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 2015 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 PPQ investment Holdings Limited is a company incorporated in the Cayman Islands with limited liability. The authorised share capital of the company is HK$800,000,000 divided into 8,000,000,000 shares of nominal value of $0.10 each, of which 5,000,000,000 shares have been issued, fully paid and are listed on the Main Board of the Hong Kong Stock Exchange. The company is a multinational conglomerate and has different overseas investments. It has made remarkable profits and its share price has increased dramatically in the past few years. The company held an annual general meeting on 30 April At the AGM, a resolution was passed to grant a general mandate to directors to repurchase the company s shares by not more than 10% of the issued share capital of the company as at the AGM date, until the conclusion of next annual general meeting. Since the AGM, the company has not issued or repurchased any of its shares. The shareholding structure of the company remains unchanged. 1. Details of the capital structure of the company are summarised below: Existing share capital structure Nominal value of each share HK$0.10 Number of authorised shares 8,000,000,000 Authorised share capital HK$800,000,000 Number of shares in issue 5,000,000,000 Issued share capital HK$500,000,000 Number of unissued shares 3,000,000,000 Unissued share capital HK$300,000,000 Board lot of shares 1,000 (Hint: The company is incorporated in the Cayman Islands. The concept of authorised share capital and nominal value of each share remained unchanged.) 2

3 Mr Ho, an executive director of the company, reported at a recent board meeting that Hang Seng Index had dropped more than 1,000 points due to the recent global financial crisis. As the negative atmosphere continues to cloud the whole stock market, share prices of a majority of blue chip companies have dropped by approximately 20%. The company s share price has fallen by more than 20% from HK$130 to HK$100 in the past two weeks. Moreover, the market circulation of the company s shares has tumbled by 30%. Mr Chiu, the chairman of the board, expressed his view that the current market price of the company s shares did not reflect the real value of the company. Low market circulation of shares would be a barrier to the rebound of company s share price, even when the stock market recovered in the future. As a result, Mr Chiu asked Mr Ho to think about any strategic plan that the company should implement in order to improve the market circulation of the company s shares and stabilise the market price of the company's shares. Mr Ho opined that the company might consider the subdivision of shares into shares of smaller nominal value to improve the market circulation. He proposed subdividing every share into four shares. Meanwhile, the company might consider buying back its shares to stabilise the market price. Mr Chiu generally agreed with Mr Ho s proposal and advised that the company should implement the strategic plan prudently, so that subdivision of shares and share buy-back should not be carried out simultaneously. The proposed strategic plan should be carried out in two separate stages: subdivision of shares in the first stage; and share buy-back in the next stage. Mr Ho further proposed that the company might repurchase the company s shares by means of an off-market share repurchase by entering into a share repurchase agreement with the shareholder(s). REQUIRED: 1. (a) Discuss how the subdivision of shares could improve the market circulation of the company s shares and any potential impact of the subdivision on the 3

4 company and the shareholders. (5 marks) Ans (a) Improves the market circulation of the company s shares 1. The subdivision of every HK$0.10 shares into four shares of a nominal value of HK$0.025 each. The number of authorised shares will increase by four times without any additional contribution from existing members. Share price becomes more affordable. 2. The subdivision of shares will reduce the nominal value and trading price of each share, and increase the total number of shares in issue; therefore the market circulation of the subdivided shares can be improved, attracting more investors. The shareholders base will be enlarged. Potential impacts on the company and the shareholders 1. The proportion of the number of authorised shares, number of shares in issue and number of unissued shares will remain the same after the subdivision of shares. 2. The subdivision of shares will not alter the underlying assets, business operations, management or financial position of the company or proportionate interest of shareholders. 3. However, the subdivision of shares into shares of smaller nominal value involves changing the share capital clause in the memorandum of association. Costs will be incurred in altering the memorandum of association, reprint of share certificate, dispatch of circular and etc.. Other than cost incurred for alteration of the memorandum of association, there is no adverse impact on the company and the shareholders. In general, the proposal is deemed to be in the interests of the company and shareholders as a whole. 1. (b) State precisely the procedure for subdivision of shares. (15 marks) 4

