Ch 13 Membership and Dividends Answer Guides JN

Exercise 13.4 - Janus Pty Ltd is profitable and its shareholders

want a dividend

We are given financial information about the company including assets and liabilities.
The business is “wildly successful” with “tremendous free cash flow”. The value of the
main asset, the farm is revalued from the purchase price of $100m to $85m. Cash on
hand is $5m.

Our advice to the shareholders who want to force directors to pay a dividend is that
dvds are a management decisions (under general power of management, s 198A,
and under specific dvd rule s 254U) (note s 254U is a RR) and at the discretionary of
directors. Therefore shareholders have no power over dvd decisions.

The exception would be if the company constitution changed this position and
provided a right to a dvd in the co constn. There is no evidence of any such
constitutional clause here.

Any payment of dvd is always subject to s 254T which says that a co must not pay a
dvd unless (a) assets exceed liabilities, (b) the payment is fair and reasonable to
shareholders as a whole, and (c) the payment does not materially prejudice creditors.
Note that paying a dvd is also a deemed debt un der the insolvent trading rules, s
588G (1A). That is a lot for directors to consider!

The shareholders cannot force the directors to pay a dvd here.

If shareholders did call a shareholder meeting to pass such a resolution it would not
be a proper purpose for a SH meeting.

If there is no excess of assets over liabilities then the directors could not pay a dvd
even if they wanted to, s 254T.

There is nothing on the facts here that suggests SHs might be able to seek a
member remedy for refusal to pay dvds, such as the oppression remedy under s 232.
This oppression remedy would only be relevant if there was something very unfair
about the failure to pay dvds, such as a change in policy so that dvds were not paid
even though past practice was to pay dvds in the circumstances, and the asset test
in s 254T was satisfied.

If the constitution replaced s 254U then SHs would have rights, subject to the assets
test in s 254T.

Exercise 13.5 – Can Fatima, a 20% shareholder, force the Ds to

call a SH meeting and put a resolution to the meeting?
SHs/members have reights to call member meetings. There are two options broadly
speaking – call directly and pay costs (s 249F), or, request Ds to call and co pays
costs of meeting, s 249D. Note if Ds fail to call a member meeting when validly
requested then the member can and can charge the costs to the co, s 249E. Costs
and timing will be the factors to consider as a request to the Ds takes extra time (Ds
must be given 21 days notice).

Members must have a minimum of 5% of the voting power. This can be on their own
or as a group. Members with the relevant voting power have the right to have
resolutions put to a member meeting. Under s 249N members with 5% of the vote
can also put a resolution to a meeting (if the meeting is scheduled to be called).

Exercise 13.6 – Chuck, the unhappy shareholder in Karate

Australia Ltd.

Karate Australia Ltd (KA Ltd) – is a public co, as indicated by the ‘Ltd’ in its name.

Jacqui (J) and Bruce (B) are directors. Chuck (C) is a shareholder.

(a) Karate Australia Ltd has not called an AGM for two years. Does the
company need to hold regular meetings?
All public companies must hold annual general meetings (AGM) annually, s
250N.

(b) Chuck believes that there are not enough good karate instructors in
Australia and he wants to change the constitution of Karate Australia
Ltd to provide that the company can only have four karate schools in
Australia, thereby maintaining the quality of the schools. How can he
do this?
C is a shareholder and decisions about how many karate schools to ru n is
a business/managment decision which is for directors to make. C cannot
interfere with the board’s management of the company. see Automatic
Self- Cleaning Filter Co v Cunninghame

(c) Jacqui and Bruce have decided to hold a shareholders’ meeting for
Karate Australia Ltd. They want all shareholders to attend. Jacqui
and Bruce are concerned, however, since the shareholders of Karate
Australia Ltd are located all over Australia. Jacqui comes up with the
idea that they should conduct the meeting using Skype, but Bruce
thinks meetings need to happen face-to-face with the shareholders.
Advise.

Companies can use technology to hold meetings, as long as the company

complies with any special rules in its constitution. The key consideration is
that the meeting must be held in a way that gives members as a whole a
reasonable opportunity to participate in the meeting. See s 249S.
(d) Chuck wants to attend the meeting that Jacqui and Bruce have
called but unfortunately he will be working on the day of the meeting.
Chuck’s friend Claudia is also a shareholder of Karate Australia Ltd
and says she would be happy to vote on Chuck’s behalf at the
meeting. Advise Chuck.

