The New South Wales v. Commonwealth case was successfully resolved, and the outcome was the Corporation Act of 2001. (1990). The argument that gave rise to this body of case law was the Commonwealth's alleged inability to pass laws governing the creation, control, administration, and dissolution of corporations. The Act is divided into ten chapters, each of which has a number of subsections, divisions, and sections.
The additional capital to be raised is of great importance, but there are a number of issues that Grant Ltd.'s issuance of additional preference shares raises. Grant Ltd. requires additional funding in order to complete its expansion plans at the most reasonable price. Chapter 2H-Shares lays out an elaborate procedure necessary for issuing and converting shares. Raising capital can be also done through external financing activities such as overdraft and loan from financial institutions. Therefore, raising capital through equity is a provision envisaged in the Corporation Act 2001 provided the terms of the equity financing are a set out in the company’s constitution or resolution passed by the members.
Subsection 254B clearly lays out the legal requirements for the issuance of new shares, their class rights and restrictions. In the case of Weinstock v Beck (2013), the High court clearly explains what preference shares are, and specifically the redeemable preference shares. Therefore legally, and logically there must exist another class of shares issued in which the preference shares enjoys more advantage, and in this case, the 25,000 ordinary shares. The same conclusion was also reached in Capel Finance 2005 v NSWCS 286, whereby it was considered an essential requirement to issue preference shares on top of another class of shares. As the case herein, these preference shares are not the only class of shares but in addition to the ordinary shares.
In the case beforehand, the issuance of the additional 5000 preference shares with the same class rights and terms as previous preference shares is still preferential. Therefore, the issuance of new preference shares is perfectly within the company’s procedures as enshrined in the Corporations Act 2001. Case laws cited herein exemplifies that which was already indicated; that these new preference shares enjoys the same preferential treatment as the existing preference shareholders.
b)
A number of major issues at hand here. First is the subdivision of the ordinary shares into two distinct groups. Secondly is the variation of class share voting rights. The pre-existing ordinary shares, predominantly owned by the Audax family will have superior voting rights compared to the new shares to be issued. Variation of class rights, to allow more votes to other shareholders than others is an issue of concern to new shareholders because they feel subordinate to the rest of shareholders.
According to the Corporations Act 2001-SECT 246B, the requirements and procedures for the variation and cancellation of rights are well stipulated. If the company’s constitution lays out an elaborate procedure for cancelling and varying the rights, then it can be varied and cancelled only in accordance with that laid down procedure. In a situation where the constitution does not provide for the variation and cancellation of rights, then this can take place only through a special resolution of the company with a written consent of a majority members in a class. Generally, for shareholders with the same class of shares, their rights rank equally during voting, so that each share is equivalent to one vote. Additionally, whenever there is a scenario of rights variation among shareholders of the same class, the aggrieved party has rights to apply to court for fair consideration before confirming and bringing into effect the variation of rights. As a neutral arbiter, the courts will only allow the application for varying rights and cancelling others if it would not unfairly prejudice shareholders of the relevant classes.
In the case of Grant Ltd, there are serious concerns to current and potential shareholders of this undertaking. First, the division of ordinary shareholders into two categories; Group A and Group B shareholders is nothing out of the normal. However, the categorization should not be carried out to the disadvantage of other shareholders. Secondly, and most importantly, the vesting of more voting rights in one group over the other. In this case, more voting rights have been granted to existing shares owned by the Audax family. The arrangement that Group A shareholders will have two votes per shares while Group B will have one share per vote is unfairly prejudicial to Group B shareholders. According to section 250E of the Corporation Act 2001, during meeting of members of a company limited by shares, each member has one vote by show of hands, or by the number of shares held by the member. The chairperson has one vote as a member, which can be precluded from voting depending on the circumstances. However, in section 253H of the Corporation Act, a voter entitles to two votes, as in the case of Group A shareholders, does not have to cast all the votes, but in case it happens it must be in different directions.
In conclusion, the case beforehand is unfairly prejudicial to incoming shareholders, who will be entitled to half the votes held by their pre-existing colleagues, mostly the Audax family. Whereas SECT 250E is replaceable according to section 135 of Corporation Act, its execution will disadvantage future shareholders. Further, the action to split the same class of shareholders on basis of voting rights will be discriminative and biased towards new shareholders. Effectively, the courts should not allow this application of variation of rights because of potential negative consequences.
c)
The issuance of new 20,000 ordinary shares at an issue price of $5. The issue is a major consideration necessary to realize additional funds for expansion activities. Issuance of new or varied additional shares is envisaged by the Corporations Act as means of sourcing for funds to achieve corporate objectives. However, when this happens, existing shareholders suffer twofold. First, their voting rights are literally granted to a new investors in the company in the form of new shares ‘created’ and sold. Additionally, the value of existing shareholders is reduced, if the selling price is lower than the actual value of the shares.
The power to issue new shares is primarily vested on the board of directors guided by the constitution. The article of association lays out the requirements and including the limitation issue of new shares, so as to safeguard against financial structure of the company and the existing shareholders. In consideration of the effects of new shareholding, the existence of pre-emptive rights serves to protect shareholders. Pre-emptive rights allows existing shareholders to safeguard against dilution by acquiring new shares pro-rata. Therefore this protection is only guaranteed the extend that the shareholders have requisite financial resources and willingness to buy new shares, otherwise dilution will occur. Preemptive rights may however interfere with company’s urgency raise new funds, because new shareholders may not be fast enough to exercise their preemptive rights. In rare scenarios, shareholders can be granted negotiated preemptive rights in a separate contract with corporation. This is however a subject of diverse public and legal opinion, because allowing for negotiated preemptive rights would mean that previous rules on issuance of new shares has been effectively repealed.
In the Grant Ltd case scenario, the issue of new shares will affect the shareholding, hence voting rights and value of investment owned by the Audax family. However, they have indicated their desire to retain their voting rights without having to buy new shares. In effect, they are not willing to the exercise their preemptive rights as per the Corporation Act 2001.
In conclusion, the actions by the Grant Ltd to offer additional preference shares to new investors as well as ordinary shares was envisaged by the Corprations Act 2001, and hence provision of proper guidelines. However the procedures laid down by the Act could be replaced by the resolutions passed by members during their general meeting. The actions to vary the rights of Audax family to enable them exercise more votes during a voting process could be challenged in courts by aggrieved shareholder who feels unfairly exposed. Actually, the Corporations Act 2001 allows for a one vote per share as a prerequisite for all shareholders, implying that a resolution has to be made
