Limitations and powers of directors in relation to dividends and bonus shares issuance

The company’s directors have the full rights to control the functions that are present within the company. Nevertheless, the powers of the directors are limited through the common and statutory laws that are present in Australia. The main aim of the paper will be to examine the limitations and powers that are present within the directors with respect to the dividends and bonus shares. The shareholders have been given the right by the law towards the management that is present within the company, the directors try to delight them by providing dividends so that it can result in attaining personal interest with relation to the company. The salary of the directors are also through the report that needs to be approved by the shareholders.  It can be seen that the directors of Waldmart Ltd had issued dividends and bonus shares towards the shareholders after the payment report was rejected. The major purpose will be to analyse the validity that is present in these issues and the grounds on which the shareholders can challenge the directors. It will also further discuss the consequences of the board of the company that they will face when the next remuneration report is also rejected.

This section will examine the rationality of the bonus shares that the directors will issue and the basis on which it can be confronted.

The payment of share capital are usually done but the directors also have the right to provide free shares to the shareholders that are present in the company whenever they find it appropriate. Bonus shares are those that does not change the overall capital of the company and there is no consideration that is received against it. The issue of bonus shares have to be governed by the common and the statutory law that is present in Australia. Section 124 of the Corporation Act states that the directors of the company have the power to issue the shares. Section 254A(1)(a) of the CA also states that the directors have the right to provide bonus shares to the shareholders as per Section 124. Note 3 of the Section additionally states that the directors may not demonstrate that the share capital has increased due to the issue of the bonus shares for the company.

The bonus shares to be issued can also be done through the excess income that is being earned by the company and for no other reasons. There can be a legal challenge binding on the directors if they are issued not from the excess profits. The issue of bonus shares can only be done when the directors can assure that the company is not indulged in insolvent trading. The directors are also liable under the director’s duties when they try to have personal interest apart from the company’s interest.

Legal challenges faced by shareholders when there are no excess profits

The shareholders may challenge the decisions of the directors in a legal manner if they find out that the interest of the directors is not towards the company. The shareholders also have the rights to execute their powers in the general meeting by passing a resolution. This resolution also needs to be validated by the shareholders through the specified quorum that needs to be maintained in the meeting by the shareholders. The resolution will only be passed when it gets more than 50 percent and a special resolution can be passed when there is more than 75 percent of the total amount of votes.

The directors of the company (Waldmart) have announced that the bonus shares will be issued to the shareholders after the remuneration report of the directors was rejected. The shareholders have stated that the condition of the company financially will get affected when the bonus shares will be issued by the directors. They are of the view that it is unnecessary for the company to issue bonus shares during the time of financial instability. This shows that the directors are in no position to issue the bonus shares, which will result in fulfilling their own interests. Moreover, the main motive for issuing the bonus shares was to take the approval of the remuneration report that was rejected by the shareholders. Therefore the shareholders have the right to confront the director’s judgment and can also exercise their power in taking action against the directors for such a decision.

This will examine the validity of the dividends that are increased by the director of the company and the basis on which the increased dividends can be confronted.

The directors have the full right to decide whether they will be issuing dividends for the company or not. Section 254U of the Act states that the issue of dividends is at the sole discretion of the directors. In the case of Burland v Earle [1902] AC 83, the court was of the opinion that the power to issue debentures is in the hands of the directors of the company until there is no fraudulent activities that are taking place. Similarly in the case of Miles v Sydney Meat Preserving Company [1912] 12 NSWLR 98, the directors were prohibited by the court in issuing debentures or increasing it that was against the company’s interest. With respect to the case Sandford V Sandford Courier Service P/L [1989] 5 ACLR, the court had stated that the company was able to show that they had earned excess profits, which can be used for issuing or increasing the dividends. Section 254 T of the Corporation Act also states that it is allowed to the directors to issue or increase dividends when the assets of the company is more than its total liabilities. They also need to prove that the dividends are fair and reasonable with respect to its relation with the shareholders of the company.  The most important part that is provided in the provision is that the company should not suffer from any damages or increase its liability with respect to the issue or increase of the dividends. Section 254S also states that the directors will be liable nder Section 588G if the issue of debentures makes the company insolvent. With respect to Re Spanish Prospecting Co Ltd [1911] 1 Ch 92, the court stated that dividends can be issued through the excess profits earned by the company. Section 256 of the Corporation Act states that the liability of the directors increase when dividends are issued apart from profits.

