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Mandatory Disclosure Of Dividend Decision

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Question:

Discuss about the Mandatory Disclosure of Dividend Decision.
 
 

Answer:

Introduction:

According to Australian Securities & Investments Commission, for a company to with shared capital to issue share are required to keep a record of all the issues shared on their part which is called as ‘share register’ or ‘the register’. The register is required to have information comprising of members of the company along with the number of the shared that the company possesses. To get in depth of the matter, the information regarding the numbers of members required to be highlighted upon on the part of the register is the name and address of every member, the date on which the name of the members was included to the register and the shared that each member held.   In this context, it is also mentionable here that on the part of the register it is also essential to include related information like, whether the members have any shares which are not beneficially held, change in the personal details of the members[1]. On the part of the register information regarding the shares which includes date of its allotment, number of shares comprising in each allotment, the classes of shares and if the shares are fully paid. 

Prior issuing these shares the detailing is also required to be provided to Australian Securities & Investments Commission. The information provided to the commission is required to comprise of information regarding the members. Under the information presented to the commission regarding the members it is required to highlight on any kind of changes to the details of the members of the organization with the help of using a Change to company details with the help of form no. 484. However, on the part of the public companies providing with these information are not necessary[2].   Similarly, in cases of companies comprising of more than 20 members the related changes and the impact on to twenty members in every class of share are required to be provided to the commission. As a result of these changes it may have impact on the company as well, in aspects like issuing more number of shares, other individual, acquiring shares from another member, another member of the company coming to the top 20 or a combination of any of these factors. It is also essential to provide the commission information regarding the shares of the company which includes information like cancelling or issuing shares along with informing the commission regarding any kind of change to the share structure [3].  Another mentionable aspect required to be provided to the commission is issues of shares. In this context, according to the commission the information which are required to be provided to them on the part of any company issuing shares are: informing the commission within 28 days following the issue with the help of lodging a Change to company details. With the help of this form information regarding number of issued shares, the class to which each share belong respectively, amount to the paid, or agreed to be paid in regards to each shares and any unpaid amount related to each of these shares.

 

Hence with the help of compliance with the above discussed aspects as mentioned by Australian Securities & Investments Commission Waldmart have the power to, issue bonus shares.

In addition to the above mentioned aspect, under Corporations Act 2001, Sect 254 A, it has been stated that the power of a company as per section 124 of this act to issue shares incorporates the power to issue bonus share, preference shares and partly paid shares[4]. In this context it is mentionable here that, according to Sect 124 of this act, it has been stated that a company possesses legal capacity of an individual in and outside the particular legislation. According to this section of the legislation the powers of a corporate body includes the authority to cancel and issue shares in the company, issue debentures etc. Thus under these aspects of the legislation, Waldmart have the power to issue bonus shares.

However, in this context it is mentionable here that the shareholders of Waldmart can compel the board at the upcoming AGM to not issue the share, under the provision of  According to Australian Securities & Investments Commission. According to the provision of the commission it has been stated that bonus shares can be issued on the part of any company, bonus share can be  issued in cases wherein no fee is payable to the company[5]. Most importantly, it has also been stated under the provision of the legislation that in case of bonus sharing, such an issue would not make any increase to the share capital of the company. In this context it is mentionable on the part of the Waldmart,  it can be noticed that  the remuneration issue was major reason behind the rise of dividend and bonus which would result in increase in share capital of the company in turn. Thus on the basis of the provision of the According to Australian Securities & Investments Commission the shareholders can compel the board to not issue the share.     

b] In a generic manner, it can be stated that under Australia’s corporate laws the directors of a company have been provided with unrestrained discretion in aspects like decision making in terms of payment of dividends, the time of payment along with the amount to be paid. Under the law, the directors of a company are not required to explain or justify the reason of particular level of dividends being opted for. In this context, it is mentionable here that, in certain cases it may occur that the declared dividend may be confusing on the part of the shareholder like increase in dividends in spite of a fall in the earning of the company[6]. In such cases there may be underlying ulterior motives behind the decision of the dividends for instance conflict between the shareholders and the managers which on the part of the manager wants to prevent it from being known in the market as in case of Waldmart which wanted to deal with the conflict with the shareholder and their strike due to which they increased the dividend.

 


On the basis of Corporations Act 2001 Sect 254T it has been stated that a company cannot pay dividend except in cases wherein, the assets of the company exceed its liability just before the declaration of the dividend and the excess is enough in making the payment of the dividend. Under the legislation, it has also been stated that in order to make the payment of dividend it is also required to be fair and reasonable in nature to the shareholders of the company[7].  In order to make the payment of the dividend it has been further stated under this legislation that the payment of the dividend is not required to materially prejudice the ability of the company to make payment to its creditors[8]. Hence, on the basis of the above discussed aspect on the part of the shareholder if they can establish that the assets of the company are not exceeding its liabilities just before the dividend was declared along with the excess not being sufficient for the payment of the dividend or in case the shareholder can establish that the payment of the dividend is unfair and unreasonable for the shareholder of the company as a whole or on establishment of the fact that the payment of the dividend do affect the ability of the company to pay its creditors then the shareholder under Corporations Act 2001 Sect 254T can prevent the directors from increasing and paying the proposed dividend.

c] In case of shareholders voting against the remuneration report along with the achievement of second strike, the situation will come under the provision of ‘two strikes rule’. It is mentionable here that under “two strikes” law the directors are held accountable for executive bonuses and salaries. It implies that in case the shareholder of Waldmart votes against the remuneration report along with achievement of second strike will make the company board face re-election in case the shareholders disagree with the pay payment scale of the executives[9]. The law came into action due to the amendments to the Corporations Act and came into effect on July 1, 2011.

