Rights of Shareholder and Power of the Company Sample for Students

Questions: 1.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?2.Can the Shareholders Stop the Directors from Increasing and Paying the proposed dividend because it is Commercially Unwise to do So?3.If Shareholders Vote against the Remuneration Report and a Second Strike is achieved, what will be the Consequence of Waldmart Ltd and its Director? Answers: Introduction The following assignment aims to analyse the relevant regulations of company law and evaluate the actions taken by the board of Waldmart Ltd. In order to analyse and evaluate the given scenario in the case study, principles of commercial law as well as corporate law have been considered. The first situation examines the eligibility of Waldmarts board to issue bonus shares along with the analysis on the eligibility of companys shareholders restricting the board for issue of shares. The study further examines the entitlement of shareholders to confine the directors from increasing or paying proposed dividend considering it to be commercially unwise. Considering the regulations of corporation law, potential consequences have been identified if shareholders vote against the companys remuneration report and a second strike is achieved. (a) Power of company to issue bonus shares and eligibility of shareholders to restrict the companys board not to issue the shares at the upcoming AGM As per the regulations under section 254A, Corporations Act 2001, an organisations power within section 124 for issue of securities contains the power for issue of bonus shares for which the investors are not required to pay considerations to the company. The act further provides that the in order to issue bonus shares increase of share capital is not required since the bonus shares are issued through profit capitalization[1]. However, the company must have appropriate balance in the reserves and sustained profitability trends to issue bonus shares to the stakeholders. As per the rulings held in case of BTR Nylex Ltd v Churchill International Inc (1992) 9 ACSR 361, court contended that the issue of bonus shares should be for companys investors while the issuing amount should be capitalised from companys reserves and not from the balance of profit attributable to shareholders[2]. According to the regulations provided in the Corporations Act, rights to issue shares lies on the companys board members depending on the companys constitution. The act provides that the existing shareholders must be given pre- emptive rights for share issue over the proposed investors[3]. In case of Bradbury v English Sewing Cotton Co (1923)AC 744, court held that the issue of shares forms part of share capital and remains the companys property hence, the companys board has the rights and power to issue shares. Similarly, company has the right and power to issue bonus shares, decision of which is taken in the board meeting with the approval of directors and board members[4]. The given situation involves proposal of bonus issue by the board of Waldmart Ltd to the existing shareholders together with the increase in dividend amount to $1.25 cents with a rise of 25% from the last years dividend amount. It has been observed that the issue of bonus shares was proposed during the period of unstable financial times. Considering the principles given under section 254A under Corporations Act, it can be said that the company has all the powers to issue bonus shares with the approval of board members. Therefore, in this case, Waldmart Limited has the power to issue bonus shares after monitoring the profitability trends and appropriate balance in companys reserves. The board of the company needs to ensure that the issue of bonus share is not against the dividend payment while the amount of profit distributable to shareholders is not used for bonus capitalization. Further, it has been observed that the approval of bonus shares lies within the power of companys board of directors. Proposal of bonus issue of share or any other form of issue like rights issue, employee issue, is approved at the board meeting and not at the annual general meeting of the company. As per the principles of corporation act proposal of share issue is approved at the board meeting whereas declared at the annual general meeting which does not give legal power to the Therefore, it can be concluded that Waldmarts board have the power to issue bonus shares subject to compliance of regulations under Corporations Act 2001. Further, Better Super Limited or any other shareholders are not legally entitled to compel the board of Walmart not to issue the share at forthcoming AGM. (b) Power of shareholders to stop the directors from increasing and paying the proposed dividend According to the provisions stated under section 254T, a listed company is entitled to pay dividend only if the value of assets exceeds the value of liabilities prior to dividend declaration. The excess amount should be adequate to make the dividend payment while the payment should be fair and reasonable to all the shareholders of the company[6]. The act further provides that the dividend payment should not materially detriment the organisations efficiency to repay its obligations. The regulations of corporation law states that board of the company is not mandatorily required to take shareholders approval to declare dividend but as per the recent amendments, directors are required to assure the solvency test. The solvency test requires the ability of the company to repay its debts within due time and the assets must be higher than the liabilities[7]. It has been noted that the declaration of dividend becomes companys obligation to the shareholders for which the shareholders have the right to enforce. Similar to the case of Industrial Equity Ltd v Blackburn (1977) HCA 59, it was held that the company acquires contractual debt to the shareholder as the dividend has already been proposed and declared. In addition, the corporation law provides that shareholders have the right to waive off the allocated dividend subjected to the declaration has been given in written notice[8]. However, under ordinary business resolutions, shareholders are not entitled to stop the directors from increasing or paying the proposed dividend even if it is commercially unwise. Once the dividend has been proposed, the company is obligated to make the payment to the shareholders within the specified period. However, as per the legislation, shareholders may restrict the company from authorising dividend if all the entitled shareholders provide unanimous agreem ent. On the contrary, corporations act does not give right and entitlement to shareholders to restrict the company from paying or increasing dividend one it has been authorised or proposed at the board meeting[9]. Moreover, in case shareholders