Experiencing Financial Difficulties Due to Greater Competition

Harry, Megan and Elizabeth are executive directors of Dogdays Pty Ltd (‘Dogdays’), which sells pet food, toys and kennels. Harry is the Managing Director. Megan leads the marketing department. Elizabeth is the Finance Director.

Each director owns 15 per cent of shareholdings, which have voting and governance rights attached to them. Outside investors hold 30 per cent of stocks. Each share is worth $1,000.

An investor called Kate holds 25 per cent of redeemable shares, also valued at $1,000 each. Eight years ago, Kate invested $25,000 in these Dogdays bonds and still retains these securities.

The constitution states that whilst the redeemable shares do not have any voting rights, they carry rights to receive 10 per cent dividends on an annual basis in November, until maturity in another two years, when Dogdays will redeem them.

Dogdays is experiencing financial difficulties due to greater competition. It returned little profits last year and no dividends were distributed. It currently has $600,000 in cash reserves. The company constitution contains a clause requiring that any contracts entered into by the company over $250,000 must first be approved by a majority of ordinary shareholders.

At a board meeting in May, Harry asked Megan to obtain a price to purchase pet companies for sale, as a strategy to expand to return profits for shareholders. Megan then asks for help from Elizabeth. Elizabeth can’t believe the good news! Her daughter has been trying to sell ‘YuYu’ a failing kitchen appliance company worth $250,000. Elizabeth instructs Kate to recommend to Harry that Dogdays purchase ‘YuYu’. Megan is too busy to look into this company and accepts the recommendation.

In September, Megan attends the next board meeting, and explains she was successful in the project and has purchased ‘YuYu’ for $500,000. Harry is furious – this is a kitchen manufacturer, not a pet company! What was she thinking? The purchase uses almost all available cash of the company, so the finance team are juggling incoming invoices. One of these is ‘Wholesale Foods’, who has been repeatedly calling about an outstanding debt of $60,000.

The company’s governance framework requires an annual shareholders meeting. At the November AGM, Harry feels he has no other option but to forward a shareholder resolution enabling the company to acquire ‘YuYu’ for $500,000, given the business has already been purchased. This is unanimously rejected. The non-director shareholders demand that the directors declare a dividend pay-out, otherwise they threaten initiating a vote to remove the directors.

With reference to the law, explain the difference in the nature of the stocks issued by Dogdays?

With reference to the law, explain whether Dogdays is bound by the contract entered into by Megan?

With reference to the law, are the shareholders of Dogdays entitled to demand a dividend from the company?

With reference to the law, are the shareholders of Dogdays entitled to remove the directors from the company?

With reference to the law, explain how the doctrine of separation of powers applies to this scenario.