5 Ans (b) The procedure for subdivision of shares is as follows: 1. Check the Articles of Association whether the subdivision is allowed; 2. Convene a board meeting to authorise the issue of the relevant announcement and the notice to convene an extraordinary general meeting (EGM); 3. Publish an announcement providing the details of subdivision of shares on the websites of the company and the Stock Exchange; 4. Deliver the circular within 15 business days after the date of announcement together with the notice of the EGM and proxy form to shareholders; 5. Publish the circular, notice of the EGM and proxy form on the websites of the company and the Stock Exchange; 6. Convene the EGM to pass the resolution of subdivision of shares; 7. Publish the poll results of the EGM on the websites of the company and the Stock Exchange ; 8. Make an application to the Stock Exchange for the listing of, and permission to deal in, the subdivided shares; 9. Inform the Stock Exchange of the proposed change in the capital structure and submit the specimen new share certificate to the Stock Exchange for approval; 10. Issue new share certificates to replace the old share certificates; 11. Update the register of members; 12. Amend the company s memorandum and articles of association; 13. Arrange the necessary statutory filing with the Companies Registry of the Cayman Islands regarding the alteration of the share capital structure and amendment of memorandum and articles of association; 14. Publish the next day disclosure return on the date of alteration of the share capital structure or before 8:30a.m. of the following day as specified by the Listing Rules; 15. Update the revised information in the monthly return when published; 16. Submit Form NN5 to the Companies Registry within one month after the date of alteration of the share capital structure. 1. (c) Calculate the following elements of the company s share capital structure upon completion of the subdivision of shares: 5

6 1. Nominal value of each share 2. Number of authorised shares 3. Authorised share capital 4. Number of shares in issue 5. Issued share capital 6. Number of unissued shares 7. Unissued share capital (7 marks) (Assume that Mr Ho s proposal to subdivide every share into four shares is accepted and approved) Ans (c) If Mr Ho s proposal to subdivide every share into four shares is accepted and approved, the company s share capital structure will be as follows upon completion of the subdivision of shares: Existing share capital structure Completion of the subdivision of shares Nominal value of each share HK$0.10 HK$0.025 Number of authorised shares 8,000,000,000 32,000,000,000 Authorised share capital HK$800,000,000 HK$800,000,000 Number of shares in issue 5,000,000,000 20,000,000,000 Issued share capital HK$500,000,000 HK$500,000,000 Number of unissued shares 3,000,000,000 12,000,000,000 Unissued share capital HK$300,000,000 HK $300,000, (d) As the company secretary, write a memorandum to the board providing the following information: 1. The rationale under which the company may stabilise the market price of its shares by buying back its shares. (4 marks) 6

7 2. The maximum number of shares that the company may buy back under the repurchase mandate before and after the completion of the subdivision of shares. (2 marks) 3. The rules under the Code on Share Buy-backs issued by Securities and Futures Commission which the company must observe if it repurchases its shares off-market. (7 marks) (Assume that Mr Ho s proposal to subdivide every share into four shares is accepted and approved) (Total: 40 marks) Ans (d) PPQ Investment Holdings Limited Memorandum From: Company Secretary To: Board of Directors Date: 4 December 2015 Subject: Subdivision of shares and shares buy-back I refer to Mr Ho s proposal on subdivision of shares and shares buy-back. The following information is provided for your perusal. 1. Stabilise the market price of the company s shares by buying back its shares Share buy-backs or repurchase of shares means that the company buys back its own shares from the market. It is considered an effective method in responding to the global financial crisis for stabilising the stock price as follows: 1. The shares repurchased have to be treated as cancelled. 2. The number of issued shares is subsequently reduced. However, the aggregate amount of authorised shares remains unchanged and will not be reduced. 7

