Limitations and Powers of Directors in Regards to Dividends and Bonus Shares

This assignment discusses the legitimacy of bonus shares and dividends issued by directors, and the basis on which they can be challenged. It also covers the consequences of rejecting a remuneration report and the process of re-election for directors.

Running head: BUSINESS LAW
Business law
Name of the Student
Name of the University
Author Note

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Introduction
Supreme powers have been provided to the company’s directors in Australia to manage
the operations of the corporation through the application of s 198A of the Corporation Act 2001
(Cth)1. The company’s directors have full power to look after the working of the organization.
However, the powers of the directors have been restricted by the rules of the both common law
and statutory law in Australia the objective of this assignment is to study the limitations and
powers of the directors in regards to dividends and bonus shares. As the owners have been
instructed by law towards the company’s management, the directorsmake them happy with the
benefits and dividends that may not help the company to gain benefits to attain the interest of
their own. In order to get allowance for the director's remuneration, the shareholders must
approve the report2. In the given situation, it is seen that Waldmart Ltd company’s directors have
taken the responsibility to issue bonus shares and dividends to the owners after the report of the
initial remuneration is discarded by them. The main use of this assignment is to discuss
legitimacy of these issues through the directors and in what basis these issues be dared by owners
of the company. This assignment also holds the discussion regarding what consequences will the
Waldmart company’s board needs to face if the report of subsequent remuneration is discarded
that might cause a “Second Strike”.
Issue 1
This part of the assignment will be analysing the legitimacy of the shares of bonus
through the directors and on what basis the problems could be challenged.
Rule
1 Lipton, P., and Herzberg, A., Welsh, M, Understanding Company Law, 19 edition (Thomson Reuters 2018).
2 Austin R.P. & Ramsay, I., Ford's Principles of Corporations Law, Butterworths, Australia, 16th edition, 2014.

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Share capital is paid usually but the directors hold the right to issue the shares for free to
the owner of the organization who are existing and if they think that it is suitable. Bonus shares
are those shares that do not change the company’s capital and no such consideration has been
received against it. The rules that are in relation with the bonus shares' issue by the directors are
ruled by the both statutory rules and common law. The exclusive powers of the company’s
directors to issue the shares have been provided under the section 124 of the Corporation Act3.
The authority to issue the bonus shares to owners of the company has been given to the
company’s directors by the section 254(1) (a) of the Corporation Act according to the section
1244. The note 3 of this section further gives that the company’s directors need not show the
company’s share capital that has increased to issue the bonus shares.
The issue of the bonus shares can be done only out of income profits and no other reason
given by the directors. The company’s directors might be dared legally if the bonus shares are
issued for any other reason other than the profits. While the bonus shares are issued it is the duty
of the directors to ensure that there must not be any kind of indulgence in any kind of trading that
is insolvent. The directors of the company will be held liable under the duties of the directors if
somehow they fail to give priority to the interest of the company over the personal interest.
The company’s shareholder holds the right to challenge the directors of the company
legally if they see that directors of the company are not functioning as per the company’s
interest. They hold to right to implement their powers through passing the resolution during the
general meeting. The validation of the resolution has to be done by shareholders through
assuring that the specific numbers of the members are present. A resolution might be passed if
3 Baxt, R., and Fletcher, K.L., Fridman, S., Corporations and Associations Cases and Materials on, Butterworths,
Australia, 10th edition, 2008.
4 Corporation Act 2001 (Cth) s 254(1) (a)

