THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES THE INSTITUTE OF CHARTERED SECRETARIES AND ADMINISTRATORS

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1 THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES THE INSTITUTE OF CHARTERED SECRETARIES AND ADMINISTRATORS International Qualifying Scheme Examination CORPORATE SECRETARYSHIP DECEMBER 2013 Suggested Answer The suggested answers are published for the purpose of assisting students in their understanding of the possible principles, analysis or arguments that may be identified in each question 1

2 SECTION A 1. Yummy Candies Limited is a company incorporated in Hong Kong and its are quoted on the GEM Board of the Hong Kong Stock Exchange. Yummy imports brand candies from the United States. The company also has candy factories in mainland China. Its business is all done wholesale to distributors in China. The company s business has dropped significantly from $400 million in 2011 to $250 million in 2012 due to keen competition. The company has been making losses for four years now, and its loss has increased significantly during Yummy Candies Limited held its annual general meeting on 15 May The following are extracts from the last annual report: For the year ended 31 Dec 2012 For the year ended 31 Dec 2011 Turnover $250 million $400 million Net loss $25 million $15 million Issued share capital Mr. Chan Executive Director and Chairman Mr. Lee Executive Director, CEO and authorised representative to the Stock Exchange As at 31 December 2012 and remain unchanged $100 million divided into 100 million of $1.00 each Holding 20 million Holding 10 million As at 31 December 2012 and remain unchanged Public float 70% The company s directors consider that if the situation does not change and the company continues to generate losses, it will become insolvent due to cash flow problems. They have concluded that the company needs additional capital to set up its own retail outlets and the expertise from someone who has good connections and market experience in China for its products. 2

3 Both Mr. Chan and Mr. Lee wish to go into semi-retirement and wish to cash in on a portion of their shareholding in the company. Negotiations have been going on with Mr. Huang, who has extensive experience in the mainland China market, and who is interested in investing in the company as well as taking a leading role in its management. Negotiations for the conditional share subscription, share sales and purchase agreement ( the Agreement ) are near conclusion and the Agreement will be signed between the company, Mr. Chan, Mr. Lee and Mr. Huang on the evening of 13 December Completion of the Agreement is conditional upon and subject to approval being given by the board of directors, the shareholders and the Hong Kong Stock Exchange. The following are the major terms of the Agreement: In respect of Mr. Huang: (1) Mr. Huang will be allotted 24 million of the company at $5 per share, which he will pay for in cash. (2) Mr. Huang will additionally buy 8 million from Mr. Chan and 5 million from Mr. Lee (3) Mr. Huang will be appointed an executive director, chairman of the board and chief executive officer of the company. (4) Mr. Huang will be entitled to nominate an executive director who will also take the position of the company secretary (Ms. Zee). In respect of Mr. Chan: (5) Mr. Chan will sell 8 million of his in the company for cash to Mr. Huang at $5 per share, the same price as in (1). (6) Mr. Chan will step down as chairman of the board but remain an executive director of the company. (7) Mr. Chan will vacate his position as chairman of the nomination committee of the board and be replaced by Mr. Huang. (8) Mr. Chan will help to ask the three independent non-executive directors to remain on the board and the board committees in spite of the change in shareholding and board leadership. (9) Mr. Chan will undertake to Mr. Huang that he will not dispose of any of his shareholdings in the company within six months from the date of the completion of the agreement. 3

4 REQUIRED: In respect of Mr. Lee: (10) Mr. Lee will sell 5 million of his in the company for cash to Mr. Huang at $5 per share, the same price as in (1). (11) Mr. Lee will step down as chief executive officer of the company but remain an executive director of the company. (12) Mr. Lee will undertake to Mr. Huang that he will not dispose of any of his shareholdings in the company within six months from the date of the completion of the agreement. (13) Mr. Lee and the incumbent company secretary will be replaced by Mr. Huang and Ms. Zee as authorised representatives to the Hong Kong Stock Exchange. 1. (a) Discuss critically how the arrangement meets the needs/wishes of the various parties, i.e. the company, Mr. Chan, Mr. Lee and Mr. Huang. Ans (a) Assuming the successful completion of the Agreement, the company s issued share capital and the respective shareholdings of its major shareholders/directors will be as follows. Shareholder(s) Existing shareholding (%) Million Change Ultimate shareholding Ultimate shareholding (%) Mr. Chan % Mr. Lee % Mr. Huang % Public % Total % The needs and wishes of the various parties will be met as follows: The company (1) The company gets the cash needed to improve its liquidity position and to set up retail outlets in China. (2) By having its own retail outlets, the company strengthens its market position and no longer needs to rely completely on its distributors and wholesalers. 4

