The board of Waldmart Ltd proposes to issue bonus shares to existing shareholders as well as increasing the dividend to shareholders to $1.25 cents a share which is a rise of 25% on last year’s dividend. It appears that the reason for this generosity to shareholders is that shareholders overwhelmingly rejected the Remuneration Report at last year’s AGM and the company received a first strike. The constitution of Waldmart Ltd gives the board the power to issue bonus shares and the board is confident that what they are offering to shareholders by way of the shares and the dividend should please shareholders enough to make the first strike a non-issue at the next AGM. In a separate letter to shareholders the board have set out their views on the justification for the report and the importance of shareholders approving the remuneration report and the reasons for arguing that it was not excessive.
Jim Smith is the manager of Better Super Ltd which holds 4% of the shares in Waldmart Ltd. Jim and a number other shareholders are unhappy with the proposal put by the Waldmart Ltd. Better Super Ltd and the other investors are of the view that the bonus share issue is unnecessary and the increased dividend is most unwise in these unstable financial times.
Better Super Ltd and the other shareholder seek your advice as to the following:
- 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?
- Can the shareholders stop the directors from increasing and paying the proposed dividend because it is commercially unwise to do so?
- If shareholders vote against the remuneration report and a second strike is achieved, what will be the consequence of Waldmart Ltd and its director?
Issue 1: Authority of Directors in Relation to Bonus Shares and Shareholders' Rights to Oppose the Decision
The purpose of this paper is to throw light upon the limitations and duties of the directors in relation to the issue of bonus shares and dividends to shareholders. The assignment also discussed the consequences of a second strike which the shareholders may initiate if they do not agree with the remuneration report. The discussion is done through the paper by addressing three questions arising out of the provided dispute between Waldmart ltd and its shareholders. The essay firstly identifies they key legal issue which has to be answered with respect to the provided scenario, secondly it analyzes the law in relation to the issue, thirdly the law is applied to the facts of the scenario and lastly a suitable conclusion is attained. The Corporations Act 2001 is the major legislation dealing with company law in Australia. The specific provisions related to the issue of dividends and bonus shares by the directors are dealt with Section 254T and Section 254A respectively. The consequences and circumstances which leads to a second strike have been added to the corporation law of Australia by the Corporations Amendments (Improving Accountability on Director and Executive Remuneration) Bill 2011 (Cth).
The authority of directors in relation to bonus shares and the rights of share holders to oppose the decision
Section 180-182 of the CA provides the mandatory duties which the directors of a company must comply with respect to running the day to day affairs of the company. Section 180 provides that the directors of a company must observe the required care and diligence towards running the affairs of the company. Section 181 and 182 deals with the duty of directors to observe good faint and always give priority to the benefit of the company when a conflict arises between personal and company interest.
Section 254A of the CA allows the directors of the company to issue bonus shares to the shareholders under the provisions of Section 124 of the CA. in case of a bonus share a company is not entitled to any remuneration with respect to the issue if bonus shares. The shares are issued for free and there is no change in the capital of the company.
It has held by the court in the case of ASIC v Fortescue Metals Group Ltd FCAFC 19 that directors breach their duties if they fail to observe care and diligence with respect to the functions of the company and use the position provided to them by the shareholders to enhance personal interest at the cost of the company. The court held in the case of The Bell Group Ltd (in liquidation) v Westpac Banking Corporation (No 9)  WASC 239 that the failure on part of the directors to give importance to the interest of the shareholders and the company over their personal interest is a breach of statutory directors duty.
Bonus shares can be only allowed by the directors of the company if the issue does not cause any disadvantage to the situation of the company towards paying back the shareholders and creditors.
In relation to the first issue of the given case the legal principles of section 254A and other laws related to bonus shares have been applied. According to the principles of Section 254A of the CA the directors of the company are legally allowed to issue bonus shares on their discretion. However the directors have to ensure that such issue is in the best interest of the company and its shareholders and they do not indulge in such issue when the company is insolvent or may become insolvent due to the issue. The directors also need to keep in mind the ability of the company towards payment of its liability after the issue of such shares. However in this case Waldmart Ltd has only issues to bonus share to induce the shareholders towards approving the remuneration report and not causing a second strike. It has not been done in the best interest of the company and is a clear breach of director’s duties as provide by the CA. Thus the shareholders of Waldmart Ltd have the right to challenge the decision of the directors not only in the AGM but also in the court of law as in the case of ASIC v Fortescue Metals Group Ltd and The Bell Group Ltd (in liquidation) v Westpac Banking Corporation.
