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Law Assignment Question

The board of Waldmart Ltd proposes to issue bonus shares to existing shareholders as well as increasing the dividend to shareholders to $1.25 cents a share which is a rise of 25% on last year’s dividend. It appears that the reason for this generosity to shareholders is that shareholders overwhelmingly rejected the Remuneration Report at last year’s AGM and the company received a first strike. The constitution of Waldmart Ltd gives the board the power to issue bonus shares and the board is confident that what they are offering to shareholders by way of the shares and the dividend should please shareholders enough to make the first strike a non-issue at the next AGM.  In a separate letter to shareholders the board have set out their views on the justification for the report and the importance of shareholders approving the remuneration report and the reasons for arguing that it was not excessive. 

Jim Smith is the manager of Better Super Ltd which holds 4% of the shares in Waldmart Ltd. Jim and a number other shareholders are unhappy with the proposal put by the Waldmart Ltd. Better Super Ltd and the other investors are of the view that the bonus share issue is unnecessary and the increased dividend is most unwise in these unstable financial times.

Required:

Better Super Ltd and the other shareholder seek your advice as to the following:

1. Does the board of Waldmart have the power to issue bonus shares and can the shareholders at the upcoming AGM legally compel the board not to issue the share?
2. Can the shareholders stop the directors from increasing and paying the proposed dividend because it is commercially unwise to do so?
3. If shareholders vote against the remuneration report and a second strike is achieved, what will be the consequence of Waldmart Ltd and its director?

Law Assignment Solution

Facts of the Case:

The brief facts of the present case are that the board of Directors of the Company, i.e. Waldmart Ltd. suggested to release the bonus shares for their present shareholders and also suggested to increase the remittance to the shareholders to $1.25 cents per share which results into an acceleration of 25% in comparison to the dividend given in the last year. The only reason behind this unselfishness to the existing shareholders is that the shareholders totally spurned the report of remuneration at the annual general meeting which was held in last year and due to this the company received the first strike. As per the company’s constitution, the board has the authority to issue the surplus shares, and the board is very much surefooted that what they are giving to the shareholders in the shape of the shares and the dividends would satisfy the shareholders adequate to make the first strike as a non-issue at the next annual general meeting.. The company had also issued separate letters to the shareholders whereby the board mentioned their prospective on the clarification for the remuneration report. The grandness of the shareholders for approving the remuneration report and the major reason for arguing that it was less.

Power of the company to issue shares:

As per section 254A of the Australian Corporations Act, 2001, the company has the authority to issue the surplus shares. This section deals with the power of the companies to issue the bonus, the partly paid, preferences and the redeemable preferences shares. According to this section, the power of the company mentioned in section 124 to suggest the shares which comprise the authority to issue of the surplus shares, the preference shares and also includes the partly paid shares (partially paid shares on the conditions of the amount of the calls which is to be given or the time for paying calls).  It is specifically mentioned in the act that the bonus shares mean the shares for whose issue there is no amount is payable to the issuing company. As the requirement of the present case is whether the board of directors has the authority to issue the bonus shares? In this regard, it is relevant to mention here that as per section 124 of the Australian Corporations Act, 2001, it is mentioned that the company has the legal capacity and also have all the powers of an individual. Moreover, it is most important to mention here that under Waldmart Ltd’s constitution, the directors have the authority to issue the surplus shares.. Furthermore, section 198 of the corporation act deals with the powers of the directors of the company whereby it is specifically mentioned that the whole of the company’s business is to be taken care by the board of directors of the company. It is further mentioned that the directors of the company might perform all of the authorities of the company excluding any of the authority under this act or under the company’s constitution which needs the company to perform in the general meeting.