5 (3) Mr. Huang is the person the company needs as he has the necessary connections and market knowledge in China that can help the company sell its products. (4) The fact that Mr. Chan and Mr. Lee remain on the board provides the necessary continuity and bridging time for the company to implement its new policy of setting up retail outlets. Mr. Chan (5) He gets paid in cash for his 8 million, a price which is certainly attractive enough while the company is still running. (6) He stays on as an executive director with fewer responsibilities; this results in a reduction in his time commitment to the business ahead of his planned retirement. (7) His continued contribution to the company will help improve the company s performance and thus the value of his remaining shareholding. Mr. Lee (similar to Mr. Chan): (8) He gets paid in cash for his 5 million, a price which is certainly attractive enough while the company is still running. (9) He stays on as an executive director with fewer responsibilities; this results in a reduction in his time commitment to the business ahead of his planned retirement, (10) His continued contribution to the company will help improve the company s performance and thus the value of his remaining shareholding. Mr. Huang: (11) Above all, Mr. Huang must be truly interested in investing in the company and believe he can turn its current situation around. (12) His investment gives him a controlling interest in the company, yet it is just below the 30% mark at which he would have to make a general offer to the other shareholders under the Takeover Code. He certainly wants to avoid this in order to conserve his cash. (13) Requiring Mr. Chan and Mr. Lee to stay on the board and restricting their sale of in the company strengthens the company s image of continuity and stability, which are necessary for him to launch his plans to revive the company. (14) Requiring the independent non-executive directors to stay on the board and the board committees strengthens the management s stability and ensures the confidence of the public shareholders. 5

6 (15) Nominating Ms. Zee to the board and getting her to take the position of company secretary gives Mr. Huang more flexibility and confidence of control over the board and the management. 1. (b) Advise the directors of Yummy Candies Limited on the relevant procedures to be followed for the implementation of the terms in the Agreement to its completion. Ans (b) The deal is a notifiable and a share transaction as well as a connected transaction. The transaction needs to be notified to the Stock Exchange and an announcement needs to be published on the GEM website of the Stock Exchange and that of the company. After approval by the board, the transaction needs to be approved by the independent shareholders. A circular must be sent to the shareholders with the advice of an independent board committee (which in turn is advised by an independent financial advisor appointed for the purpose) stating whether the transaction is fair and reasonable as far as the independent shareholders are concerned, and their recommendation. The following are the relevant procedures to be followed for the implementation of the agreement up to its completion (1) Notify the Stock Exchange as soon as possible on the general nature of the transaction. (2) Since the transaction is of such magnitude, it is considered inside information and a request must be made to the Stock Exchange to halt trading in the of the company starting from 9 a.m. on the following trading day, i.e. Monday 16 December 2013, pending the publication of a detailed announcement. (3) Convene and hold a board meeting to: a. authorise the signing of the conditional agreement b. appoint Mr. Huang as an executive director, chairman of the board and chairman of the nomination committee and chief executive officer of the company and an authorised representative of the company to the Stock Exchange upon completion c. approve the resignation of Mr. Chan as chairman of the board and the nomination committee on completion d. approve the resignation of Mr. Lee as chief executive officer of the company on completion 6

7 e. approve the appointment of Ms. Zee as an executive director on completion f. approve the appointment of Ms. Zee as company secretary (in place of the incumbent company secretary who will resign in due course) and an authorised representative of the company to the Stock Exchange (in place of Mr. Lee) on completion g. establish the independent board committee of the board (IBC) to advise the independent shareholders h. subject to the approval of the IBC, appoint the independent financial advisor (IFA) to advise the IBC i. authorise the issue of an announcement as soon as possible on the details of the transaction and resumption of trading in the of the company the next trading day following its publication j. authorise the convening of an extraordinary general meeting (EGM) of the company to approve the transaction k. authorise the preparation of a circular to be sent to all shareholders with the notice of the EGM l. make an application to the Stock Exchange to quote the 24 million new subject to completion (4) Publish the announcement in 3(i) and request resumption of trading in the of the company after its publication. (5) Publish on the GEM website of the Stock Exchange and that of the company and send to all shareholders the notice of EGM and the circular. (6) Hold the EGM and publish the results after market close. If the resolution is passed at the EGM: (7) Issue the 24 million new to Mr. Huang and process the transfer of from Mr. Chan (8 million) and Mr. Lee (5 million) to Mr. Huang. (8) Publish the Next Day Disclosure Return on the GEM website of the Stock Exchange and that of the company. (9) Submit to the Stock Exchange the signed Director s undertaking (Form A) for each of Mr. Huang and Ms. Zee. (10) Up-date the statutory books and file the notification of change of secretary and director (Form D2A), and the return of allotments (Form SC1) with the Companies Registry. 7