8 3. The percentage shareholding interest of all other shareholders in the company s issued share capital will be proportionately increased following the cancellation of the repurchased shares and the resulting reduction in the number of issued shares. 4. The earnings per share will then be enhanced. 5. It gives positive message/confidence to the market that the shares are worth buying. Thus, the market price of the company s shares will rise. 2. Maximum number of shares that may be bought back under the repurchase mandate Before the completion of the subdivision of shares Number of issued shares as at the AGM date x 10% 5,000,000,000 x 10% = 500,000,000 shares After the completion of the subdivision of shares Maximum number of shares that may be bought back under the general mandate x 4 500,000,000 shares x 4 = 2,000,000,000 shares 3. Rules regulating off-market share buy-backs under the Code on Share Buy-backs Rule 2 of Code on Share Buy-backs issued by the Securities and Futures Commission states that off-market share buy-backs must be approved by the Executive Director of the Corporate Finance Division of the Securities and Futures Commission (the Executive) before the company acquires any shares. Such approval will be granted upon the following conditions: 1. The approval of at least three-fourths of the votes cast on a poll by independent shareholders at a general meeting duly convened and held; 8

9 2. The notice of the general meeting must be accompanied by a circular containing, in addition to the information to be disclosed in an offer document, the following: i. the identity of the proposed offeree (i.e. vendor) and a description of its business activities and its relationship with the company, if any; ii. a description of the terms and conditions of the agreement(s) between the company and the proposed offeree; and iii. the advice of an independent financial adviser and the recommendation of an independent committee of the company's board of directors as to whether shareholders should approve or disapprove the off-market share buy-back proposal; 3. A certified copy of the resolutions must be filed with the Executive within three days of the general meeting; 4. A copy of the agreement must be available for inspection by shareholders during the period from the date of mailing the notice of the general meeting up to the date of the general meeting. 9

10 SECTION B 2. Addison and Ben are shareholders of GoldGo Limited Company (GoldGo), a private company limited by shares incorporated in Hong Kong. The articles of association of GoldGo specify that the company must hold a general meeting annually. Addison is an aircraft engineer in USA and he resides there. Due to his busy work schedule, it appears that he is unable to attend the forthcoming annual general meeting to be held in Hong Kong. Addison is aware that the Companies Ordinance (Cap. 622) came into operation on 3 March He seeks your advice on any provisions of the Companies Ordinance which may solve his problem. REQUIRED: 2. (a) (i) State concisely in what circumstances a private limited company is not required to hold an annual general meeting. (4 marks) (ii) Discuss whether GoldGo must hold its annual general meeting and any new initiatives introduced by the Companies Ordinance to facilitate the holding of an annual general meeting. (5 marks) Ans (a) (i) Circumstances under which a private limited company is not required to hold an annual general meeting Under the Companies Ordinance (Cap. 622), a company must hold an annual general meeting (AGM) in respect of each financial year of the company unless: 1. Everything that is required to be done at the meeting is done by a written resolution and copies of the documents required to be laid or produced at the meeting are provided to each member of the company on or before the circulation date of the written resolution (section 612(1)); 10

11 2. The company is a single member company (section 612(2)(a)); 3. The company has dispensed with the holding of AGMs by a written resolution or a resolution at a general meeting passed by all members under section 613; or 4. The company is a dormant company (section 611). (ii) Whether GoldGo must hold its annual general meeting and the new initiatives introduced by the Companies Ordinance to facilitate the holding of an annual general meeting 1. Under the Companies Ordinance, a private company must hold its annual general meeting by reference to its accounting reference period, instead of in each calendar year, unless the company falls into any of the above circumstances in part (a). 2. GoldGo does not fall into any of the circumstances (as mentioned in part 2(a) above) which allow it not to hold an annual general meeting. 3. Moreover, GoldGo must hold its general meeting annually because its articles of association specify that a general meeting must be held annually unless revision has been made to alter its articles of association. 4. Under section 584 of the Companies Ordinance, a company may hold a general meeting at two or more places using any technology that enables the members who are not together at the same place to listen, speak and vote at the meeting. Thus, GoldGo must hold its annual general meeting by reference to its accounting reference period (i.e., within nine months after the end of its accounting reference period) at two places (i.e. Ben in Hong Kong and Addison in the USA) using any technology that enables them to listen, speak and vote at the annual general meeting. 2. (b) Briefly advise how GoldGo can dispense with holding its annual general meeting and how it can deal with its ordinary business which is normally 11