The authority of directors in relation to issue of dividends and the rights of the share holders to oppose the decision
Only a company which is not limited by guarantee is entitled to issue dividends and the circumstances in which the issue of dividends is permitted in Australia are provided through the provisions of Section 254T of the CA. only in situation when the liabilities of the company are lesser than its assets are the directors of such companies allowed to issue dividends. A reasonable and fair cause also has to be ensure in relation to the shareholders of the company by the directors before a divided is declared. The future position of the company after the payment of the dividends to pay back the creditors also have to be considered by the directors. In case the payment of dividends may make a company insolvent the directors of the company must not declare dividends. Further Section 588G of the CA prohibits and imposes penalties upon directors from doing insolvent trading. The court confirmed in the case of Hilton International Ltd v Hilton  NZHC 605;  1 NZLR 442 that the issue of debentures by the directors which could bring detriment to the position of the company is prohibited by law. in the case of Burland v Earle  AC 83 it was held by the court that the discretion of directors to issue dividends would not be interfered expect in exceptional circumstances. In the case of Re City Equitable Fire Insurance Co Ltd  1 Ch 407 the court ordered for the repayment of dividends by shareholders as it hampered the position if the company to meet its liabilities.
Shareholders with a minimum of 5% voting rights related to the Annual general meeting can compel the directors to hold a meeting or they can themselves hold a meeting related to the management of the company.
With respect to the issue related to dividends issued by Waldmart ltd the legal principles as provided through section 254T and other common law related to the issue of dividends in Australia have been applied to come to an appropriate conclusion. The companies can only issue dividends if the directors are sure that it would not hamper the financial position of the company and the issue is in the best interest of the company. the directors of Waldmart ltd in this case also have to ensure that the liabilities of the company are lesser than the total assets on the company so that the company does not have any problem in meeting its debts. The directors also have to ensure fairness and reasonability towards the shareholders before they declare dividends. However in this case similar to that of bonus shares the intentions of the directors are only to induce the shareholders to approve the remuneration report and not cause a second strike. The present condition of the market suggests that such issue is not in the best interest of the company and may cases financial instability to the company. The shareholders are aware that the issue of dividends with result in long terms losses for them and the company so they have the right to oppose the decision of the directors in the AGM as the directors are not fulfilling their duties responsibly. It was also provided in the case of QBE Insurance Group Ltd v AISC and Hilton International Ltd v Hilton that directors cannot issue dividends to the detriments of the company.
The issue is to determine the situation which the directors have to go through in case of a second strike initiated by the shareholders in relation to the directors remuneration reports.
The directors of the company have been forced to be more accountable towards the affairs of the company through the enactment of the two strike rule. In case of a second strike by the shareholders all the directors of the company can be subjected to the process of re-election. The second strike occurs when the shareholders do not agree with the report published by the directors with respect to their remuneration for the second time and the report fails to achieve a minimum of 25% of the total votes. The first strike occurs when the shareholders give the directors a second chance to publish a report related to their remuneration and reject the first report with less than 25% of the votes. Whether or not all the directors of the company have to go through re-election is determined through the spill resolution and within 90 days the spill meeting takes place where the re-election is held. However the managing director of the company is not subjected to re-election during the meeting as he has the responsibility to manage the company’s affairs.
In case the shareholders of the company do not approve the the subsequent remuneration report by the directors after the first strike a second strike will be started by the shareholders. In case a second strike is started all the directors of Waldmart Ltd would have to go through a process of Re-election initiated by the shareholders. The directors who have to go through the process would be selected by the shareholders during the Spill resolution and it is the responsibility of the shareholders to initiate a spill meeting where the elections will take place within 90 days of the resolution. However the managing director of Waldmart would not be subjected to election as he or she would manage the affairs of the company.
Concluding this paper it can be stated that the directors have been provided the power to issue bonus shares with respect to Section 254A of the CA. however the authority is subjected to the provisions related to the duty of the directors as per Section 180-183 of the CA. similarly dividends cannot be issued in circumstances provided in Section 254T of the CA. the second strike will make the directors selected in the resolution to go through a re-election in the spill meeting.
ASIC v Fortescue Metals Group Ltd FCAFC 19
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QBE Insurance Group Ltd v AISC (1992) 8 ACSR 631
Re City Equitable Fire Insurance Co Ltd  1 Ch 407
The Bell Group Ltd (in liquidation) v Westpac Banking Corporation (No 9)  WASC 239
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