In this assignment, the rights that have been given to the minority shareholders by the Corporations Act need to be discussed. For this purpose, it has to be seen if the minority shareholders can influence the decision made by the management of the company. Another issue that is present in this case is related with the second strike rule and its consequences for the company and its directors.
(i) Does the board of Waldmart have the power to issue bonus shares and can the shareholders at the upcoming AGM legally compel the board not to issue the share?
On the basis of the present facts, it has to be considered if Better Super Ltd., that has only 4% shares in Waldmart Ltd can prevent the board of Waldmart from issuing bonus shares. Generally in such cases, the minority shareholders lacked the ability to have an impact on the decisions made by the management of the company. Due to this reason, in some cases, the management may decide to ignore the interests of the minority shareholders. But the corporations’ law has provided a number of methods that are available to the minority shareholders for the purpose of protecting their interests.
An example in this regard can be given of the unfair prejudice claim that can be brought by the minority shareholders. Similarly, it is also available to the minority shareholders to pursue a derivative action or on the other hand, a winding up petition may also be made by the directors. As mentioned above, extensive remedies are available to the oppressed minority shareholders under the Corporations Act, 2001 (Cth). As these remedies are available to the minority shareholders, it becomes the responsibility of the directors of the company to consider the interests of all the shareholders of the corporation while using their powers and managing the company.
It is natural for the majority to expect or even require the management of the company to manage the affairs of the company in such a way that is most beneficial for them, even if this will result in a loss to the minority shareholders. It also needs to be recognized and in most of the cases the minority shareholders do not have much ability to have an impact on the way in which the management is conducting the affairs of the company. Still, the directors are under an obligation to act fairly common considering the interests of all the shareholders.
In the same way, the law also requires that the directors of the corporation should ensure that their decisions promote the interests of the company as a whole and its shareholders and these decisions are not only in favor of the majority shareholders. It is also required by the law that the decisions of the directors are taken for the purpose of promoting the interests of the company as a whole and not the majority shareholders only.
If the directors fail to fulfill this responsibility, there is always a risk that such directors can be held responsible for the breach of their statutory duties. At the same time, it can also be held that these directors were involved in oppressive conduct. The law has provided widespread remedies for oppressive conduct and these remedies have a significant impact on the company and its shareholders.
For this purpose, minority oppression is the term that is used for the conduct that has been mentioned in s232, Corporations Act. This section provides that extensive powers are available to the court to grant remedies to the shareholders if the court arrives at the conclusion that the affairs of the corporation (along with rear lot proposed resolution, act/omission) is contrary to the interests of the shareholders of the corporation or the conduct can be described as oppressive, unfairly prejudicial or discriminatory.
The purpose behind the provisions of section 232 is to prohibit the conduct which results in some commercial unfairness for the minority shareholders of the company. It is worth mentioning at this point that the provisions of s232 are very wide. The result is that no definite limitations are present on the conduct that can be treated by the court as offensive conduct. Likewise, this provision provides that the offending conduct can be of the company or it can be the conduct of the directors. For this purpose, the courts have to evaluate the conduct by using an objective test.
Therefore the court will see if the particular conduct will also be treated as unfair by any reasonable commercial bystander. In such a case, it is not efficient that there has been discrimination or prejudice against the shareholder. In such cases it is also required to be established that an element of unfairness should be present with goes beyond a mere disadvantage. Even if there are a wide range of circumstances under which it can be held that the conduct stated in s232 has taken place but establishing such conduct may be difficult, especially when such a decision was made by the directors of the company for a legitimate purpose.
Hence, in the present case, even if the board of WaldMart has the power to issue bonus shares and similarly even if the minority shareholders are not in a position to require the board of the company in the annual general meeting of the company that the bonus shares should not be issued by Waldmart, there are other remedies available to the shareholders for the oppressive conduct.
(ii) Can the shareholders stop the directors from increasing and paying the proposed dividend because it is commercially unwise to do so?
It has to be seen in this question if the shareholders are in a position to stop the directors of Waldmart from increasing and paying the proposed dividend. In the opinion of these shareholders, it will be commercially unwise to give dividend. For dealing with such a situation, a wide range of remedies are available under the Corporations Act. These remedies are provided to the minority shareholders in case such shareholders are suffering from oppressive conduct of the majority. It has been generally seen that the oppressive conduct occurs when there is any unfairness or prejudice faced by the minority shareholders as a result of the abuse of power by majority.
