Question

Mary holds 5,000 ordinary shares in Unity Ltd. The directors of Unity Ltd determined in April 2010 that a dividend of $2 per share would be paid in June and indicated to shareholders the dividend would be a cash payment paid on 28 June.

In May the company auditors indicated there were financial stresses as a result of the global financial crisis and it was unlikely the company would have sufficient profits to pay a dividend in June. As a result the directors of Unity Ltd revoked their decision to pay the dividend and made an announcement to this effect. Mary is angry about the directors’ decision.

Given the financial stresses the board of directors has decided that the company should raise $12 million of additional capital either by an issue of debentures, or an issue of shares.

The company is bound by the replaceable rules in the Corporations Act 2001 (Cth).

Required:

Answer the following questions

(a)?Advise Mary whether or not she can insist on the dividend being paid. Support your answer with reference to relevant sections of the Corporations Act 2001 (Cth). ; and

(b)?Advise Mary how the Board of a publicly listed company decides whether disclosure is required when it wants to issue new shares to the public; and how disclosure should be made under Chapter 6D, Corporations Act 2001 (Cth) when a publicly listed company decides to issue new shares to the value of $12 million. You should support your answer with reference to relevant sections of the Corporations Act 2001 (Cth) ); and

(c)?Mary believes that by virtue of owning shares in Unity Ltd, she has direct ownership of Unity’s assets. DISCUSS whether Mary’s beliefs are correct or not. In your answer identify some legal differences between equity capital (eg, shares) and debt capital (eg debentures).

Answer 1

a.According to sec.254T.the directors of company must met three requirements before declaring dividend and payment if

1.the company assets exceed its liabilitiesimmediately before the dividend declaredand excess is sufficient to pay dividend.

2.the payment of dividend is fair and reasonable to company shareholders as a whole.

3.the payment of dividend does not materially perjudice the company ability to pay its creditors.

Company profitability is likely to impact on directors decisionabout paying dividend_but it is no longer sole determinant.

b.the general rule providedin corporation act is that you can not raise capital inAustralia without issuing disclosure documents chapter6D of act contain fundraising provisions which regulate the way in which capital can be raised in Australia without issuing formal disclosure document Sec 727prohibits the offer of securities to investor without disclosure.sec706of act provides an offer of securities for issue needs disclosure to investors according to sec 708 disclosure document is not required if person makes a personal offer of securities to 20 or fewer person with no more than 2 millian doller raised in any rolling 12th month period.Disclosure can be made through following documents as per sec.705 prospectus,short form prospectus,profile statement,offer information statement.

3.As we know shareholders are real owner of company and debentureholder are creditor of company.the following are basic differences:share capital are owned fund and debt are loan fund.sharecapital are long term fund and debt capital are short term.In share capital return to shateholder are variable and irregular and in debt capital return is fixed and regular.collateral securities not required in share capital but for securing of loan itis essential in debt capital.