Corporations And Associations Cases And Materials System

Power of Corporations to Issue Shares

Discuss about the Corporations and Associations Cases and Materials System.

In order to decide the issue that is present in this case, it has to be considered if the minority shareholders of Waldmart can have an impact on the way in which the affairs of the company are managed by its management. Similarly, it also needs to be considered if the board of the company is required to keep in mind, the interests of the shareholders of the company as a whole and not only the majority shareholders. Is it important for the directors of the company to take care of the statutory duties that have been imposed on the directors or if it can be said that there has been a breach of these duties, and at the same time, the directors have been involved in conduct that can be termed as oppressive.

Section 254 A of the Corporations Act provides for the power of the company to issue bonus, partly-paid, preference and redeemable preference shares.

The issue in this cases is if the shareholders of Waldmart Ltd , including Better Super Ltd that has 4% shares in Waldmart Ltd can compel the board of the company not to issue the shares. It has been seen in such cases that the minority shareholders of do not have much power to influence the management of the company. As a result, sometimes the interests of the minority shareholders are ignored by the management of the company. However there are several ways provided by the law in which a minority shareholder can protect its interests. For example, the minority shareholders can bring an unfair prejudice claim. Or they can pursue a derivative action or the minority shareholders may seek a winding up petition. Under Section 232, Corporations Act, 2001, far-reaching remedies have been provided to the oppressed shareholders who are in minority. In view of these remedies, it is important that the directors of the company should use their powers and manage the affairs of the company keeping in view the interest of all the shareholders. It is also natural that the majority may expect or require that the company should be managed to their advantage, even if doing so provides to be detrimental for the other shareholders of the company. Similarly, it is also true that generally the minority shareholders have very little or no ability at all to influence the way in which the affairs of the company are being conducted. However, despite this position, it is necessary that the directors of the company should act fairly between all the shareholders of the company.[3] Similarly, the directors are required to make sure that the decisions taken by them are capable of promoting the interests of the company as a whole and the shareholders generally and not only the majority shareholders of the corporation. On the other hand, the directors who fail to fulfill this responsibility is the risk of being held liable for the breach of statutory duties (Section 181 Corporations Act), these directors can also be involved in oppressive conduct. In such a case, extensive remedies may be available that can have considerable impact on the corporations and its shareholders.

Impact of Minority Shareholders on Management of Company Affairs

In this context, minority oppression can be described as the term that is used for describing the conduct falling within the purview of section 232, Corporations Act, 2001. In this section, it has been mentioned that wide-ranging powers have been granted to the courts to the shareholders in case it has been established that the affairs of the company (together with any real or proposed resolution, act/omission) is either:- against the interests of the shareholders as a whole or such conduct is unfairly prejudicial to, oppressive to, or unfairly discriminating against a shareholder, whether in such capacity or some other capacity.[6] Hence, section 232 is aimed at the conduct due to which the minority shareholders of the corporation may suffer some commercial unfairness. It needs to be mentioned in this context that section 232 has been drafted widely. Consequently, no definite limits are being placed on what can be considered as offending conduct. In the same way, the offending conduct can be the conduct of the corporation or the conduct of its directors or the shareholders. While dealing with such an issue, the courts will evaluate the conduct by applying an objective test.[7] This test is based on the fact, if the conduct can be considered as unfair by any reasonable commercial bystander. At the same time, it also needs to be mentioned that it is not enough if the shareholder has been discriminated against or prejudiced. Therefore it is also required that there should be an element of unfairness that extends beyond a mere disadvantage.[8] Similarly, although a wide range of circumstances are present where it can be said that the conduct mentioned in section 232 is present, but it may be difficult to prove, particularly when the decision has been made by the directors for a legitimate commercial purpose.[9] Therefore, even if the board of Waldmart enjoys the power to issue bonus shares, and even if the minority shareholders of the company cannot legally compel the board during the upcoming AGM not to issue the shares, the shareholders can use other remedies provided by the Corporation's Act, 2001.

Can the shareholders stop the directors from increasing and paying the proposed dividend because it is commercially unwise to do so?

