Issue 1
The directors that are present in the company have the total rights to take the control of the entire functioning of the company. Nevertheless, under the common and statutory law of Australia their powers have been kept under control through provisions. The main aim of this paper is to scrutinize the limitations and the powers of the directors with respect to dividends and bonus shares. The law has given a say to the shareholders within the company, the directors need to provide the benefits such as dividends so that it can help the company and satisfy the interest of the personnel as well. The benefits that the directors can enjoy will be the report that has been approved by the shareholders. In this scenario that is the directors of Waldmart Ltd are keen on providing bonus shares and dividends to its stakeholders after the report regarding first remuneration has been rejected by the stakeholders. The paper will try to identify the issues that are present among the directors based on the issues that the shareholders have challenged them. The consequences of the board of directors in the company will also be discussed in the report that they may face as the report may be rejected that can cause a ‘Second strike’.
This part of the paper will help in analysing the validity of the bonus shares that has been issued by the directors and the base on which the issue has been challenged.
The share capital of the company can be paid, nevertheless there is a right among the director to provide shares at no cost to the shareholders who are present in the company if they find it appropriate. Bonus shares are the ones that do not hamper the capital that is present in the company. The setup that is present with respect to the issue of bonus shares are governed by the statutory and the common law. Section 124 of CA states that there is exclusive power in the hands of the directors to issue shares of the company. Section 254A(1)(a) of the CA as per Section 124 states that the directors have the power to issue shares as bonus to the shareholders. Furthermore, Note 3 of this Section also states that the directors may not need to show the share capital that has increased within the company so that they can issue the shares as bonus.
Rule
The bonus shares can be issued by the company through the profits that it has gained for the financial year by the director. If the bonus shares are being issued for other reasons apart from profits, then the directors can be challenged on a legal basis. The directors need to show that there is no insolvent trading so that the bonus shares can be issued. The directors can be penalized under the duties of the director if they fail in prioritising the interest of the company over their personal benefit.
The shareholders also have the legal right to challenge the directors with respect to the decisions taken by them if they feel that it is unfavourable for the company. They can pass a resolution in the general meeting regarding this factor. The specified number of shareholders have to be present in the meeting so that the the resolution that has been passed can be validated. The special resolution can be passed with a minimum of 75 percent of the total votes and resolution can be passed with 50 percent of the votes.
The directors of the company has declared bonus shares after the shareholders have rejected the remuneration report that was provided initially. The financial condition of the company can be hampered of the shares that are bonus are given by the directors. This has been claimed by the shareholders. According to the shareholders, the bonus shares are unnecessary during the time of financial meltdown of the company. In the given case, the company’s directors do not exercise the right to give bonus shares in order to fulfil their personal interest. Moreover, the bonus shares that can be issued needs to have a motive for the issue of bonus shares. Therefore, the shareholders have the authority to take the proceedings against the directors as well as challenge the judgment that has been given by them for the decision that has been taken unwisely.
This portion of the paper will help in analysing the validity that is present for the increased dividends that has been taken up by the company and the grounds on which it has been challenged.
The company’s director enjoy full power in taking the decision to issue dividends to the shareholders. This has been provided under Section 254U of the Corporation Act where it has been stated that the issue of dividends are solely based on the director’s discretion. In the case of Burland v Earle [1902] AC 83, the court did not interfere with the director’s powers with respect to the dividends that are issued until there has been any fraud committed by them. Similarly, in the case of Miles v Sydney Meat Preserving Company [1912] 12 NSWLR 98 the directors of the company are prohibited from issuing or increasing debentures against the company’s interest. In case of Sandford V Sandford Courier Service P/L [1989] 5 ACLR the court had provided that the company can only be able to show the excess profits for the issue or increase in the dividends. Section 254T of the Corporation Act also states that the increase or issue of dividends can be done when the total assets of the company are more than that of the liabilities that are present. In addition to this, the directors also need to show that the dividends are fair with respect to the shareholders that is present in the company. Section 254s also states that the divides can make the company insolvent and that the directors are liable under Section 588G for insolvent trading. In the case of Re Spanish Prospecting Co Ltd [1911] 1 Ch 92, the court stated that the dividend can only be issued through the profits of the company. Thus section 256 of the act states that the directors are liable if the dividends are issued for other reasons except profits.
Application
The directors of the company have stated that the dividends need to be increased after the initial report of remuneration was rejected by the stakeholders. The discussion that has been provided above has shown that the directors of the company can exercise full powers of discretion to issue and increase the dividends. The cases and provisions that has been provided above states that the increase in the issue dividends can be done when the company has excess profits. In this case, there is no proof that the company has earned excess profits and the main motive for the increase in the number of dividends was to get the approval of the shareholders regarding the remuneration report of the directors. The market’s financial condition are not in a stabilized manner that may lead to the insolvency of the company. In the case of Re Spanish Prospecting Co Ltd, the directors were held liable directly for issuing the debentures, as they were not able to show the profits for issuing such shares. Therefore, the directors of the company were also liable under section 1324 and 256D for increase in the dividends for the company without showing the extra profits that was earned.
This part will deal with the director’s position in Waldmart Ltd in which they would be if the stakeholders decide together to not vote in favour of the report in relation to second remuneration and call a second strike
The issue in relation to the remuneration of the senior management has been under the company for over a decade. There has been changes in the report of remuneration for the directors after the productive commission inquired in to the matter. The inquiry amended the corporation act and the two strike system was bought in to the act. Earlier the shareholder’s vote with respect to the report was not binding but the amendment changed the entire scenario. The senior executive and the directors whose compensation can be discussed but is not included in the process of voting.
If the report of remuneration do not have a total of 25 percent votes that needs to be given in the AGM, then the duty of the directors is to talk about the shareholder’s comments in the following AGM. If in the first AGM and second AGM the total number of votes are not 25 and 50 percent respectively, then there will be a re-election for the entire board through spill resolution. Within the next 90 days, the shareholders need to organize meetings after the spill resolution has been approved.
Issue 2
The process of re-election can be started and the company’s directors can be removed from their respective positions due to the election by maintaining a minimum number of legal directors to run the company. The process does not take in to account the managing director in the election process and the other two position of the directors will be fulfilled with the person who gets the maximum vote in the election process. If both the directors get the same amount of votes, then the director can choose the member to constitute the board.
The scenario that has been provided showed that the report of remuneration was provided by the directors and rejected by the shareholders of Waldmart. The remuneration report did not have the minimum vote capacity in the previous AGM. The directors did not change the report and issued bonus shares and increase dividends so that the shareholders approve the first report of remuneration. If the shareholders are not approving the second report of remuneration then there will be a spill resolution that will be passed. This resolution will provide a re-election process for the directors in the company within the 90 days from where the spill resolution was passed. Additionally, not all the directors can be removed from its position, as for a public limited company there has to be a minimum of 7 directors present in the board.
Conclusion
Therefore it can be concluded form the above that there is unrestricted power among the company’s director to give bonus shares or increase the dividends. They can also authorise the issue as well as take personal discretion that are present under the provision of corporation act to take their own decisions. The bonus shares as well as the dividends can only be given through the extra profits that is being earned by the company and also needs to be seen that the financial position of the company is not hampered. The directors also need to have a proper knowledge regarding the capacity of the company to pay back its creditors and that the company is not insolvent. If the second strike is being called by the director, then majority or the directors that has been pointed out by shareholders has to undergo the re-election process. The parliament has taken steps in ensuring that the directors of the company are accountable within the management.
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