8 (11) Publish an announcement on the changes in directors and company secretary with the list of directors and their roles and functions on the GEM website of the Stock Exchange and that of the company. (12) Notify the Stock Exchange of the change of authorised representatives and company secretary (Form FF001G). (13) Publish the up-dated List of Directors and their Roles and Functions, and the updated Company Information Sheet on the GEM website of the Stock Exchange and that of the company. 1. (c) In respect of Ms. Zee s appointment as company secretary, examine: (i) what is required in terms of the formalities for her appointment, (ii) what qualification and/or experience she must possess, and (iii) what her roles, duties and responsibilities will be. Ans (c) (i) Ms. Zee s appointment as company secretary must be approved at a board meeting. According to the Listing Rules of the Hong Kong Stock Exchange, the appointment needs to be at a board meeting physically held and not by a mere board resolution. Her appointment needs to be published in the form of a company announcement, notified to the Hong Kong Stock Exchange (Form FF001G), filed with the Companies Registry (Form D2A), and entered in the company s statutory books and Register of Secretaries. (ii) The Companies Ordinance does not lay down any required qualifications or experience for a person to be appointed company secretary. However, the Listing Rules require that a company secretary must: (a) have the required knowledge and relevant experience, in the opinion of the Exchange, capable of discharging the functions of company secretary; or (b) be a member of the Hong Kong Institute of Chartered Secretaries, a lawyer or a qualified accountant. Regarding knowledge and experience, the directors have to satisfy themselves that Ms. Zee is qualified at the time of appointment. Subsequent to her appointment, Ms. Zee must take at least 15 hours of relevant professional training each year in order to meet the requirement of the Listing Rules. (iii) The company secretary plays a very important role in a company, especially that of a listed company. Internally, she/he is the chief administrative officer of the company. Externally, she/he is the linkage between the company and its members, government bodies, regulators and the media on corporate matters. 8

9 For a listed company in Hong Kong, the company secretary reports only to the chairman or the chief executive officer. Ms. Zee s duties include: (1) arranging meetings (members, board and committee meetings) and the preparation of relevant minutes, (2) maintenance of the statutory books and co-ordination with the external share registrar, (3) filing of statutory forms and returns with the Companies Registry, (4) ensuring compliance with the applicable laws, (5) ensuring compliance with the Listing Rules, (6) supporting the board and ensuring good information flow within the board, (7) ensuring board policies and procedures are followed, (8) advising the board on corporate governance matters, (9) facilitating the induction of directors and their professional development, and (10) preparation of annual and interim reports Since Ms. Zee will also be appointed a director of the company, she should be careful not to breach the Companies Ordinance by acting in her dual capacity on matters which must be performed jointly by a director and the company secretary. 9

10 SECTION B 2. Wafer Integrated Systems Limited (Wafer) is a private company incorporated in Hong Kong. It is in the business of manufacturing and distributing silicon chips for use in various types of computer systems. The following is an extract from the audited financial statements of Wafer for the year ended 31 March 2013: Authorised share capital (200 million of $1 each) Issued share capital Fixed assets Land and buildings Fixed assets Plant and machinery $200 million $75 million $100 million $100 million The company has been making good profits over the past few years and has decided to expand its manufacturing facilities by acquiring additional factory space and machinery. It is estimated that additional funding of $70 million is required. The directors and major shareholders do not want to invite new investors to the company to raise the funds. They are considering fundraising either by way of a rights issue or by borrowing, in view of the current low interest rates. REQUIRED: 2. (a) As the company secretary, write a memorandum to the directors to advise them of the feasibility, considerations and the steps to be taken in each of the alternatives, i.e. a rights issue AND a debenture issue. Ans (a) Wafer Integrated Systems Limited Memorandum From : Company Secretary To : Board of Directors Date : 31 May 2013 Subject : Expansion funding Rights issue or debenture borrowing I refer to the recent discussion on the possibility of raising capital needed to expand the company s production capacity by acquiring additional factory space and machinery. Against the background of the directors wish to raise the necessary funds by way of either a rights issue or by issuing debentures, below is an analysis on the feasibility, considerations to be taken by the board, and the procedures for each of the alternatives. 10

