Q The assignment is related to Analysing the Remuneration Report analysis Of Power Of Board To Issue Bonus Shares Home, - Analysing the Remuneration Report Analysing the Remuneration Report a) ANALYSIS OF THE POWER OF BOARD TO ISSUE BONUS SHARES & THE POWER OF SHAREHOLDERS IN LEGALLY COMPELLING THE BOARD NOT TO ISSUE THE SHARE: As per the Corporations Law, under Section 254A, a company have the power to issue bonus shares. Bonus shares are shares on which no consideration is being paid by the company who issues it. Whenever bonus shares are issued, the share capital amount remains unchanged but the number of shares issued in the market increases. The fact that the power to issue shares on behalf of the company vests in the hands of the Board of Directors is as per Section 198A(2) which gives the power to the directors to issue shares and exercise all the powers on behalf of the company. In the given case of Waldmart Ltd. the company have received its first strike when the shareholders rejected the remuneration report. The “first strike” refers to a situation where a “NO” vote of 25% or more is given by the shareholders at the AGM (annual general meeting) of the company when the remuneration report is being presented by the board of directors and rejected by the shareholders. Therefore, it can be analysed that although there is power of the board to issue bonus shares on behalf of the company and so the action of the board of directors of Waldmart Ltd. in relation to issue of bonus shares is legally enforceable. However, there is no such power of the shareholders to legally compel the shareholders in issuing shares. But in this case, since the board of directors are issuing shares just to please the shareholders so that they can take advantage of getting the remuneration report approved by the shareholders. Therefore, the shareholders can again vote for 25 percent or more for a “NO” in the remuneration report which will ultimately result in re-election of the board of directors. b) POWER OF SHAREHOLDERS IN STOPPING THE DIRECTORS FROM INCREASING AND PAYING THE PROPOSED DIVIDEND: The duty and the power of the company’s issuing shares and proposing dividend vests in the hands of the board of directors and the shareholders are not legally responsible for the same. However, the proposed dividend needs to have voting in favour of it from the shareholders in the annual general meeting of the company. Therefore, in case of Waldnart Ltd., the proposed dividend by the shareholders is showing an increase in 25% from the last dividend even though the business environment has not grown to such level. This indicates the fact that the increase in dividend by the Board of Directors is proposed so as to have their Remuneration Report approved by the shareholders at the AGM. The shareholders can therefore stop the directors from increasing and paying dividend as because they have a proper justification of the same where in increasing the dividend to just level is not wise to do analysing the current market situation in which the company operates. The Board wants to increase the same to such level just to please the shareholders which is unjustified. c) SHAREHOLDERS VOTING AGAINST THE REMUNERATION REPORT AND RECEIVING SECOND STRIKE: CONSEQUENCES ON WALDMART LTD & ITS DIRECTORS: In case the shareholders vote against the remuneration report being prepared by the Board of Directors on finding the report unjustified as because it shows the salaries and bonuses and unreasonable, then the shareholders can take an action called “second strike” wherein the company board can face re-election in cases the amount paid to executives are found unreasonable and the shareholders does not agree on the same. This law of “Second Strike” is a part of Corporations Act and was introduced from 1st July, 2011. The second strike leads the shareholders to vote on the same AGM where they have voted “NO” for the remuneration report. A spill resolution is then passed stating the “spill meeting” details. Spill meeting is a meeting wherein the directors of the company are required to stand for re-election. An exception to this is the Managing Director who does not require re-election and continues to run the company. The idea of “first strike” and “second strike” is to provide increase in transparency and accountability of the board of directors acting on behalf of the company. The cases where the remuneration report is found unreasonable for two consecutive years, re-election of the directors takes place, thereby helping in keeping a check on the directors’ biasness towards themselves. The check is done by the shareholders by voting “NO” of 25% or more. Therefore, it can be observed that although the directors are the people responsible for the smooth running of the business but it is the shareholders who are the ultimate holders and owners of the company. The shareholders should thus analyse carefully all the reports that are prepared and issued by the board of directors.
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