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

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