11 Rights issue Feasibility A rights issue is a way of permanently increasing the share capital of the company. This is the most straightforward way of raising the funds for the company and involves the least administrative work. Since the new are to be offered to the existing shareholders on a pro-rata basis, only a board resolution approving the issue is required. If all the are taken up, there will be no change in the ratio of shareholdings of the existing shareholders in the company. Considerations Decide on the issue price of the rights. The issue must not be lower than $1 per share (the par value of the. The issue price should be made attractive at a discount from the current net asset value per share to give shareholders the incentive to take up the rights. Whether all existing shareholders are likely to exercise the rights to subscribe at the proposed rights issue price per share. If not, to what extent this will affect the amount of funds raised. Whether renunciation in favour of another party is allowed (which is unlikely since the company wishes to keep the present membership profile intact). Procedures Convene and hold a board meeting to approve the issue. Send out a provisional allotment letter to the shareholders explaining the matter; specify the number of entitled rights, issue price per share of the rights entitlement, mode and timing of the payment. The provisional allotment letter to be accompanied by a Form of Acceptance for shareholders signature and return. Convene a board meeting to formally allot the rights. Issue the new. Up-date the Register of Shareholders. File the return of allotment with the Companies Registry. 11

12 Debenture issue Feasibility By issuing debentures, the company borrows money to finance its cash needs in the form of loan capital. Loan capital is temporary and the company has to pay interest at the agreed rate and to redeem the debenture at an agreed future date according to the terms of the debenture deed. Debentures usually need to be backed up by a pledge by the company on its assets or its entire undertaking as collateral. It is a natural choice, if the company has assets to pledge, at a time of low interest rates when expected additional income more than covers the costs, so that shareholders own resources can be reserved for other purposes. The company can borrow by creating a fixed charge on its assets, to be agreed with its lenders. When assets are charged, the company cannot deal with them freely until the charge is released. Considerations Under the company s memorandum and articles of association, the directors are empowered to borrow the amount in question and pledge the assets of the company for the charge. Since the company has no other borrowings and $70 million does not exceed the nominal share capital of the company, the directors can borrow the full amount. The directors shall negotiate the terms of loan with the lender and agree on what assets will be pledged, at what interest rate and terms for the redemption of the debenture. Procedures Negotiate the terms of loan with the lender and draft the loan agreement. Draft of the debenture to be agreed with the lender. Convene a board meeting to approve the loan, the execution of the loan agreement and the debenture under common seal. Enter the details of the debenture in the Register of Charges of the company. File the registration of charges with the Companies Registry within five weeks. 12

13 File the charge also with the Land Office if the assets pledged are the land and buildings of the company. 2. (b) Should the directors of Wafer finally decide on borrowing by issuing debentures and pledge the company s land and building assets, discuss the requirements and procedures for the registration of charges and their discharge. Ans (b) Requirement and procedures of registration of charges and their discharge Under Part III of the Companies Ordinance, the company is required to record charges for its pledge of assets or any part of its undertakings. Section 80(2) of the Companies Ordinance lists the type of assets where such registration is required, including land and buildings. When a charge is made, it creates an encumbrance on the assets involved, forbidding the free transfer of clean title of the assets without first getting the charge discharged. When filed with the Registrar of Companies, a charge becomes public record alerting third parties who wish to assess the asset strength of the company or who intend to enter into any agreement involving the transfer of title of the assets. This record is kept by way of entry into the Register of Charges, part of the company s statutory books. When the company makes such entries in its Register of Charges, it must also file details with the Companies Registry within five weeks from the date such charges are created. Registration with the Companies Registry is by way of filing Form M1 (Mortgage or Charges Details) together with a certified true copy of the instrument creating the charge. Registration must also be made with the Land Office if land and buildings are the subject of assets charged. The obligation to file the registration is on the party (the chargor) whose assets are charged. Should registration be omitted, the company and its officers are liable to a default fine. Should registration be omitted, the chargee will not get the intended protection. The chargee, or any party who has an interest in the charge, can also make the filing, with expenses recoverable from the chargor. 13

14 When the loan is repaid, the company must file Form M2 (Memorandum of Satisfaction or Release of Property from Charge) with satisfactory evidence that the company has met its obligations and the charge should be discharged. When the Registrar of Companies is satisfied, a discharge endorsement will be stamped on the copy of instrument and it will be returned to the company. 14

15 3. World Tours Limited is a company incorporated in Hong Kong whose are quoted on the Hong Kong Stock Exchange. On 2 May 2013, the issued share capital of the company included the following shareholdings: Issued share capital Shareholder Mr. A and also a director 500 million of $0.5 each Holding 30 million 6% Shareholder Mr. B Holding 25 million 5% Shareholder Mr. C Holding 20 million 4 % The following events subsequently occurred: i. On 8 May 2013, Mr. C was appointed a director of the company. ii. On 18 May 2013, 40 million new in the company were allotted to Mr. C. iii. On 28 May 2013, Mr. B bought 2 million in the company. REQUIRED: 3. (a) Describe the purposes and operation of Part XV (Disclose of Interests) of the Securities and Futures Ordinance (SFO) and the duties of listed companies under it. Ans (a) Purposes and operation of Part XV of the Securities and Futures Ordinance Purposes The Securities and Futures Ordinance became law in April 2003 after modernising and consolidating some 10 ordinances to form a single law for the regulation of the stock market and related financial activities in Hong Kong. It is an important piece of legislation for Hong Kong as an international financial centre. The most important purpose of Part XV of the Securities and Futures Ordinance is to enable those who invest in listed companies to obtain relevant shareholding information (for 5% shareholdings and above) on a timely basis so that they can make informed decisions for their investments. Operations Part XV requires directors, the chief executive and substantial shareholders of listed companies to disclose, in prescribed forms in a timely manner, their interests and short positions to the company and the Hong Kong Stock Exchange. 15