find that the company does not satisfy the solvency test or if the payment of dividend is detrimental to the benefits of the shareholders, then the shareholders may apply to the court under jurisdiction claiming the contravention of corporation act regulations. The shareholders can also apply against the companys directors for breach of organisational constitution as well as legislations of corporation law[10]. Accordingly, in the present situation, decision of board of Waldmart Ltd on increase of dividend to $1.25 cents with a rise of 25% should be as per the provisions of section 254T with respect to the solvency test. It has been mentioned that the increase in dividend payment by company has been proposed during the unstable financial times and Better Super Ltd and other shareholders were not happy with the proposal. Considering the above discussion on corporation act regulations, Better Super Ltd or other shareholders are not entitled to stop company from paying the dividend. Besides, if the shareholders determine that Waldmart fails to satisfy solvency test as per section 254T then they can make application to the court against the company as well as the directors. (c) Consequences of Waldmart Ltd and its directors if shareholders vote against the remuneration report and second strike is achieved According to the regulations of section 300A of Corporations Act 2001, a company listed on Australian stock exchange requires to prepare and present remuneration report to the shareholders. The report must be presented at every annual general meeting (AGM) disclosing the policies of the companys board to determine the nature and value of remuneration payment of which has been made to the directors and key managerial personnel[11]. The report further presents the business relationships between companys policies and financial performance together with the explanation on problems of business performance. Further, as per the amendment on Corporations Act 2001 that was made on July 1 2011, the shareholders are entitled to vote for the remuneration report at the annual general meeting to provide their consent or otherwise[12]. In case the company receives a no vote that is equal to or more than 25%, the company achieves first strike hence, the company is required to present explanation on shareholders concerns in subsequent remuneration report[13]. On presenting the subsequent remuneration report, the company needs to ensure the appropriateness of explanation provided for last report for shareholders concerns. However, if company receives a no vote against the subsequent report with 25% or more, the consequence will fall under second strike[14]. In the present case, board of Waldmart Ltd achieved first strike on the remuneration report presented at the annual general meeting held last year. However, the company presented a separate report to provide justification for the unapproved remuneration report stating the importance and concerns of shareholders. Besides, considering the proposals of company on bonus issue and increase dividend amount, Better Super Ltd and other shareholders were unhappy. Accordingly, it has been expected that the shareholders might vote against the remuneration report in the subsequent AGM, which would occur second strike if the rejection vote exceeds 25%. Therefore, in case Waldmart Ltd achieves second strike then the consequences will include voting of shareholders at the same annual general meeting, which would be held to establish the requirement of directors for re- election within a period of 90 days[15]. The regulations of Corporation Act further provides that the if the shareholders vote and pass the resolution with eligible vote of 50% or more, then Waldmart Limited will be required to hold spill meeting within a period of 90 days. The spill meeting will be conducted to determine the eligibility of present directs of Walmart to stand for the process of re- election excluding the companys managing director[16]. The consequences of second strike for conducting spill meeting to re-elect the directors is not applicable to managing director who is entitled to persist the business activities. In addition, Waldmart is required to comply the requirements of Corporations Act and ASX Listing Rules to establish the procedures of voting i ncluding maintenance of integrity. Contravention of regulations and principles, companys directors would be imposed with severe penalty charges together with the fines and imprisonment[17]. Conclusion In view of the above discussion on companys powers and shareholders rights as per the Corporations Act 2001, it can be said the board of the company should consider shareholders concern while taking any business decisions. The Corporations Law provides that the power to issue bonus shares lie on the companys board subject to the satisfaction of solvency test and shareholders benefits. The act does not give right to shareholders to compel the board for not to issue shares unless the agreement has been obtained unanimously. Further, payment or increase of dividend depends on the boards approval that cannot be revoked if the same has been approved or proposed at the board meeting if company has sufficient profit. In addition the study indentified the consequences of second strike to Waldmart and directors which requires holding of spill meeting within 90 days to re- elect directors. References Austin R.P. Ramsay, I., Ford's Principles of Corporations Law, Butterworths, Australia, 16th edition, 2014. Austlii.edu.au. Australasian Legal Information Institute (Austlii) https://www.austlii.edu.au 2017 Chen, V., Ramsay, I. and Welsh, M.A., 2016. Corporate law reform in Australia: An analysis of the influence of ownership structures and corporate failure. 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Australasian Legal Information Institute (Austlii) https://www.austlii.edu.au 2017 Malhotra, M., Thenmozhi, M. and Arun Kumar, G., Evidence on changes in time varying volatility around bonus and rights issue announcements.International Journal of Emerging Markets,8(2), pp.129-143 2013 Vallascas, F. and Hagendorff, J., CEO bonus compensation and bank default risk: evidence from the US and Europe.Financial Markets, Institutions Instruments,22(2), pp.47-89 2013 Jokinen, J., Granlund, M. and Pfister, P.D.J., The role of auditors in the Finnish limited liability companies as to solvency test in the context of asset distribution 2015. Harris, J. Hargovan, A. Adams, M., Australian Corporate Law LexisNexis Butterworths 5th edition, 2015. Austin R.P. Ramsay, I., Ford's Principles of Corporations Law, Butterworths, Australia, 16th edition, 2014. 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Chen, V., Ramsay, I. and Welsh, M.A., Corporate law reform in Australia: An analysis of the influence of ownership structures and corporate failure 2016.