Corporation Law Second Strike

Question: Discuss about theCorporation Law for Second Strike. Answer: Introduction The directors of the company have total powers to control the overall functioning of the company. However their powers have been limited by provisions of both statutory and common law in Australia[1]. This purpose of this paper is to analyze the powers and limitations of directors in relation to bonus shares and dividends. As the shareholders have been given a say by law towards the management of the company the directors try to please them with dividends and benefits which might not be beneficial for the company in order to attain personal interest. The remuneration of the directors can only be allowed if the report is approved by the shareholders. In the provided scenario it has been seen that the directors of Waldmart Ltd have taken the initiative to issue dividends and bonus shares to the shareholders after the first remuneration report has been rejected by them. The purpose of this paper is discuss the validity of such issues by the directors and on what grounds such issue can b e challenged by the shareholders. The paper also discusses the consequences which the board of Waldmart has to face in case the subsequent remuneration report is rejected causing a Second strike. This Section of the paper would analyze the validity of the issued bonus shares by directors and the grounds on which the issue can be challenged. Rules Share capital is usually paid, however the directors have the right to issue shares free of cost to the existing shareholders of the company if they think it is appropriate to do so. The shares which do not alter the capital of the company and against which no consideration is received are known as bonus shares. The provisions related to the issue of bonus shares by the directors are governed by both common law and statutory provisions. Section 124 of the CA provides exclusive powers to the directors of the company to issue shares. The power to issue bonus shares to the shareholders has been provided to the directors through Section 254A(1)(a) of the CA as per Section 124. Note 3 of the Section further provides that the directors do not need to show that the share capital of the company has increased in order to be able to issue bonus shares[2]. Bonus shares can only be issued out of profits and not for any other reason by the directors. The directors may be challenged legally if they issue bonus shares for reasons other than profits. When issuing bonus shares the directors need to assure that they do not indulge in any kind of insolvent trading. Directors can also be liable under directors duties if they fail to prioritize the companys interest over their personal interest[3]. The shareholders of the company have the right to legally challenge the decisions of the directors if they believe that the directors are not working in favor of the company. They have the right to exercise their powers by passing resolutions during general meetings[4]. The resolution must be validated by the shareholders by ensuring the presence of specified number of members. A resolution can be passed with more than 50% of the total votes and a special resolution can be passed with 75% of the total votes[5]. Application The directors of Waldmart have declared to issues bonus shares just after their initial remuneration report have been rejected by the shareholders. According to the shareholders the financial condition of the company may be affected if the bonus shares are issued by the directors. The shareholders believe that the issue of bonus shares is one of the most unnecessary steps during financially unstable times. In this case the directors of the company do not have the right to issue bonus shares in order to fulfill their own interest. Further the only motive behind the issue of the bonus shares in this case is to make the shareholders approve the subsequent remuneration report by the directors. Thus the shareholders not only have the right to go up against the judgment of the directors during the AGM but also they have the authority to bring proceedings against the directors for taking such an unwise decision. This Section of the paper would analyze the validity of the increased Dividends by directors of Waldmart and the grounds on which the increase in dividends can be challenged. Rules The directors of the company have ultimate power to decide the issue of dividends. It has been provided by Section 254U of the CA that dividends can be issued at the discretion of directors. The court ruled in the case of Burland v Earle [1902] AC 83 the court will not interfere with the powers of the directors in relation to the issue of dividends until there is fraud by them[6]. The court held in the case of Miles v Sydney Meat Preserving Company [1912] 12 NSWLR 98 that directors of the company are not allowed to increase or issue debentures against the interest of the company[7]. In the case of Sandford V Sandford Courier Service P/L [1989] 5 ACLR it was provided by the court that only when the company has been able to show excess profits can the directors of the company increase or issues dividends[8]. Section 254 T of the CA further provides that the directors will only be allowed to declare or increase dividends when they can show that the total assets of the company are more t hat its total liabilities[9]. The directors also need to prove that the dividends are reasonable and fair in relation to the shareholders of the company overall. One of the most important provisions provided by this Section is that the company does not suffer any damage to its position of paying its liability due to the issue or increase in dividends. Section 254s further provides that in case the divides make the company insolvent the directors of the company would be liable under Section 588G for insolvent trading. In the case of Re Spanish Prospecting Co Ltd [1911] 1 Ch 92 the court provided that dividends are entitled to be issued if the company makes profits[10]. Section 256 of the CA makes the directors liable if the dividends are paid for reasons other than profits. Application The directors of Waldmart have declared to increase dividends just after their initial remuneration report have been rejected by the shareholders. As discussed above the directors of Waldmart have discretionary powers to increase and