16 Notifications received by the Hong Kong Stock Exchange are published on its website and shared with the Securities and Futures Commission. Notifications received by the listed companies are kept in registers for open inspection of shareholders and the public. Requirements of a listed company under Part XV of the SFO Every listed company in Hong Kong is required to: (1) Keep a register of interests of its directors and chief executive in the and short position of the company. (2) Keep a register of interests of substantial shareholders in the and short position of the company. (3) Keep the registers in (1) and (2) above at the company s registered office or principal place of business in Hong Kong. (4) Inform the Registrar of Companies of the location of the registers if they are not kept at either of the places in (3) above. (5) Enter into the registers any notifications the listed company has received within three business days. (6) Inform the Monetary Authority of such information received if the listed company is a registered financial institution. (7) Keep the registers open for inspection during business hours by its members free of charge. (8) Keep the registers open for inspection during business hours by the general public at a fee of no more than $10. (9) Provide copies of the registers on request at a fee of no more than $2 per page. (10) Keep the registers for at least six years after the company ceases to be a listed company. 3. (b) What actions are required (including no action) by each of Mr. A, Mr. B and Mr. C on the each of the three events given in the question, under Part XV of the SFO, and what are the reasons for each of these actions (including no action)? (Note to candidates: Candidates may choose to provide their answers in bullet points or table form) Ans (b) The required actions (including no action) to be taken by each of Mr. A, Mr. B and Mr. C under Part XV of the SFO and the reasons for the actions (including no action) on each of the three events are: 16

17 Event (i) Mr. C appointed a director Event (ii) 40 million allotted to Mr. C Event (iii) Mr. B bought 2 million Mr. A Mr. B Mr. C No action File disclosure No action Does not concern him. He is already on the register as a director with a 6.00% shareholding. Shareholding reduced from 6.00% to 5.56% as the result of new being allotted to Mr. C. Does not concern him. No change in 5.56% shareholding. No action File disclosure File disclosure Does not concern him. Mr. B ceases to be a Mr. B becomes a He is already a substantial substantial substantial shareholder. shareholder again. shareholder and his Shareholding reduced Shareholding shareholding remains from 5.00% to 4.63% increased from unchanged at 5.00%. as the result of new 4.63% to 5.00%. being allotted to Mr. C. File disclosure File disclosure No action On becoming a Acquires additional Does not concern director, even though. him. his shareholding is Shareholding changes No change in only 4.00%. from 4.00% to 11.11% % shareholding. Workings The changes in shareholdings in the company (Note: The table below shows the workings but candidates are not required to show this as part of their answers) Existing Event (i) Mr. C appointed a director Event (ii) 40 million allotted to Mr. C Event (iii) Mr. B bought 2 million Total number of issued 500 million 500 million 540 million 540 million 17

18 Shareholding Shareholding Shareholding Shareholding Shareholder Mr. A (also a Director) 30 million (6.0%) 30 million (6.0%) 30 million (5.56%) 30 million (5.56%) Shareholder Mr. B 25 million (5.0%) 25 million 5.0%) 25 million (4.63%) 27 million (5.00%) Shareholder Mr. C 20 million (4.0%) 20 million (4.0%) 60 million (11.11%) 60 million (11.11%) 18

19 4. Unique Exhibitions Management Limited is a private company incorporated in Hong Kong. Mr. Fong is one of the shareholders and has told you over lunch that he has lost his share certificate and would like to have it replaced. REQUIRED: 4. (a) As company secretary of Unique Exhibitions Management Limited, state the procedures you will take to satisfy Mr. Fong s request. Ans (a) Shares in private companies are not readily marketable or transferrable. Therefore the procedure for replacing lost share certificates is less formal than it is for listed companies. However, certain procedures are still needed to safeguard the interests of the company and any possible third parties. Procedures in respect of Mr. Fung (1) Ask Mr. Fung to write a formal application letter to the company making the request. (2) Ask Mr. Fung to give a letter of indemnity to the company. (3) Ask Mr. Fung to pre-pay the company the fee covering the issue of a new certificate as determined by the company and allowed by the company s articles of association. Procedures to be taken by the company (1) Pass a board resolution to cancel the old certificate, to issue the replacement certificate and authorise the director(s) to sign and fix the common seal (or security seal) of the company on the new share certificate. (2) Record the cancellation of the old certificate and the issue of the new one in the register of members. (3) Notify Mr. Fung when he should collect the new certificate and sign to acknowledge its receipt. 4. (b) What information should be included in a share certificate? Ans (b) The share certificate must bear at least the following information: (1) The name of the company. (2) The stock code of the company if the company is listed. (3) Place of incorporation of the compnay 19