In accordance to this law, the ‘first strike’ occurs in case the remuneration report of a company which highlights upon every director’s individual salary along with their bonus receives “no” vote from 25% or more shareholders at the annual general meeting of the company.

Following the first strike, the second strike occurs in case the following remuneration report of the company also receives a “no” vote of 25% or more shareholders. In case of this second strike, the shareholders will needs to vote at the same AGM for the purpose of determining if all the directors will require standing for re-election. In case the “spill” resolution is approved with 50% or more votes cast, then within the following 90 days a “spill meeting” will be held.

 


In this spill meeting the directors who were in the position at the time of directors report was taken into consideration at the latest AGM, will need to stand for re-election[10]. This re-election excludes the managing directors of the company as they are permitted under the law to continue to process the functioning of the company. 

It is also mentionable here that the law has far reaching impact in terms of impact on remuneration practices and corporate governance within the company. To get in depth of far reaching impact of the rule it can be stated, that it prevents the key management personnel from hedging their incentive remuneration[11]. It also imposes rules regarding disclosing entities with the help of remuneration consultants which includes the role of the consultant along with the means of communication of the recommendations of the consultants. Under the “two strikes” rule the key management personnel are prohibited from voting on remuneration issues and any intention to require a board spill. Under the law, the approval of the shareholders is required to obtain “no vacancy” declarations wherein a company has not exceeded the maximum limit of director as determined in the constitution of the company[12]. In addition to the above mentioned aspect, under this rule the remuneration is required to be disclosed in the remuneration report which is supposed to be confined to key management personnel.

 


Hence, on the basis of the above made discussion, it can be stated that the main purpose behind this reform is to provide with an enhanced level of accountability on the part of the directors and transparency on the part of the shareholders[13]. Moreover, in cases wherein, a company receives consecutively “no” votes twice it implies that the company has failed to address the concerns put forward on the part of the shareholders, wherein it becomes apt on the part of the board to be held accountable with the help of re-election process.   

Thus, on the part of Wardmart, if it face negative vote against the remuneration report by the shareholders and a second strike is held, it will result in making the company’s board face re-election , spill resolution followed by spill meeting wherein the directors have to report and stand for re-election. Hence, remuneration practices and corporate governance of the company in totality will be affected with due to negative vote of the shareholders to the remuneration report and the second strike under the “two strikes” rule.

 

References List

"CORPORATIONS ACT 2001 - SECT 254APower to issue bonus, partly-paid, preference and redeemable preference shares". in , , 2017, <https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s254a.html> [accessed 17 April 2017].

"CORPORATIONS ACT 2001 - SECT 254TCircumstances in which a dividend may be paid". in , , 2017, <https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s254t.html> [accessed 16 April 2017].

"Farrer, Jonathan --- "Australia's Dividend Laws: The Case for Mandatory Disclosure of the Dividend Decision" [1998] SydLawRw 2; (1998) 20 (1) Sydney Law Review 42". in , , 2017, <https://www.austlii.edu.au/au/journals/SydLawRw/1998/2.html> [accessed 20 April 2017].

"Shares | ASIC - Australian Securities and Investments Commission". in , , 2014, <https://asic.gov.au/for-business/running-a-company/shares/#issues-of-shares> [accessed 19 April 2017].

"Two strikes round one". in , , 2017, <https://www.morningstar.com.au/funds/article/two-strikes/4311?q=printme> [accessed 20 April 2017].

Adams, M, Australian essential corporate law. in , 3rd ed., Sydney, N.S.W., Cavendish, 2007.

Ferran, E, "Corporate Mobility and Company Law". in The Modern Law Review, 79, 2016, 813-839.

Fisher, L, "Two-strikes rule is a strike against director arrogance". in afr.com, , 2013, <https://www.afr.com/leadership/twostrikes-rule-is-a-strike-against-director-arrogance-20130509-jyand#> [accessed 20 April 2017].

Harris, J, Australian corporate law. in , 1st ed., Chatswood, Butterworths, 2013.

Rear, S, & P Lucas, "How does the "2 strikes" rule affect your Company and your Board?". in Mondaq.com, , 2012, <https://www.mondaq.com/australia/x/161828/Directors+Officers+Executives+Shareholders/Remuneration+Reform> [accessed 15 April 2017].

Roth, G, & P Kindler, The spirit of corporate law. in , 1st ed., Oxford, United Kingdom, Hart, 2013.

Wilkins, G, "What is the 'two-strikes' rule?". in smh.com.au, , 2012, <https://www.smh.com.au/business/agm-season/what-is-the-twostrikes-rule-20121008-278us.html> [accessed 20 April 2017].+Reform> [accessed 20 April 2017].

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