The issue in this question is if the shareholders of Waldmart can prevent the directors of the company from increasing and paying the proposed dividend, because they believed that doing so will be commercially unwise. In this regard, the Corporations Act provides that a wide range of remedies are available to the minority shareholders if they have to face oppressive conduct at the hands of the majority. In practice, generally oppressive conduct takes place when the minority shareholders have to face unfairness/prejudice due to power abuse by the majority or regarding control of corporation. Hence, the actions taken in bad faith can be called oppressive.[10] At the same time, a conduct can be treated as oppressive, even if the conduct was lawful and undertaken in good faith, if you do such conduct, the minority shareholders have to face a disadvantage or a burden that is beyond what can be treated as commercially reasonable and fair. Hence, such a conduct may take place even if all the members of the company have been equally treated, for instance, in case of raising capital, where all the members have been invited.[11] Some of the instances of the conduct that can be treated as unfairly prejudicial, oppressive or unfairly discriminatory include:-

Remedies for Minority Shareholders

Issuing shares mainly with a view to dilute the voting rights of the minority;

The non-payment of dividends to the shareholders or making excessive payments to the directors when such decisions cannot be justified objectively, keeping in view the circumstances of the company;

Applying the funds of the company to provide a benefit to the interests of some of the shareholders, but not to the shareholders of the company as a whole; 

Persistent refusal to call the meeting of the company in order to prevent the participation of the minority shareholders; and excluding a director from representing a shareholder from the management of the corporation

In most of the cases involving minority oppression, in which the parties reach the court, occurs in unlisted private companies as compared to the public companies. The reason behind this position can be that the dissatisfied shareholders coming from a listed company always have the option to sell their shares.[12] On the other hand, in case of the minority shareholders coming from a private company, generally there is no market or there is an illiquid market for such shareholders, except probably the oppressing majority shareholders.[13]

It has also been seen that generally the minority oppression takes place in closely held quasi-partnership companies after there is a breakdown of the relationship existing between the directors and the shareholders.[14] Generally, the oppression takes place when one shareholder/director is frozen out of managing the corporation and/or the company conducts a capital raising or a share buyback which dilutes the equity of the minority. Similarly, the minority shareholders may fail to get any dividend or may not be able to sell their shares and their capital is blogging the company forever by the company is being managed for providing benefit to others. In such a case, the only option accessible to the minority members is to involve in legal action for extracting their capital.[15]

It can be oppressive conduct even if the directors have fulfilled their statutory duties. Though, generally along with oppressive conduct, a breach of directors’ duties also takes place.[16] Particularly, there is a breach of the duties that have been imposed by sections 181 to 183, Corporations Act. Section 181 provides for the duty of the directors to act in the best interests of the corporation and also to refrain from exercising their powers for achieving an advantage for themselves or for some other person. In this regard, section 183 provides for the duty according to which the directors should not misuse the information. Such a misuse of the duty takes place when the directors have misuse such information for achieving an advantage for themselves or for some other person. In view of the statutory duty of the directors to use their powers in good faith, it is important that the directors should act in the best interests of the corporation as a whole, keeping in view the best interests of all the shareholders of the company as a general body. However in practice, the shareholders may have different or competing interests. As a result, it may become difficult for the directors to satisfy everyone through their actions. While several decisions made by the board do not have much impact on the individual shareholders, there are certain actions, like raising capital or share buyback, that have a direct impact on the interests of the individual shareholders.

Concept of Minority Oppression

If shareholders vote against the remuneration report and a second strike is achieved, what will be the consequence of Waldmart Ltd and its director?

The Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 was implemented on 1 July, 2011. These included the changes that are made to the two strikes rule concerning the non-binding advisory report on adopting the remuneration report and limits placed on the capacity of key management (directors and sr. executives) to vote on the remuneration report and other resolutions related with such report. According to the amendment made to the Corporations Act, if 25% votes cast at an AGM of the company have opposed the acceptance of the remuneration report and observations were made by the shareholders and the AGM concerning such report, then in the next year, the board is required to mention in the annual report regarding any planned responses to such observations or to clarify why any response was not proposed.[17] Similarly, if 25% votes have been cast as two consecutive AGMs, then during the second AGM, the company is required to provide an option to the shareholders (more than 50% of the votes are cast in favor of a spill) requires that the entire board of the company, except the MD. In any of the directors appointed after the remuneration report was approved, should seek re-election at the next AGM of the company.[18] The law requires that such a meeting to take place within 90 days.

In this way, the two strikes rule has been designed for holding the directors responsible for executive salaries and bonuses. As a result, the entire board of the company may have to face re-election if the shareholders of the company do not agree with how much is being paid to the executives of the company.

On these grounds, if more than 50% of the shareholders of Waldmart has cast their vote against the remuneration report and a second site has been achieved, the law provides that the entire board of Waldmart Pty Ltd will have to seek re-election.

Conclusion: in this assignment, it was found that the directors of Waldmart can be considered to be involved in oppressive conduct and as a result, the statutory remedies that are available to the minority shareholders can also be sought by the Better Super Ltd. and other minority shareholders. In the same way, the shareholders can prevent the directors of the company from paying the proposed dividend if such a conduct can be termed as oppressive. The law provides that if the shareholders of the company have voted against the remuneration report of the company and a second strike has been achieved, the directors of Waldmart will have to seek re-election.

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