BLO 2205 Corporate Law: Analyzing Corporate Governance at Waldmart

This case study examines the actions of the board of directors of Waldmart Ltd, specifically their proposal to issue bonus shares and increase dividends after shareholders rejected the remuneration report at the previous AGM. The analysis delves into the directors' powers and limitations under Australian corporate law concerning dividends and bonus shares, exploring the validity of these actions and the grounds on which shareholders can challenge them. It considers relevant sections of the Corporations Act and case law to determine whether the directors acted in the company's best interest and if their actions could be considered insolvent trading. The study also assesses the potential consequences for the board if the remuneration report is rejected for a second time, triggering the 'two-strike' rule and potential re-election processes. The document concludes that the directors may be liable for increasing dividends without showing excess profits, potentially violating sections 1324 and 256D of the Act.

Running head: CORPORATE LAW
Corporate Law
Name of the Student
Name of the University
Author Note

1CORPORATE LAW
Introduction
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 Australia1. 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.
Issue 1
This section will examine the rationality of the bonus shares that the directors will
issue and the basis on which it can be confronted.
Rules
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
1 Cassidy J., Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney 2013

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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 company2.
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 interest3.
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 resolution4.
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 votes5.
Application
2 Corporation Act 2001 (Cth)
3 Ciro T, Symes C, Corporations Law in Principle LBC Thomson Reuters, Sydney, 9th edition 2013
4 Fisher S, Anderson C, Dickfos, Corporations Law - Butterworths Tutorial Series, 4th Edition Butterworths, Sydney
2014
5 Cassidy J., Corporations Law Text and Essential Cases. Federation Press, 4th edition Sydney 2013

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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.
Issue 2
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.
Rules
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 place6. 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 interest7. 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
6 [1902] AC 83
7 [1912] 12 NSWLR 98

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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 company8. 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 insolvent9. 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 company10. Section 256 of the Corporation Act states that the liability of the
directors increase when dividends are issued apart from profits.
Application
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
8 [1989] 5 ACLR
9 Fitzpatrick, Symes, Veljanovski, Parker, Business and Corporations Law; LexisNexis 3rd edition 2017
10 [1911] 1 Ch 92

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Section 1324 and 256D, as they tried to increase the debentures without showing that the
company earned excess profits.
Issue 3
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.
Rules
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 matter11.
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 meet12. 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 passed13.
11 Graw, Parker, Whitford, Sangkuhl and Do, Understanding Business Law 7th ed LexisNexis Butterworths, 2015.
12 Parker, Clarke, Veljanovski, Posthouwer, Corporate Law, Palgrave 1st edition 2012
13 Hanrahan, P., Ramsay I., Stapledon G., Commercial Applications of Company Law. Oxford 18th edition 2017

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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 process14.
Application
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.
14 Davenport, S and Parker D, Business and Law in Australia, Thomson Reuters, 2012

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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.

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Reference List
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