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Question:

Separately consider each capital transaction. Can Grand Ltd successfully undertake each transaction?  Explain your answer with references to the relevant sections of the Corporations Act 2001 and relevant case law.
 
 

Answer:

Issue

Grand Ltd’s current share capital consists of 25000 ordinary shares, which were issued at a price of $5 per share, and 5000 preference shares that were issued at a price of $2.

Preference Shares

The rights of the preference shares have been decided by passing a special resolution by Grand Ltd just after its registration. The rights of the preference shareholders are as under:

  • The preference shareholders shall enjoy preference on the repayment of capital over other shareholders at the time of liquidation of the company.
  • The preference shareholders shall receive dividend at the rate of 7% per annum. Moreover, the preference shares that have been issued are cumulative preference shares.
  • These shares shall carry one vote per share.
  • The preference shareholders shall have no share in the surplus profits or assets of the company.

The document governing the organization does contain provisions that shall be applicable on the further issue of preference shares. Neither does it provide for variation or cancellation of the rights of any share.  

Ordinary Shares

The shareholding of the ordinary shares of the company is as under:

  • 60% of the ordinary shares that is 15000 shares are held by Audax family
  • Others hold 40% of the ordinary shares that is 10000 shares.

At the time of issue of ordinary shares, each carried one voting right.

Now, the company is willing to increase its capital base by the issue of shares. It has two options   

  • Raising funds from the issue of equity share capital
  • Raising funds from the issue of preference share capital

Grant Ltd prefers to raise funds from the issue of equity shares. This shall dilute the shareholding of Audax family. The Audax family does not want to invest funds in the company any further. However, it still wants to retain its shareholding of 60% in Grant Ltd. Therefore, the company is considering adopting the following strategy to raise additional funds:

  • 5000 new preference shares shall be issued on the same terms as the old preference shares.
  • 20000 new equity shares shall be issued to new investors at an issue price of $5 per share.
  • After the issuance of new equity shares, the equity shares shall be divided into two groups. These groups shall be named as Group A equity shares and Group B equity shares. Group A equity shares shall consist of shares Audax family and shall carry two votes per share on a poll. Group B shares shall consist of new equity shares having one vote per share.

The main issue mentioned in the above case study is that whether Grant Ltd can go ahead with the above mentioned issuance of preference and ordinary shares or not. Further, whether Audax family can be granted two votes when a poll is demanded is also an issue of the case study. In the paragraphs mentioned below the these issues shall be dealt with in the light of the provisions of Corporations Act 2001.

 

Law/Principle

As per Section 9 of Corporation Act, 2001, a redeemable preference shares means shares that have preference over other class of shares in the payment of dividend of the company or in the distribution of the assets of the company at the time of winding up (icnl.org, 2017).  These shares may or may not carry voting rights. However, preference shares that are issued by a listed company must carry voting rights relating to certain matters (Freckelton and Selby 2013).

Corporations Act, 2001 defines ordinary shares as shares that do not carry any preferential rights. Ordinary shares are entitled to vote and participate in the dividends or in the distribution of assets of the company (icnl.org, 2017).

The Corporation Act further provides that without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares and subject to the provisions of this Act, the Listing Rules and the Constitution, the directors can, at any time issue such number of shares that they consider appropriate (Coffee Jr, Sale and Henderson 2015). Further, the shares that the directors plan to issue can belong to any class of shares (icnl.org, 2017). These shares can be ordinary shares, preferred shares, deferred shares or shares having other special rights and restrictions with regard to return on capital, dividend otherwise or otherwise as the directors determine on their discretion (icnl.org, 2017).

The Corporation Act further elaborates on the rights attached on any class of shares. As per the provisions of this Act, share capital of the company can be divided into different classes of shares subject to certain conditions (icnl.org, 2017). According to the relevant provisions of the Act, the rights of any class of shares can be varied if three quarters of the shareholders of that class of shares give their consent in writing or if it authorized by a special resolution passed in a separate meeting of the class of shareholders whose rights are being considered to be varied.

