(a) The legal issue is can Delusions of Grandeur Ltd increases the dividend rate for preference shareholders from 7 per cent to 10 per cent immediately? The argument would centre on interpretation of s246B (2) of the Corporation Act 2001. Section 246B (2) applies if a company’s constitution does not include a procedure for varying share rights (Tony & Christopher 2009).
The relevant assumption in this problem is s246B (2) (d): “those rights may be varied or cancelled only by special resolution of the company and: (c) by special resolution passed at a meeting: (i) for a company with a share capital of the class of members holding shares in the class… (d) with the written consent of members with at least 75% of the votes in the class. ” (Tony & Christopher 2009) It would seem that the Company has the special resolution about the preference shares’ rights.
By reliance on the assumption in s246B (2), the Company will cannot increase the dividend rate for preference shareholders to 10% immediately without at least 75 per cent written consent of members of the votes in the class. In conclusion, under s246B (2), it would seem most likely that the Company will not be able to increase preference shares’ dividend rate from 7 to 10 per cent immediately. (b) The issue is can Delusions of Grandeur Ltd issues 5,000 new shares on the same terms as the existing preference shares immediately?
The argument would centre on interpretation of s246C (6) and s246B (2) of the Corporation Act 2001. Section 246C (6) states the issue of new preference shares that rank equally with existing preference shares, which says: “the new preference issue will not amount to a variation of rights if the company’s internal rules permit the company to issue new preference shares on the same term. ” (Tony & Christopher 2009) Section 246B (2) applies if a company’s constitution does not include a procedure for varying share rights (Tony & Christopher 2009).
The relevant assumption in this problem is s246B (2) (d): “those rights may be varied or cancelled only by special resolution of the company and: (c) by special resolution passed at a meeting: (i) for a company with a share capital of the class of members holding shares in the class… (d) with the written consent of members with at least 75% of the votes in the class. ” (Tony & Christopher 2009) The Company issues 5,000 new preference shares on the same term which rank the same as existing preference shares, thereby, varying the priority rights previously enjoyed by existing preference shareholders.
It would seem that the Company does not have the internal rules which permit the Company to issue new preference shares on the same term. However, apply to s246B (2), it would seem that the Company may issue 5,000 new preference shares immediately with the written consent of members with at least 75 per cent of the votes in the class. Case which support s246B (2) is Biodiesel Producers Ltd & Stewart [2007] FCA 722 (Tony & Christopher 2009, p. 379).
In this case it was held that creation of B Class shares amounted to a variation of existing rights of the shareholders in the company, and the company’s constitution was not complied with and the execution of the shareholders agreement did not mean there was compliance with s246B of the Corporation Act 2001 (Tony & Christopher 2009, p. 379-380). The Federal Court examined the application of s246B in the context of an allocation of “B Class performance shares” which was approved by the board but did not have shareholder approval (Tony & Christopher 2009, p. 79). In conclusion, based on s246C (6) and s246B (2), it would seem most likely that the Company will not be able to issue 5,000 new preference shares on the same term as the existing preference shares immediately. (c) The legal issue is can Delusions of Grandeur Ltd divides the ordinary shares into 2 groups; Group A shares will have two votes each on a poll and Group B will have one vote each on a poll immediately? The argument would centre on interpretation of s246C (1) and s250E (1) of the Corporation Act 2001.
Section 246C (1) states that the division of one class of shares into two or more classes of shares, where different rights attach to each class of shares after the division is taken to be variations of class rights (Tony & Christopher 2009). Part of the Corporation Act 2001 (ss246B-246G) permits companies to vary or cancel the rights attaching to a particular class of shares or members under regulated conditions (Tony & Christopher 2009). Section 250E (1) provides that each shareholder, whether preference or ordinary has equal voting rights (one vote per share on a poll) (Tony & Christopher 2009).
It would seem that two votes per share in Group A is not comply with s250E (1). Apply to s246C (1), the Company varies the rights of a particular class of ordinary shares directly which is cancellation or variation of voting rights attaching to a share. By reliance on the assumption on the part of the Corporation Act 2001, the Company cannot divide the ordinary shares into two groups then give two votes each share in Group A without the regulated conditions.
In conclusion, according to s246C (1) and s250E (1), it would seem most likely that the Company will not be able to divide the ordinary shares into Group A which each share has two votes and Group B that one vote per share immediately. (d) The issue is can Delusions of Grandeur Ltd issues 25,000 new shares in Group B to new investors at $5 per share immediately? The argument would centre on interpretation of s254D and s254D (4) of the Corporation Act 2001.
To protect existing shareholders in proprietary companies, s254D, a replaceable rule, requires directors to first offer any new shares of a particular class to the existing shareholders in the class in proportion to their existing shareholders (Tony & Christopher 2009). Section 254D (4) states that the company may by resolution passed at a general meeting authorize the directors to make a particular issue of shares without complying with subsection (1) (Tony & Christopher 2009).
According to s254D, it would seem that the Company needs to offer 25,000 new shares to shareholders in Group B first. If the Company has the ordinary resolution with shares, the Company may, by pass the ordinary resolution at a general meeting, authorize the directors to issue the shares without complying with s254D (4). In conclusion, reliance on s254D and s254D (4), it would seem that the Company will not be able to issue new Group B shares to new investors immediately. References Tony, C. & Christopher, S. 2009, Corporations Law in Principle, 8th edn, Thompson Reuters, Australia