issue dividends. However according to the cases and provisions discussed above they would only be able to increase of issue dividends in case Waldmart has earned excess profit. In this case there is no sign that the company has made excess profits. Further the only motive behind the increase in dividends in this case is to make the shareholders approve the subsequent remuneration report by the directors. The financial conditions of the market are not stable and the issue of dividends can also make the company insolvent. As ruled in the case of Re Spanish Prospecting Co Ltd the directors can directly be held liable for the issue of debentures without being able to show profits if the company faces looses because of such issues. The directors of Waldmart c an also be held liable under the provisions of Section 1324 and 256D for increasing the dividends of the company without showing excess profit. This Section of the paper analyses the position in which the directors of Waldmart Ltd would be in if the shareholders of the company decide not to vote in favour of the second remuneration report and cause a second strike. Rules The issue related to the remuneration of senior executives and directors of the company have been in under the decade for a few years. There have been significant changes related to the remuneration report of the directors after the inquiry of the productive commission into the matter[11]. The corporation act had been amended following the inquiry and the two strike rule was incorporated into it. Previously the vote of the shareholders in relation to the report was not binding but after the amendment the scenario has been changed considerably. According to the rules the directors and senior executives whose remuneration is to be discussed are not included in the voting process. In case the remuneration report does not receive 25% of the total votes casted at the AGM than it is the duty of the board of directors to address the comments of the shareholders in the next AGM[12]. However in case the remuneration report is not approved by at least 25% of the total votes at the next AGM and 50% of the total members cast their vote to support a spill resolution than the entire board of the company would have to undertake the process of re election. The shareholders are required to organize a meeting for the re election within 90 days from the date when the spill resolution had been approved[13]. In the meeting a re-election process would be initiated which the board of directors have to undergo. In case the directors of the company are removed from their positions as a result of the election it is to be ensured that the minimum legal directors required to manage a company remain as directors. The managing director is excluded from the process of election and the remaining two directors position is filled with those directors who receive the maximum number of votes during the election. In case two directors of the company get same number of votes than the remaining director or directors have the authority to decide which director would be chosen for the board. The directors can be chosen to fill the minimum number if if they do not receive more than 50% of the votes[14]. Application In the provided scenario the remuneration report which was published by the directors of Waldmart last year has been rejected by the shareholders. The report had failed to achieve minimum number of votes at the last AGM. The directors of the not altered the report according to the comments of the shareholders and moreover proposed to issue bonus shares and increase dividends in order to lure the shareholders to approve the initial remuneration report. In case the shareholders do not approve the second remuneration report and 50% of them vote in favour of a spill than as discussed above a spill resolution will be passed. In this spill resolution all directors of Waldmart have to go through a re-election process according to the wants of the shareholder. The spill meeting would have to be scheduled within ninety days from when the spill resolution had been passed. However all directors cannot be removed from their positions by the shareholders as a minimum of seven directors which are required for a public limited company have to be on board. As discussed above the directors who receive the maximum votes would be eligible for the position. Conclusion Concluding the paper based on the above analysis it can be held that the powers to issue bonus shares and increase dividends with respect to the directors of a company are not unrestricted. Although they can authorise the issue on their own discretion they have to follow the provisions of corporation act and common law to make their decisions. Dividends and bonus shares can only be issued out of profit and it has to be assured that such issue does not hamper the financial position of the company. The directors must also assure that the companys capacity of paying the creditors back is not hampered and the company does not become insolvent. Thus in this case they cannot issue bonus shares and increase dividends to fulfil their own interest. In case the directors call a second strike than all the directors of the company or the directors specified by the shareholders would go through a process of election. This step has been taken by the parliament in order to ensure the accountability of the companys directors towards its management. References Burland v Earle [1902] AC 83 Cassidy J., Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney 2013 Ciro T, Symes C, Corporations Law in Principle LBC Thomson Reuters, Sydney, 9th edition 2013 Corporation Act 2001 (Cth) Davenport, S and Parker D, Business and Law in Australia, Thomson Reuters, 2012 Fisher S, Anderson C, Dickfos, Corporations Law - Butterworths Tutorial Series, 4th Edition Butterworths, Sydney 2014 Fitzpatrick, Symes, Veljanovski, Parker, Business and Corporations Law; LexisNexis 3rd edition 2017 Graw, Parker, Whitford, Sangkuhl and Do, Understanding Business Law 7th ed LexisNexis Butterworths, 2015. Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. Oxford 18th edition 2017 Miles v Sydney Meat Preserving Company [1912] 12 NSWLR 98 Parker, Clarke, Veljanovski, Posthouwer, Corporate Law, Palgrave 1st edition 2012 Re Spanish Prospecting Co Ltd [1911] 1 Ch Sandford V Sandford Courier Service P/L [1989] 5 ACLR