20 (4) The serial number of the share certificate. (5) The issue date of the certificate. (6) The name of the person who is entitled to the certificate. (7) The specific number of held by him. (8) The nominal value of each of the. (9) The extent to which the are paid up. (10) The class of, if the company has different classes of. (11) The distinguishing number of the (if not all the of the company are of the same class, or not all fully paid up). (12) The impression of the common seal (or securities seal). (13) The signature of director(s)/company secretary as required by the articles of association of the company. 4. (c) Discuss critically why and in what ways the procedures in (a) would be different should Unique Exhibitions Management Limited be a listed company and if the total value of the covered in the lost share certificate were worth more than $20,000. Ans (c) Because the in listed companies are readily marketable, more stringent and careful steps are required to protect the interests of the shareholders, the company and any third parties involved. Detailed procedures must be followed: these are set out in section 71A of the Companies Ordinance, where a company is defined as one which are quoted on the Hong Kong Stock Exchange. The Companies Ordinance requires slightly different treatments in the issue of replacement share certificates depending whether the value of the are worth more or less than $20,000. The value of the is calculated based on the last closing price of the relevant immediately before the date of the application (Form S1). Should the value of the be less than $20,000, the company is only required to publish Form S2 (Notice of Intention to Issue New Share Certificate) one time only in one English and one Chinese newspaper. The company must wait one month from the publication of the notice before it can issue the new certificate provided no objections have been received. Should the value of the be more than $20,000, the company is required to publish Form S3 once in each of three consecutive months in the Gazette. The company must wait three months from the date of the first publication before it can issue the new certificate provided no objections have been received. 20

21 Because the are quoted on the Stock Exchange and the value of the covered by the lost share certificate exceeds $20,000, the procedures to be followed include: (1) Ask Mr. Fung to complete, sign and submit to the company a Form S1 (Application for the Issue of a New Share Certificate). (2) Ask Mr. Fung to pre-pay the cost of the new share certificate issue, including the advertising fee in the Gazette. (3) Send to the Stock Exchange a Form S3 (Notice of Intention to Issue New Share Certificate) regarding the company s intention to cancel the original certificate and issue a new certificate. (4) Obtain an acknowledgement of Form S3 from the Stock Exchange certifying that a copy will be exhibited for three months in accordance with section 71A(5) of the Companies Ordinance. (5) Publish the Form S3 in the Gazette once in each of three consecutive months to give notice of the company s intention as described in Form S3. (6) Should no objection or claim be received after the completion of the three months from the first Gazette publication, the new replacement share certificate can be prepared. (7) Pass a board resolution to cancel the old certificate and authorise the issue of the new one. (8) Record the cancellation of the old certificate and the issue of the new one in the register of members. (9) Notify Mr. Fung that the new certificate is available for collection and obtain his signed acknowledgement of receipt. (10) Within 14 days after the issue of the new certificate, publish in the Gazette notification of the cancellation of the old certificate and issue of the new one in the prescribed Form S4 (Notice of Cancellation of Original Share Certificate and issue of New Certificate). (11) Send a copy of Form S4 to the Stock Exchange. 21

22 5. Apex Limited is a company limited by incorporated in Hong Kong which has adopted Part I of Table A as its articles of association. It is a locks manufacturer and distributor of building hardware marketed under various brands that have been sourced from other manufacturers. Apex has an issued and paid up share capital of $200,000,000 divided into 200 million of $1 each. The company is owned by four equal major shareholders A, B, C and D who are also directors of the company. Management of the company is undertaken by A, who is stationed in Hong Kong and who takes care of the company s head office functions. B, C and D are stationed in Beijing, Shanghai and Guangzhou respectively, from where they take care of the company s manufacturing and retail business on the mainland. The following are extracts from the company s annual report for the past three years ended 31 December: 2012 $m 2011 $m 2010 $m Revenue from operations Profit attributable to shareholders Cash flow from operations The directors want to expand the company s operations. They are considering raising additional capital through an initial public offer on the Hong Kong Stock Exchange by the new issue of 100 million at a price of $4.00 per share. REQUIRED: 5. (a) Discuss if Apex Limited can satisfy the qualifications for listing on the Main Board of the Hong Kong Stock Exchange according to each of the criteria. Ans (a) For a company be considered for a listing on the Hong Kong Stock Exchange, it must meet the respective requirements of listing on either the Main Board or GEM Board. Below are the requirements for admission to the Main Board with analysis whether Apex Limited meets them: 1. Financial requirements An applicant has to satisfy at least one of the following financial requirements in the last three years: 22

