Supreme powers have been provided to the company’s directors in Australia to manage the operations of the corporation through the application of s 198A of the Corporation Act 2001 (Cth)[1]. The company’s directors have full power to look after the working of the organization. However, the powers of the directors have been restricted by the rules of the both common law and statutory law in Australia the objective of this assignment is to study the limitations and powers of the directors in regards to dividends and bonus shares. As the owners have been instructed by law towards the company’s management, the directorsmake them happy with the benefits and dividends that may not help the company to gain benefits to attain the interest of their own. In order to get allowance for the director’s remuneration, the shareholders must approve the report[2]. In the given situation, it is seen that Waldmart Ltd company’s directors have taken the responsibility to issue bonus shares and dividends to the owners after the report of the initial remuneration is discarded by them. The main use of this assignment is to discuss legitimacy of these issues through the directors and in what basis these issues be dared by owners of the company. This assignment also holds the discussion regarding what consequences will the Waldmart company’s board needs to face if the report of subsequent remuneration is discarded that might cause a “Second Strike”.
This part of the assignment will be analysing the legitimacy of the shares of bonus through the directors and on what basis the problems could be challenged.
Share capital is paid usually but the directors hold the right to issue the shares for free to the owner of the organization who are existing and if they think that it is suitable. Bonus shares are those shares that do not change the company’s capital and no such consideration has been received against it. The rules that are in relation with the bonus shares’ issue by the directors are ruled by the both statutory rules and common law. The exclusive powers of the company’s directors to issue the shares have been provided under the section 124 of the Corporation Act[3]. The authority to issue the bonus shares to owners of the company has been given to the company’s directors by the section 254(1) (a) of the Corporation Act according to the section 124[4]. The note 3 of this section further gives that the company’s directors need not show the company’s share capital that has increased to issue the bonus shares.
The issue of the bonus shares can be done only out of income profits and no other reason given by the directors. The company’s directors might be dared legally if the bonus shares are issued for any other reason other than the profits. While the bonus shares are issued it is the duty of the directors to ensure that there must not be any kind of indulgence in any kind of trading that is insolvent. The directors of the company will be held liable under the duties of the directors if somehow they fail to give priority to the interest of the company over the personal interest.
The company’s shareholder holds the right to challenge the directors of the company legally if they see that directors of the company are not functioning as per the company’s interest. They hold to right to implement their powers through passing the resolution during the general meeting. The validation of the resolution has to be done by shareholders through assuring that the specific numbers of the members are present. A resolution might be passed if the vote is more than 50% and the special resolution might be passed of the total vote is more than 75%.
One of the advantages of issue of bonus shares is that it is beneficial for those shareholders who want to have long term investment in the company. Bonus shares also allow the company to save cash for reinvesting in business. The disadvantage include the fact that not all shareholders need long term investment. The company also does not get any cash on receiving bonus shares. They have to make a declaration in relation to the fact that the issue is in compliance with the constitution under s 140. Under s 254A(1)(b) preference share can only be issued if it is provided through the constitution or a special resolution.
The Waldmart company’s director have announced that to issue the bonus shares directly after the first report of remuneration was discharged by the owners. As per the owners, the company’s financial condition might get affected if the issuing of the bonus shares are done by the company’s directors. The owners think that if the issue of the bonus shares are done during unstable financial times then it is the most inappropriate step to be taken. In this situation, the company’s directors do not hold any right to issue the bonus shares to fulfil the interest of their own. Furthermore, the aim behind issuing the bonus shares in this situation is to make the owners accept the following report of remuneration by the company’s directors. Therefore, the owners not only hold the right to go against the director’s judgements during the AGM but they also hold the right to bring the proceedings against the directors of the company for taking the decision that is unwise.
This part of the assignment will be analysing the legitimacy of the dividends that have increased by the directors of the company named Waldmart and on what basis the increase in dividends could be challenged.
The power to take decisions regarding the dividends issue has been vested upon the company’s directors[5]. The section 254U of the Corporation Act provides that the dividends’ issue can be done at the director’s discretion[6]. As per the case Burland v Earle[7], no interference will be done by the court with the director’s power while issuing the dividends until they have done any kind of fraud. The court stated in the given case Miles v Sydney Meat Preserving Company[8] that the company’s directors are not permitted to issue or increase debentures against the company’s interest. The court provided in the case of Sandford v Sandford Courier Service P/L[9] if the corporation has gained excess profits and the can show it then only the directors can issue or increase the dividends. The section 254 T of the Corporation Act gives that the company’s directors will only be permitted to increase or issue dividends when they are able to show the company’s total assets are more than its total liabilities[10]. It is the duty of the directors to verify that dividends are fair and reasonable with regards to the company’s owners in all. One such important rule that has been provided in this part is that the organisation do not undergo any lossto their position of paying the liability because of the increase or issue in dividends. The section 254s states that if these dividends make the organisation insolvent then the company’s directors will be held responsible under the section 588G for the insolvent trading. The court had stated in the given case Re Spanish Prospecting Co Ltd[11], only when profit has been made a company is allowed to issue dividends.In case it is found that the dividends have been paid by the directors without profit they can be held liable under the provisions of section 256.
