Board of Directors’ Power Related to Issue of Shares
Board of directors are authorized to exercise all the power of company provided the same are specifically reserved for the members as per the company’s constitution or the Corporations Act 2001. Present report revolves around the analysis of power available to board relating to the issue of shares and the right or power available in hand of shareholders in order to compel the board of Wald mart from bonus issue as well as enhancing the dividend in case the same is unwise commercially. The report comprises provision relating to the specified situation to create a base of the decision made. Further, the power available to the shareholder to compel the decision of Board has also been discussed.
Sections 124(1) (a) of Corporation Act 2001 provides that a company can issue as well as cancel the shares. Further, power comprises the right to issue bonus shares, preference shares comprising of redeemable preference shares as well as partially paid shares. The organisation can determine the conditions related to the issue of shares along with its price as per provision specified in section 254 B of Corporation Act 2000. Moreover, shares could be issued for a non-cash deliberation. At the same time, an organisation cannot issue bearer shares, stock or change shares into stock. Mainly the power is enjoyed by the director.
According to the constitution of the corporation or by an edict, shareholders have the right to take part in the decision making of organization. Furthermore, shareholders hold many statutory securities and rights accessible to them, without taking into consideration the number of shares they embrace. The same will consist, the capability of appealing to the court for orders in cases when organization is running in unjustifiable prejudicial to an associate or opposite to the interest of the members as a whole.
Minimum 100 members who are entitled to vote at a general conference or who mutually holds at least 5% of votes that are entitled to be cast at a general conference could draft notice to the organisation that they suggest to change a decision at the next general conference, which takes place more than two months subsequent to the notice is given to organisation.
The notice should be provided in writing and also includes the words of resolution that will be suggested. Furthermore, the notice has to be approved and signed by all associates that suggest passing the resolution at the general conference.
Shareholders’ Rights to Participate in Decision-making
The members suggesting the resolution could also entail the organisation to circulate the resolution prior to meeting at the organisation’s cost, if
- It does not cross the word limit of 1000.
- If it is not offensive.
- If it has arrived at the organisation in time to be sent out along with the notice of the meeting.
Apart from this, disputing the legitimacy of an executor’s resolution, shareholders might be capable in appealing to the court for help on the basis that the demeanour of organization’s affairs is, as an outcome of executives resolution in question, opposing to the interest of the associates as a whole, or unfair to, unjustly prejudicial to or unfairly biased against an associate. Therefore, there are no minimum obligations of shareholders related to looking for such support provided that the candidate holds at least one share. Shareholders could also utilise their capability to assemble a general meeting and suggests a resolution to eliminate one or more than one executives if the shareholders consider that the executives are not exercising according to their interest.
By considering the above-described provisions, it can be said that the board of Waldmart have the authority to issue bonus shares and shareholders at the upcoming AGM legally compel the board not to issue the shares if they believe that their interest is violated with the issue.
The Section 2(35) of Companies Act defines the word dividend. As per the provisions, the word dividend comprises any short-term dividend. It is a comprehensive and not an exhaustive definition. As per generally approved defined, dividend refers to the revenue of the organization, which is not preserved in the company and is allocated to the shareholders in the ratio to the amount compensated on the shares detained by them.
Further, dividends are generally payable for a financial year subsequent to the preparation of financial statement, and the amount of distributable revenue is accessible. The dividend for the financial year of the organization also called as a final dividend are due only if it is proclaimed by the organization at its AGM that is Annual General Meeting on the suggestion of Board. In addition to this, sometimes dividends are also remunerated by the board among two AGMs without proclaiming them at an AGM also called as interim dividend.
- The final dividend is usually fixed at AGM at a rate, not more than what is declared by the executives along with the AOA of organization.
- Section 134 (3) (k) states that the board should state the amount of dividend if any in the Executives Report that is suggested to be recompensed. Further, the dividend which is suggested by the board of directors should be proclaimed at the AGM. This composes an item of Ordinary Business to be conducted at each AGM.
- Moreover, Section 132 (2) of Act or specifies that then there is no declaration of dividend in the financial year when there is a loss. This implies that the dividend should be paid only if the company has earned a profit after deducting depreciation or out of the revenue of organization for any preceding financial year obtained subsequent to deduction of depreciation, as per provisions of Section 123(1) above subsection and continuing undistributed or out of both.