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the vote is more than 50% and the special resolution might be passed of the total vote is more
than 75%.
One of the advantages of issue of bonus shares is that it is beneficial for those
shareholders who want to have long term investment in the company. Bonus shares also allow
the company to save cash for reinvesting in business. The disadvantage include the fact that not
all shareholders need long term investment. The company also does not get any cash on
receiving bonus shares. They have to make a declaration in relation to the fact that the issue is in
compliance with the constitution under s 140. Under s 254A(1)(b) preference share can only be
issued if it is provided through the constitution or a special resolution.
Application
The Waldmart company’s director have announced that to issue the bonus shares directly
after the first report of remuneration was discharged by the owners. As per the owners, the
company's financial condition might get affected if the issuing of the bonus shares are done by
the company’s directors. The owners think that if the issue of the bonus shares are done during
unstable financial times then it is the most inappropriate step to be taken. In this situation, the
company's directors do not hold any right to issue the bonus shares to fulfil the interest of their
own. Furthermore, the aim behind issuing the bonus shares in this situation is to make the owners
accept the following report of remuneration by the company’s directors. Therefore, the owners
not only hold the right to go against the director's judgements during the AGM but they also hold
the right to bring the proceedings against the directors of the company for taking the decision
that is unwise.
Issue 2

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This part of the assignment will be analysing the legitimacy of the dividends that have
increased by the directors of the company named Waldmart and on what basis the increase in
dividends could be challenged.
Rule
The power to take decisions regarding the dividends issue has been vested upon the
company’s directors5. The section 254U of the Corporation Act provides that the dividends’
issue can be done at the director’s discretion6. As per the case Burland v Earle7, no interference
will be done by the court with the director’s power while issuing the dividends until they have
done any kind of fraud. The court stated in the given case Miles v Sydney Meat Preserving
Company8 that the company’s directors are not permitted to issue or increase debentures against
the company’s interest. The court provided in the case of Sandford v Sandford Courier Service
P/L9 if the corporation has gained excess profits and the can show it then only the directors can
issue or increase the dividends. The section 254 T of the Corporation Act gives that the
company’s directors will only be permitted to increase or issue dividends when they are able to
show the company’s total assets are more than its total liabilities10. It is the duty of the directors
to verify that dividends are fair and reasonable with regards to the company’s owners in all. One
such important rule that has been provided in this part is that the organisation do not undergo any
lossto their position of paying the liability because of the increase or issue in dividends. The
section 254s states that if these dividends make the organisation insolvent then the company’s
directors will be held responsible under the section 588G for the insolvent trading. The court had
5 Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. (Oxford 18th edition 2017)
6 Corporation Act 2001 (Cth) s 254U
7 [1902] AC 83
8 [1912] 12 NSWLR 98
9 [1989] 5 ACLR
10 Redmond, P., Companies and Securities Law - Commentary and Materials, Law Book Co., Sydney, 5th, 2009.

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stated in the given case Re Spanish Prospecting Co Ltd11, only when profit has been made a
company is allowed to issue dividends.In case it is found that the dividends have been paid by
the directors without profit they can be held liable under the provisions of section 256.
As per Whitehouse v Carlton Hotel Pty Ltd (1986) 70 ALR 251, s 181 requires an action
for proper purpose, good faith and best interest of the company. An action which is done to
maintain control over the company is not for proper purpose. Directors are required to act
diligently and carefully like a reasonable person under s 180(1). Under s 1324 a statutory
injunction can prevent the issue of the shares. This may also be a variation of call right under s
246 and thus may require a special resolution. Minority shareholders may also take derivate
action under s 232-234 if they feel that the action is prejudicial to their interest. They can also
take statutory derivative action under s 236.
Application
As soon as the first remuneration report has been rejected by the owners of the company
the directors have decided to enhance the rate of dividends. The corporation act provides
discretionary power to the directors whereby they have the right to indulge in such actions.
However the rules which have been discussed about clarify that only when profit has been made
by the company can the director have the right to issue dividends. The facts of the case study do
not provide any information where it is indicated that the corporation has gained a profit. It can
be evidently stated that the dividend have only be increased by the directors to impress the
shareholders so that the second remuneration report is not rejected. There are also chances that
the company can become insolvent if the dividends are issued as the market’s financial
conditions are not good. It had been clearly clarified by the court that where there is no profit and
11 [1911] 1 Ch 92