Application of Law

The provisions of Corporation Act, 2001 have been mentioned above. On applying the above mentioned provisions of Corporation Act 2001 in case of Grant Ltd the following inferences can be drawn:

  • The Corporation Act, 2001 contains provisions relating to the issuance of preference shares by the company. The provisions of the Act provides that the directors of the company may at any time issue such number of shares as they deem fit (icnl.org, 2017). Therefore, applying this provision in case of Grant Ltd, this company can issue 5000 fresh preference shares on the same terms as the old preference shares.
  • The Corporation Act has given the authority to the directors of the company to issue any number of shares at any time and belonging to any class (icnl.org, 2017). Hence, applying this provision, Grant Ltd can issue $20000 new equity shares.
  • The Act has also laid down provisions relating to division of class of shares. As per the relevant provisions of the Act, the rights of any class of shareholders can varied if it is approved by three quarters of the shareholders whose rights the company is considering to alter or by passing a special resolution in separate meeting of the class of shareholders whose rights shall be varied (Tricker and Tricker 2015). Further, the Act also provides that a class of ordinary shareholders may have more than one vote when a poll is demanded (icnl.org, 2017). On applying these provisions of Corporation Act, 2001, Grant Ltd can issue 10000 ordinary shares and provide two votes on in case of a to Audax family if the same is approved by three fourths of the ordinary shareholders of Grant Ltd. In other words, a separate meeting of the ordinary shareholders should be held and at least 18750 ordinary shareholders out of 25000 shareholders grant their approval on providing Audax family two votes when a poll is demanded. Only if this condition is satisfied, Grant Ltd can go ahead and provide this liberty to Audax family. Therefore, Grant Ltd needs to hold a meeting of the ordinary shareholders in order to seek approval for granting two votes per share to Audax family when a poll is demanded.

Conclusion

It can be concluded from the above discussion that all companies are required to follow the provisions laid down in Corporation Act 2001 and the document governing the company. However, if there is a contradiction between the document governing the company and the Act, the Act shall prevail. Further, in case the document governing the organization is silent relating to any matter, the company shall follow the provisions of Corporation Act. Grant Ltd needs to follow the provisions mentioned in the Corporation Act for raising funds through the issue of additional preference shares or ordinary shares. Grant Ltd also needs to follow the provisions contained in the Act in order to grant additional voting rights to Audax family. The Act authorizes the directors of any company issue any class of shares at any time as the directors deem fit. Hence, the directors of Grant Ltd can issue the required number of preference and ordinary shares at any point of time, as they consider appropriate. The Act also provides that when the rights of any class of shares are varied, a meeting of that class of shares shall be held and the proposal relating to the variation of the rights of shares should be approved by three quarter of the shareholders. The Act also permits to grant more than vote to any class of ordinary shareholders when a poll is demanded. However, such voting rights can be granted only if the requisite number of shareholders as provided by the Act pass the proposal granting such rights. Therefore, Grant Ltd needs to hold a meeting of the ordinary shareholders before granting any additional voting rights to Audax family in order to seek approval from the ordinary shareholders. In case, the requisite number of shareholders does not approve the proposal in the meeting, then the proposal shall fail and Audax family shall not be granted any additional voting rights.

 

Bibliography

Coffee Jr, J.C., Sale, H. and Henderson, M.T., 2015. Securities regulation: Cases and materials.

Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.

Freckelton, I.R. and Selby, H., 2013. Expert evidence: Law, practice, procedure and advocacy. Lawbook Company.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury Publishing.

Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company law.

Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company law.

Harris, J., Hargovan, A. and Adams, M.A., 2013. Australian corporate law(Vol. 2). LexisNexis Butterworths.

Hilb, M., 2012. New corporate governance: Successful board management tools. Springer Science & Business Media.

icnl.org, i. (2017). [online] Available at: research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed 30 Jul. 2017].

Monem, R.M., 2013. Determinants of board structure: Evidence from Australia. Journal of contemporary accounting & economics, 9(1), pp.33-49.

Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA

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