In this context, the actions taken by those controlling the company can be described as oppressive if these actions are taken in bad faith. Likewise, the conduct of the majority can be considered oppressive although the conduct was lawful and when such conduct was taken in good faith, if as a result of the conduct, a disadvantage is created for the minority shareholders that cannot be described as commercially fair and reasonable. In this way, oppressive conduct can take place even in cases where all members of the company are treated equally, for example, while raising capital for the company, then all the members are invited. Some of the examples where it can be said that the conduct was oppressive, unfairly prejudicial or discriminatory can be given as follows:-
The issuance of shares for the purpose of diluting the moral rights of majority;
Non-payment of dividends to the shareholders or when excessive payments have been made to the directors if such a decision cannot be justified objectively, on the basis of the circumstances of the corporation;
Applying the funds for granting a benefit to the interests of some shareholders and not for the shareholders as a whole;
Persistently refusing to call a meeting of the company for the purpose of denying the participation of minority shareholders; and
Prohibiting a director from representing a shareholder in the management of the company
It has been seen that in most of the cases where minority oppression is involved and the parties have reached the court, take place in case of unlisted private companies. The probable reason behind such a situation could be that in case of a listed company, the dissatisfied shareholders always have the option to sell their shares. But in case of a private company, generally no market is available to the minority shareholders, except the majority shareholders, who are involved in oppressive conduct.
Similarly in most of the cases where minority oppression has been alleged, take place in closely held, quasi-partnership corporations after the relationship between directors and shareholders completely breaks down. Usually, oppressive conduct occurs when a shareholder or director is secluded from the management of the company or when a capital raising or share buyback is conducted by the company to which the equity of the minority is diluted. Likewise, the minority shareholders may not be able to get any dividend and similarly they may find it difficult to sell their shares. The result is that in such a case, the capital is blocked in the company forever. Therefore the only option that is left for the minority shareholders is to take legal action in order to extract their capital.
(iii) If shareholders vote against the remuneration report and a second strike is achieved, what will be the consequence of Waldmart Ltd and its director?
After implementation of The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 in July 2011 changes have been introduced. Regarding the two strikes rule related with the non binding advisory report on the adoption of remuneration report as well as the restrictions that have been placed on the capability of key members of management, like directors and senior executives, to vote regarding the remuneration report and be a resolutions concerning the report.
Therefore, as a result of the amendments that have been introduced in the Corporations Act, in case 25 percent of the votes that have been cast at the annual general meeting of the corporation are against the acceptance of the remuneration report and at the same time, the shareholders have made observations at such a meeting regarding the record, the law requires that during the next year, the board of the company is under an obligation to mention in the annual report, any responses that have been planned to these observations or for the purpose of clarifying why there was no such response proposed.
In the same way, when 25 percent of the votes are cast during the two consecutive annual general meetings of the company, the law requires that during the second meeting, the company is under a legal obligation to provide an option to the shareholders and the entire board of that particular corporation, except its MD. The law also provides that when a particular director has been appointed after the approval of remuneration report, such directories also required to seek re-election at the next annual general meeting. It has also been provided by the law that such AGM should take place within a period of 90 days.
On these grounds, it can be stated that the purpose behind the introduction of the two strikes rule in the Corporations Act is to make the directors responsible regarding executive salaries and bonuses. Due to the presence of these provisions, there can be a situation where the entire board of the company is going to seek re-election when the shareholders do not agree with the remuneration being paid to executives of the corporation. Therefore, the effect of these provisions is that if more than 50 percent shareholders of Waldmart are against the remuneration report of the company and in this way a second strike has been achieved, according to the law it is required that all the members of the board of Waldmart Pty Ltd, have to seek re-election.
Conclusion:
In this assignment, it was discovered that a wide range of remedies can be granted by the court in case the minority shareholders are facing oppressive conduct. For this purpose, the conduct that can be described as oppressive was also discussed. In the same way, the remedies that can be provided by the court regarding such a conduct were also discussed. At the same time, the consequences of a second strike for the company and its directors, was also examined.
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Case Law
Elder v Elder and Watson (1952) S.C. 49
Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [2001] NSWCA 97
Hillam v Ample Source International (No 2) [2012] FCAFC 73
Morgan v 45 Flers Avenue Pty Ltd (1986) 10 ACLR 692
Roberts v Walter Developments Pty Ltd & Ors (1997) 15 ACLC 882
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