Consequences of board members when remuneration reports are rejected

The directors of Waldmart have stated to increase the debentures after their compensation report was rejected by the shareholders. From the above discussion, the directors of the company have full power in issuing or increasing the dividends to the shareholders. The case studies that have been provided above states that the debentures can only be issued when the company has earned excess profits. With respect to Waldmart, it can be seen that the company has not been able to earn excess profits. Moreover the motive of the directors in increasing the dividends was to get the shareholders’ approval in the next report of remuneration. The financial condition of the company is not good in the market, which may make it insolvent if the dividends are issued. In the case of Re Spanish Prospecting Co Ltd, the directors can be held liable directly for issuing the debentures without the profits or losses to be shown by the company. Thus the directors of Waldamrt can be held liable under Section 1324 and 256D, as they tried to increase the debentures without showing that the company earned excess profits.

This section will examine in which the position of the directors of company (Waldmart Ltd) will be when the shareholders take the decision of not voting in the favour of the second report of remuneration and cause a second strike.

The issues with respect to the compensation of the senior executives for the company are less than a decade in the past few years. The changes have been made significantly in the remuneration report for the directors after the productive commission inquired in to matter. The Corporation Act after the inquiry had been amended and the rule of two strike was introduced in the system. In the previous time, the relation with the shareholders and the report was not binding in nature but after the amended the scenario changed completely. The voting process does not include the discussion of the remuneration of the executives and directors after the amendment has been made.  

In the remuneration report, if the report does not get a total of 25 percent votes in the general meeting, then it is the duty of the directors to make the necessary addresses in the next annual meet. However, if the remuneration report is not approved by 25 percent of the votes in the next annual meet and 50 percent of the total members vote for a spill resolution, then the board of directors for a company has to go through the re-election process. The shareholders have to organize a meeting for the process of re-election within the next 90 days from the time when the spill resolution has been passed.

The position of directors when shareholders do not approve the remuneration report

The process of re-election will be started by the board of directors and if they are removed from their position due to this process then the company needs to a have a minimum number of directors that is required in running the company. The managing director is excluded from this process and the remaining position of the directors has to be filled with those who have been elected in the process of re-election. When there arises a case that two of the directors have got the same amount of votes, then the remaining directors have the power to decide regarding which director will be selected in the board. The directors will be chosen by a minimum number if there is less than 50 percent of the votes that has been casted in the election process.

In this scenario, the report of remuneration has been published by the directors of Waldmart in the previous year when it got rejected by the shareholders. The report had failed to attract the minimum number of required voters in the previous Annual General Meeting (AGM). The directors of the company not only changed the report but also proposed to issue bonus shares and increase the debentures for the shareholders so that it can result in approving the remuneration report in an initial manner. In case, the shareholders does not approve the report of remuneration for the second time and 50 percent of the votes are in favour of spill then a spill resolution will be passed by the company. This will result in a process of re-election for the directors of Waldmart Ltd. The spill meeting will be scheduled to be held within 90 days from the ay the resolution has been passed. Moreover, in a public limited company, a minimum of 7 directors are required to run the board and all cannot be removed at once. The discussion above shows that the directors who will gain the maximum number of votes will be suited in a position for the board.

Conclusion

Thus it can be concluded from the analysis that there is restrictions on the power of the directors to issue bonus shares or increase the dividends. However, they have the authorization to issue it at their own discretion but has to follow the common law and provisions laid down in the corporation act to take these decisions. The bonus shares and dividends can only be issued out of the excess profits that the company makes and also it needs to assure that the financial condition of the company is not hampered. Therefore in this case it can be stated that the directors cannot issue shares out of their own interest, which may lead to a condition of second strike and may result in a process of re-election.

Reference List

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