23 (a) Profit test At least $50 million in the last three years ($20 million during the latest year and aggregate $30 million in the two years before that) PLUS market cap at least $200 million at the time of listing. Company: Yes, the company meets this requirement with total profits of $68 million for the past three years and $28 million during the latest year and aggregate $40 million in the two years before that. Yes, at the time of listing, the market cap will be $1.200 million ($4 x ( ) million ) (b) Market cap/revenue test Market cap at least $4 billion at the time of listing and revenue at least $500 million for the most recent year. Company: No, the company cannot meet this requirement because market cap will only be $1,200 million at the time of listing. (c) Market cap/revenue/cashflow test Market cap at least $2 billion at time of listing, revenue at least $500 million for most recent year and positive cash flow from operations of $100 million in aggregate for last three years. Company: No, the company cannot meet the $2 billion market cap requirement although it meets the other two ($520 million revenue, $1,170 positive cash flow) Since the company meets the requirement of the profit test, it meets the financial requirements criteria. 2. Acceptable jurisdictions of place of corporation This requirement is to make sure non-hong Kong companies seeking a listing on the Hong Kong Stock Exchange meet shareholder protection standards and requirements. Company: Yes, the company was incorporated in Hong Kong. 3. Accounting standards Applicants must adopt either Hong Kong Financial Reporting Standards or International Financial Reporting Standards. Company: Yes, the company will do that. 23

24 4. Suitability for listing Both the applicant and its business must be considered as suitable for listing in Hong Kong. Company: There is no reason to consider the company NOT suitable for listing in Hong Kong. 5. Operating history and management Trade record of at least three financial years with (a) management continuity for at least the three preceding years, and (b) ownership continuity and control for at least the most recent audited year. Company: Yes, the company meets both in terms of both continuous operating history and management. 6. Minimum market capitalisation at time of listing $200 million Company: Yes, at the time of listing the company will have a market capitalisation of $1,200 million. 7. Minimum market capitalisation of public float at time of listing $50 million Company: Yes, the public float will have a market capitalisation of $400 million at the time of listing. 8. Public float Maintain at all times a public float of at least 25%. The public float market capitalisation must be not less than $50 million at the time of listing. Company: Yes, at the time of listing public float will represent % of the issued share capital of the company and will have a market capitalisation of $400 million. 9. Spread of shareholders The in the hands of the public must be held among at least 300 shareholders. Company: Yes, this will be assured at the time of the IPO. 24

25 10. Offering mechanism A new applicant may not list by way of placing only if there is likely to be significant public demand for the. [That means applicant must seek to list by way of BOTH a private placing and a public offer.] Company: Yes, this will be assured at the time of the IPO. 11. New issue price Applicants to both the Main Board and the GEM Board are free to decide on the new issue price, but this should not be lower than the nominal value of the. Company: Yes, since the new will be offered at $4.00 per share while the nominal value of the is $ Non-private company Applicants to both the Main Board and GEM Board must not be private companies. Company: Yes, as the company has adopted Part I of Table A as its articles of association, it is not a private company. In conclusion, Apex Limited meets the requirements to be listed on the Main Board of the Hong Kong Stock Exchange. 5. (b) Advise Apex Limited what board and board committee structure preparations it has to consider to ensure it is in compliance with the Listing Rules and Corporate Governance Code requirements. Ans (b) In preparation for the IPO and the company s being finally approved for listing on the Hong Kong Stock Exchange, the board of Apex Limited should consider compliance with the various Listing Rules and the Corporate Governance Code as required of all listed companies in Hong Kong. The following are recommended for the consideration of the board of Apex Limited in respect of its board of directors and board committees: (1) The company has to appoint at least three independent non-executive directors, one of whom must have appropriate professional qualifications, accounting or related financial management experience as required by rule 3.10(2). (2) As an IPO applicant, the company needs to appoint at least one 25