C can appoint Claudia to be his proxy and vote in his place under the
appointment process and rules in s 249X. If the co is a pty ltd co then it
can include its own rules about proxies in its constitution as s 249X is a
RR.

(e) Karate Australia Ltd is extremely profitable, but it has never paid a
dividend, as Jacqui and Bruce are financially conservative and think
the company needs to retain the cash to have a buffer to protect
itself, just in case there is an economic slowdown. Can Chuck force
Jacqui and Bruce to declare a dividend?

As discuss above, s 254U gives the directors the discretionary power to

determine when, how much and in what form a dividend will be paid
(subject to the rules in s 254T). There is no evidence that the company
has a constitution that sets out any dvd rules (s 249U is a RR).

(f) Chuck has had enough of the company and now wants to sell his
shares to Claudia, who is willing to purchase them. How can Chuck
and Claudia complete this transaction? Would it make any difference
if Karate Australia Ltd were a proprietary company?

Yes, C can sell his shares, similarly to selling any other property C owns.
But provided there are no special rules set out in the co constitution –
there is no evidence there is any such rules here. This is because a A
share is a type of personal property called a chose in action and
represents a proportional ownership interest in the company. Shares are
able to be transferred by the member who owns them under section
1070A of the Corporations Act.

Selling the share requires a share transfer lodged with the company for the
directors to decide if they agree with the transfer and if so issue a new
share certificate to Claudia.

KA is a public co so directors cannot refuse to register the share transfer

(s 1072G is a replaceable rule for proprietary companies but not public
companies so directors in pty ltd cos have more discretion).

If KA Ltd were a pty ltd co then we need to check the constitution for
restrictions on share transfers. Here, C is selling to Claudia, so one SH out
and one SH in. But if C wanted to sell his shares to more than one other
person then we would need to check how many SHs the co had to ensure
it stayed within the 50 member limit.
Exercise 13.7 – Pink Ltd, the non-listed public company, makes a
profit with the Badhair tour. Can it pay a dividend?

A company must not pay a dividend unless the “balance sheet solvency test”
in s 254T is met. S 254T has three elements to be satisfied:
(a)the company’s assets exceed its liabilities before the dividend is paid and
the difference sufficient to pay the dividend,
(b) the payment of the dividend is fair and reasonable to the company’s
shareholders as a whole and
(c) the payment of the dividend must not prejudice the company’s ability to
pay its creditors.

The facts do not give the information required to make this decision. Without
being sure the company satisfies the s 254T requirements the company
cannot pay a dividend. There have been losses for a number of years save for
the last year so I would be surprised if the company would satisfy all three
requirements.

Exercise 13.8 – AK Pty Ltd – calling meetings

A
Hayato, Kirra and Jon are the directors of AK Pty Ltd. The
shareholders of AK Pty Ltd are Hayato (200 shares) and Kirra (one
share). Hayato wants to call a directors’ meeting in order to pass a
resolution to declare a dividend.

(a) Can Hayato call a directors’ meeting? How would he go about

this?

Hayato is both a SH and a director. He can call a D meeting in his role as a

D, s 248C. He cannot call a D meeting in his role as SH.

(b) If the directors fail to pass the resolution, can Hayato call a
shareholders’ meeting to pass a resolution forcing the directors
to declare a dividend?

Hayato theoretically has power to call a SH meeting in both his roles as a D

and as a SH (it looks like he has 200 of 201 shares so satisfies the 5% of
the vote requirement). S 249 D.
This meeting is for SHs to vote on a decision that is a decision for Ds to make
and so is not for a proper purpose, so cannot be called (see also above).
There is no evidence that the co constitution has changed the RRs on this
power of the Ds so as to all SHs to decide.

(c) How can Hayato remove Kirra and Jon as directors?

SHs vote on who will be the directors of the co. This would be a proper
purpose to call a SH meeting and Hayato can call a SH either in hois role as a
D or as a SH. As he looks to have 200 of 201 shares, Hayato’s vote would
satisfy the ordinary resolution requirement of 50%. There is no evidence that
the shares have difderent voting rights here.

(d) Is there any other way Hayato could go about having a dividend
declared?

Replace the directors. Consider the oppression action under s 232, depending
on the usual past dvd practices of the company and s 254T.