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dividends are issued the directors might be held legally responsible for any loss incurred by the
company. Therefore in the present situation both section 1324 and 256D would make the
directors of Waldmart liable if they increase the dividends without being able to show profit.
Issue 3
In this part the result of the shareholders not approving another remuneration report
which would under law lead to a second Strike has been discussed.
Rule
The issue in relation to the remuneration of the senior executives and the company's
directors have been given under a decade for quite a few years. Certain important changes in
relation to the director’s remuneration report are there after the investigation of the productive
commission in the matter12. The amendment of the CA was done by following the investigation
and the rule of the two strikes was incorporated in it. Formerly, the company owners’ votes in
regards to the report were not required but somehow the scenario after the alteration had changed
considerably13. As per the provisions the senior executives and the directors whose remuneration
work to be deliberated have not been included in the process of voting. If in case the 25% of the
total votes that was casted at the AGM, have not been received by the report of remuneration
then the board of directors have the duty to look after the explanations of the owners in the
following AGM. If the report of remuneration has not been approved by the twenty five percent
of the entire votes at next AGM then the fifty percent of the whole members have casted their
vote so that they can support the spill resolution rather than the whole company’s board have to
12 Ciro T, Symes C, Corporations Law in Principle LBC Thomson Reuters, Sydney, 9th edition 2013
13 Cassidy J., Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney 2013

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undergo the re-election process. The owners must organise a re-election meeting within the
ninety days from the date when the still resolution has been accepted.
The process of re election will be initiated in the meeting in which the board of directors
have to take part. If the company's directors are removed as the election's result then it is to be
assured that the least legal directors are needed for the management of the company and to
remain as the directors. In the election process, the managing director has been excluded and the
other two positions of the directors are filled with those who get the maximum votes during the
process of election. If both the directors get the same amount of vote then the other directors
have the right to decide that which director will be chosen for the board. In order to fill the least
number in case that does not receive the votes more than 50% then the directors might be
chosen14.
Application
The given situation states that the report of the remuneration that was published last year
by Waldmart company’s directors was discarded by the owners. There was a failure by the report
to achieve the least number of votes in the last AGM. The company’s directors did not change
the report as per the owner’s commentsand besides is planned to issue the bonus shares and
increase the dividend to appeal the owners to accept the first report of remuneration. If the
owners do not accept the second report of remuneration and 50% of the owner's vote in favour of
the spill then a spill resolution would be passed as discussed above.In the resolution of spill
directors of the Waldmart have to undergo a process of re-election as per the needs of the owner.
The spill meeting needs to be organised within the 90 days from when the resolution of spill has
been passed. All the directors of the company cannot be detached from the positions they hold
14 Fitzpatrick, Symes, Veljanovski, Parker, Business and Corporations Law; LexisNexis 3rd edition 2017

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buy the owners as at least 7 directors are needed for a company that is public limited and they
have to stay on board. As it has been discussed the directors who gets the maximum votes will be
qualified for the director’s position.
Conclusion
While concluding this assignment that is based on the study it can be stated that the
power to increase the dividends and issue the bonus shares as per the company’s directors have
not been unrestrictedand they can sanction the issue by following the rules of the common law
and Corporation Act so that they can make their own decisions. It must be ensured that it or not
harm the company's financial position. It must also be assured that to pay the creditors does not
hamper the company and not become bankrupt. If the company’s directors announce a second
strike then they have to undergo an election process that has been specified by the owner of the
corporation. The Parliament has taken this step to assure the responsibility of the directors of the
company towards the management.

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Bibliography
Austin R.P. & Ramsay, I., Ford's Principles of Corporations Law, Butterworths, Australia, 16th
edition, 2014.
Baxt, R., and Fletcher, K.L., Fridman, S., Corporations and Associations Cases and Materials on,
Butterworths, Australia, 10th edition, 2008.
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)
Corporation Act 2001 (Cth) s 254U
Fitzpatrick, Symes, Veljanovski, Parker, Business and Corporations Law; LexisNexis 3rd edition
2017
Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. (Oxford
18th edition 2017)
Lipton, P., and Herzberg, A., Welsh, M, Understanding Company Law, 19 edition (Thomson
Reuters 2018).
Redmond, P., Companies and Securities Law - Commentary and Materials, Law Book Co.,
Sydney, 5th, 2009.

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