Section 254T (1) specifies that a company cannot declare a dividend in the following circumstances:
- Organization’s assets are more than its liabilities instantly prior to the individual dividend is proclaimed, and the excess is enough for the compensation of dividend.
- The compensation of the dividend is unfair and rational to the shareholders of the organization as a whole.
- The payment related to the dividend should not affect the capability of the company regarding payment to its creditors.
Yes, the shareholders can stop the directors from increasing and paying a proposed dividend in case the same is commercially unwise. In the present case of Wald mart Ltd as shareholders wanted to stop directors from enhancing as well as paying a dividend as it is commercially unwise. Thus, as per provision of section 245 T (1) of Corporation Act 2000, in case the compensation of divided in unfair for shareholder as well as for organization as a whole. Thus, in order to pass the resolution in order to stop the issue of dividend payment than at least 100 members who are eligible for a vote at the general meeting or the member who mutually hold five per cent of holding can apply for a resolution to be passed at the general meeting. Moreover, a concept of the harmonizing the interests of diverse classes of shareholders is also available for right of shareholders. The same can be explained by using an example that if an organization is paying out a huge dividend funded by debt to just one class of shareholder than in that case this shareholder will acquire a benefit while shareholders of other classes cannot and will bear the burden of additional debt. Thus, organizations which recompense the equal amount of dividend to every shareholder could generally satisfy this test with ease, particularly where it has no further classes of share.
Shareholders’ Right to Compel the Board’s Decision
In the present case of Wald mart Ltd above specified harmonization concept can be applied as the decision taken by the BOD is unwise. Thus, even if the quantum of a member who thinks that the decision in not commercially wise is less than no. of members required for passing a resolution at the general meeting, then minority members can file a petition to the court for stopping the decision relating to enhanced payment of dividend.
Corporations Act 2001 specifies that a listed company requires providing its remuneration report to a non-binding shareholder vote at AGM. The ‘two strikes’ rule has been developed in order to hold director accountable for executive salaries and bonuses. In other words, it can be said that an entire company can face re-election in case shareholders does not agree with the quantum of the amount paid to the executives of the company. The first strike occurs in case remuneration report of a company receives a ‘no’ vote of twenty-five per cent or more by a shareholder at AGM. The second strike occurs in a situation when a company’s subsequent remuneration report after the first strike also receives a ‘no’ vote of 25% or more by the shareholders at the AGM of the company.
Consequences of Wald mart Ltd and its director in case shareholder vote against the remuneration report and a second strike is achieved:
In case the second strike is achieved by remuneration report of Waldmart Ltd. than a resolution is required to be passed at AGM on which 2 strikes has been achieved relating to holding another AGM for general meeting which is known as spill meeting with the objective of considering spilling the board. In case the resolution is passed by a simple majority than the meeting is required to be conducted in the next ninety days. At spill meeting, the directors (other than managing director) who were directors when remuneration was considered at latest AGM will stand for re-election. In case all the directors are removed then the minimum three directors will remain on the board. The individual who receives the highest vote will be appointed as director.
Wald mart Ltd. will require disclosing the impact of 2 strikes in the notice of the annual general meeting. It will be necessary to proactive in explaining the new reforms in the next AGM so the shareholders can consider the impact of ‘2 strikes’ before voting against the remuneration report. Moreover, the directors of Wald mart who will fill the vacancy will require standing for election at next AGM considering the same as spill meeting for re-election.
Shareholders’ Right to Stop Directors from Increasing Dividend
Conclusion
Above analysis depicts that provision of Corporate Law 2001 is developed in such a manner that Board of Directors cannot attain undue advantage of power and authority available to them. Moreover, in case shareholder are having an opinion that transaction or decision made by the management are not appropriate on commercial terms or on any other basis than shareholders have the right to file a petition to the court against same. Further, the requirement to be accomplished for filing complaints is that the individual should hold at least one share of the company. It can be concluded that provision of new remuneration reforms provides a large axe to the shareholders which can be applied by them to wield against board who disregard the satisfaction of shareholders in relating to remuneration practices.
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