26 additional executive director (total two including Mr. A) in order to have sufficient management presence in Hong Kong as required by rule (3) The company has to decide which of the directors will be the chairman and which will be the chief executive of the company. As required by code provision A.2 the chairman and the chief executive should be two separate individuals otherwise the company has to give considered reasons for deviation. (4) The board has to appoint an audit committee comprising at least three independent non-executive directors, one of whom must have appropriate qualifications or accounting or related financial management experience as required by the Listing Rules. (5) The board has to appoint a nomination committee comprising mainly independent non-executive directors, and its chairman should be either the chairman of the company or an independent non-executive director. (6) The board has to appoint a remuneration committee comprising mainly independent non-executive directors, and its chairman should be an independent non-executive director. The list of directors and their role and functions and the terms of reference of each of the board committees are to be published on the websites of the Stock Exchange and that of the company. 26

27 6. Great Wall Limited is a company incorporated in Hong Kong with its quoted on the main board of the Hong Kong Stock Exchange. The company specialises in the research, development and integration of communication systems. The company operates a share option scheme, which was adopted on 1 May 2013 when the company went public. The terms of the share option scheme are basically the same as those as in Chapter 17 of the Listing Rules. Mr. Wong, the chairman of the board s remuneration committee, has consulted you, the company secretary, on the use of the share option scheme. REQUIRED: 6. (a) Write a memorandum to Mr. Wong to address his enquiry on the purpose, use, operation and rules of the share option scheme. Ans (a) Great Wall Limited Memorandum To From : Mr. Wong, Remuneration Committee Chairman : Honey Bee, Company Secretary Date : 6 December 2013 Subject : Share option scheme I refer to your enquiry on the company s share option scheme (the scheme) and set out below the purpose, use, operation and rules in relation thereto. The scheme was adopted when the company s were first quoted on the Hong Kong Stock Exchange, on 1 May 2013, and has a life of 10 years from that date. 1. Purpose of the scheme: (a) The scheme was set up to attract employees of the desired quality and expertise so that they would contribute their best to the company s development and prosperity. (b) The scheme provides an incentive to employees in addition to their normal remuneration. (c) Granting options to employees means they benefit from the company s long-term financial success. (d) Share options are also granted to reward performance. 27

28 2. Operation of the scheme: (a) A qualified employee (a grantee) is offered the opportunity to subscribe for a certain number of in the company at a fixed price per share (exercise price) at some time in the future. (b) The grant letter lists the conditions of the grant, including: I. Option period II. Vesting period III. Number of options granted IV. Exercise price per option share V. Options are not transferable (c) The grantee accepts the offer within around a month s time by the payment of a token $1.00 as consideration. (d) When the options become vested, the grantee can exercise the options (or part of the total options granted) by paying the company an amount based on the exercise price. (e) Share options are usually only exercised when the market price of the are substantially higher than the exercise price where grantees can make a substantial profit by selling them. 3. Rules of the scheme: The rules of the share option scheme basically follow the provisions of Chapter 17 of the Listing Rules. The major points include: (a) Share options are a scarce resource for a listed company. Under the Listing Rules, no more than 30% of a listed company s issued share capital at any time should consist of share options exercised and to be exercised. (b) A share options scheme must be approved by the shareholders. (c) The maximum validity of a share option scheme is 10 years. (d) The exercise price must not be lower than the highest of: (i) the closing price of the on the date of grant; (ii) the average closing price on the five business days immediately before the date of grant; and (iii) the nominal value per share of the company. (e) Share options are granted by the directors. (f) Share options are personal to the grantees and are not transferrable. (g) The directors must not grant options of more than 10% of the issued share capital unless this limited is refreshed by a resolution of the shareholders at general meeting. 28

29 (h) Share options granted to a director must be approved by independent non-executive directors and must not exceed 0.1% of the issued share capital of the company during any 12-month period. (i) Unless approved by shareholders, options granted to an individual must not entitle that grantee to be issued more than 1% of the issued share capital of the company during any 12-month period. (j) No share options should be granted during black-out periods. I hope the above answer your enquiry and shall be please to discuss with you further. Honey Bee Company Secretary 6. (b) State concisely the notification requirements in the Appendix 10 of the Listing Rules, The Model Code of Securities Transactions by Directors of Listed Issuers. How does this affect the exercise of share options previously granted to the directors? Ans (b) The Model Code regulates the timing and procedures for directors who wish to deal in the of the company. The procedures are: (1) The directors must first notify the chairman of the company in writing (or in the case it is the chairman making the notification, to the director designated for this purpose). (2) The chairman will acknowledge and give clearance, if so desired, in writing to the director within five business days. (3) No dealing must take place before such dated acknowledgement and clearance has been received by the director. (4) The director must complete the dealing within five business days, beyond which fresh notification and acknowledge must be followed. Exercise of share options by a director where the exercise price was previously fixed at the time of grant is NOT subject to the provisions of the Model Code. END 29