the shareholders and the creditors of the company. Under section 254T of the Corporation Act, the rules regarding the issue of dividends in case of a company not limited by guarantee is capable of issuing dividends unless the liability of the company is less than the assets then only in such circumstances the directors of the company will be allowed to issue the dividends.
The issues which deals with the dividends that are brought out by Waldmart Ltd are laid down under section 254T of the Corporation Act, it provides the principle and other issues that are related to the dividend in Australia. The directors of the company can issue the dividends only if he is sure of the fact that the issuing of the dividends will not cause any financial harm to the company and will be in the best interest of the company. in Waldmart Ltd, the directors also had to make sure that the assets of the company are more than the liability of the company so that the company has no issues in clearing off the debt of the company. it is the duty of the directors to be fair and reasonable to their shareholders before the dividends have to be declared. But in this case the directors have attracted the shareholders only for the purpose to approve the reports of remuneration so that no strike would take place. However, in this case the issue has come out because the decision which was made was not in the best interest of the company and the company would face financial instability. The shareholders have the right to oppose against the directors as they are fully aware of the fact that the decision of the directors will lead to financial loss for the company and them. Thus, they decided to oppose the decision in the Annual General Meeting of the company as the directors were not making the decision in relation to the best interest of the company and the shareholders, they was breach of the duty of the directors of the company. In the case, QBE Insurance Group Ltd V AISC[11] it was clearly stated that the directors could not issue dividends to determine the company.
What will be the consequence if the shareholders vote against the remuneration report and a second strike takes place?
The directors have to keep in mind the status of the company after making back the payment to its creditors[12]. If such pay backs will make the company bankrupt, then the directors of the company shall not declare the dividends. Insolvency is restricted and penalty is imposed on the directors under section 588G of the Corporation Act, if they declare the dividends of the company making the company solvent. This was seen in the case, Hilton International Ltd V Hilton (1988) NZHC 605[13].
Only those shareholders[14] that have at least minimum of 5% of the voting rights of the company that are in relation to the Annual general meeting, can make the directors of the company hold a meeting or even they can conduct a meeting in regard to the management of the company. The directors have to be very responsible regarding the affairs of the company in relation to the two strike rules. If a company[15] gets exposed to a 2nd strike by the shareholders all the directors of the company will be liable to re election. When the shareholders and the directors do not agree with reports being published by the directors in relation to the remuneration, and it fails to get a minimum of 25% votes in that case then the 2nd strike takes place by the shareholders. The reason for 1st strike by the shareholders is because the directors fail to give out the desired result in the remuneration report and fail to get 25% votes. Now, if all the directors are opposed to re-election is not sure. This can be seen within 90 days a pill meeting take place where the re-election is held. This process is called the spill resolution, which excludes the re election of the managing director[16] of the company, because he has the pressure to manage the affairs of the company.
The shareholders of the company were not in favour of the remuneration reports hence they did not approve it. The shareholders were sure of the fact that the decision made by the directors were definitely not in the best interest of the company and its shareholders as it would bring financial loss to them. Therefore, after the first strike the shareholders would initiate a second one against the director’s decisions. If the 2nd strike would take place this would result in the re-election of all the directors of Waldmart Ltd. by the shareholders. The shareholders will then by the process of Spill resolution re appoint all the directors for the company except the managing director of the company. it will be the duty of the shareholders to start the spill meeting where the election will take place within 90 days of the resolution being passed. This entire process of re election would not be applied to the managing director of the company as the main affairs of the company are managed by the managing director.
Conclusion
In end of this case study, it can be noted that the powers to issue the bonus shares are given to the directors; it is the right of the director to perform their duty with care, diligence and in the best interest of the company and its shareholders. Under section 254A of the Corporation Act, the same has been specified. The powers and the duties of the directors of a company are laid down under the sections 180-183 of the Corporation Act. And the issue of dividends are restricted under the section 254T of the Corporation Act. Thus, when there is a 2nd strike in the Waldmart Ltd. Company that will lead to re-election of the directors that are chosen for the process of re-appointment. The re-appointed will be done by the shareholders of Waldmart Ltd. through Spill meeting, leaving out the Managing director, he will be excluded from this re appointment as he has a crucial role to manage the affairs of the company. Hence, while considering the re-election the managing director of the company will not be involved in this process.
Reference List
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