As per Whitehouse v Carlton Hotel Pty Ltd (1986) 70 ALR 251, s 181 requires an action for proper purpose, good faith and best interest of the company. An action which is done to maintain control over the company is not for proper purpose. Directors are required to act diligently and carefully like a reasonable person under s 180(1). Under s 1324 a statutory injunction can prevent the issue of the shares. This may also be a variation of call right under s 246 and thus may require a special resolution. Minority shareholders may also take derivate action under s 232-234 if they feel that the action is prejudicial to their interest. They can also take statutory derivative action under s 236.
As soon as the first remuneration report has been rejected by the owners of the company the directors have decided to enhance the rate of dividends. The corporation act provides discretionary power to the directors whereby they have the right to indulge in such actions. However the rules which have been discussed about clarify that only when profit has been made by the company can the director have the right to issue dividends. The facts of the case study do not provide any information where it is indicated that the corporation has gained a profit. It can be evidently stated that the dividend have only be increased by the directors to impress the shareholders so that the second remuneration report is not rejected. There are also chances that the company can become insolvent if the dividends are issued as the market’s financial conditions are not good. It had been clearly clarified by the court that where there is no profit and dividends are issued the directors might be held legally responsible for any loss incurred by the company. Therefore in the present situation both section 1324 and 256D would make the directors of Waldmart liable if they increase the dividends without being able to show profit.
In this part the result of the shareholders not approving another remuneration report which would under law lead to a second Strike has been discussed.
The issue in relation to the remuneration of the senior executives and the company’s directors have been given under a decade for quite a few years. Certain important changes in relation to the director’s remuneration report are there after the investigation of the productive commission in the matter[12]. The amendment of the CA was done by following the investigation and the rule of the two strikes was incorporated in it. Formerly, the company owners’ votes in regards to the report were not required but somehow the scenario after the alteration had changed considerably[13]. As per the provisions the senior executives and the directors whose remuneration work to be deliberated have not been included in the process of voting. If in case the 25% of the total votes that was casted at the AGM, have not been received by the report of remuneration then the board of directors have the duty to look after the explanations of the owners in the following AGM. If the report of remuneration has not been approved by the twenty five percent of the entire votes at next AGM then the fifty percent of the whole members have casted their vote so that they can support the spill resolution rather than the whole company’s board have to undergo the re-election process. The owners must organise a re-election meeting within the ninety days from the date when the still resolution has been accepted.
The process of re election will be initiated in the meeting in which the board of directors have to take part. If the company’s directors are removed as the election’s result then it is to be assured that the least legal directors are needed for the management of the company and to remain as the directors. In the election process, the managing director has been excluded and the other two positions of the directors are filled with those who get the maximum votes during the process of election. If both the directors get the same amount of vote then the other directors have the right to decide that which director will be chosen for the board. In order to fill the least number in case that does not receive the votes more than 50% then the directors might be chosen[14].
The given situation states that the report of the remuneration that was published last year by Waldmart company’s directors was discarded by the owners. There was a failure by the report to achieve the least number of votes in the last AGM. The company’s directors did not change the report as per the owner’s commentsand besides is planned to issue the bonus shares and increase the dividend to appeal the owners to accept the first report of remuneration. If the owners do not accept the second report of remuneration and 50% of the owner’s vote in favour of the spill then a spill resolution would be passed as discussed above.In the resolution of spill directors of the Waldmart have to undergo a process of re-election as per the needs of the owner. The spill meeting needs to be organised within the 90 days from when the resolution of spill has been passed. All the directors of the company cannot be detached from the positions they hold buy the owners as at least 7 directors are needed for a company that is public limited and they have to stay on board. As it has been discussed the directors who gets the maximum votes will be qualified for the director’s position.
Conclusion
While concluding this assignment that is based on the study it can be stated that the power to increase the dividends and issue the bonus shares as per the company’s directors have not been unrestrictedand they can sanction the issue by following the rules of the common law and Corporation Act so that they can make their own decisions. It must be ensured that it or not harm the company’s financial position. It must also be assured that to pay the creditors does not hamper the company and not become bankrupt. If the company’s directors announce a second strike then they have to undergo an election process that has been specified by the owner of the corporation. The Parliament has taken this step to assure the responsibility of the directors of the company towards the management.
Austin R.P. & Ramsay, I., Ford’s Principles of Corporations Law, Butterworths, Australia, 16th edition, 2014.
Baxt, R., and Fletcher, K.L., Fridman, S., Corporations and Associations Cases and Materials on, Butterworths, Australia, 10th edition, 2008.
Cassidy J., Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney 2013
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Corporation Act 2001 (Cth)
Corporation Act 2001 (Cth) s 254U
Fitzpatrick, Symes, Veljanovski, Parker, Business and Corporations Law; LexisNexis 3rd edition 2017
Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. (Oxford 18th edition 2017)
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