12 discussed and resolved at the annual general meeting. (11 marks) (Total: 20 marks) Ans (b) How GoldGo can dispense with holding its annual general meeting 1. It appears that the articles of association of GoldGo specify that an annual general meeting must be held annually. 2. The relevant provisions under the Companies Ordinance on dispensation with annual general meetings are permissive and are not expressed to override the provisions in a company's articles. 3. If GoldGo wishes to take advantage of sections 612(2) and 613 but the company's articles provide that an annual general meeting must be held or prohibit the dispensation with annual general meetings, GoldGo would have to amend its articles so that it will not be in breach of its articles if no annual general meeting were held. 4. A resolution to dispense with the holding of an annual general meeting must be passed by all members by written resolution or at a general meeting (section 613) 5. GoldGo is required to deliver a copy of the resolution passed under section 613 to the Registrar of Companies for registration within 15 days after it being passed (sections 622(1)(g) and (2)). How GoldGo can deal with its ordinary businesses which are normally discussed and resolved at annual general meeting 1. There are four ordinary business matters normally discussed and resolved at annual general meeting: (i) re-appointment of the auditor; (ii) adoption of the financial statements; (iii) re-election of the directors; and (iv) declaration of dividends. 2. If a company is not required to hold an annual general meeting in respect of a financial year, the person who is the auditor of the company as at the end of 12

13 the appointment period is deemed to be re-appointed for the next financial year (section 403(1)). 3. GoldGo must send a copy of the reporting documents for the financial year to every member of the company (section 430(3)). 4. There is no provision in the Companies Ordinance that deals with re-election of directors when a company has dispensed with holding its annual general meeting under sections 612(2)(b) and 613. Thus, GoldGo may make reference to the relevant provisions, if any, in its articles of association for such purposes. 5. There is no provision in the Companies Ordinance that deals with the distribution of a final dividend when a company has dispensed with holding its annual general meeting under sections 612(2)(b) and 613. Thus, GoldGo may make reference to the relevant provisions, if any, in its articles of association for such purposes. 6. If necessary, the directors may call or the members of the company may request the directors to call a general meeting to deal with such matters. A written resolution may also be passed for such purposes. 13

14 3. Jaybee International Holdings Limited is a limited company incorporated in Hong Kong and its shares are listed on the Main Board of Hong Kong Stock Exchange. The company published its announcement with respect to the audited results for the year ended 31 December 2014 on 11 March During trading hours on 12 March 2015, Mr Lai, an executive director, noted that there was an inadvertent clerical error in the following sentence of the results announcement: Profits attributable to shareholders of the company is HK$10 million HK$10 million had been wrongly translated as HK$100,000,000 in the Chinese version of the results announcement. Mr Lai is aware that either the company or the Stock Exchange may apply for a trading halt. He wonders whether the company should take the initiative to apply for a trading halt due to the above error. REQUIRED: 3. (a) Briefly explain: (i) What a trading halt and suspension are. (7 marks) (ii) What major benefits a trading halt and suspension will bring to the market and investors. (2 marks) Ans (a) (i) What a trading halt and suspension are 1. Listed companies are not allowed to publish inside information during trading hours. If a disclosure obligation is triggered during trading hours, trading must be halted and suspended immediately. 2. The Stock Exchange may at any time direct a trading halt or suspend dealing in any securities if the Stock Exchange considers this is necessary for the protection of investors or the maintenance of an orderly market. 14

15 3. The Exchange may also grant a trading halt or suspension at the request of a listed company. Such a request must be made by the company, its authorised representative or financial adviser and must be supported by the specific reason. 4. A trading halt is generally a temporary interruption in the trading of securities in anticipation of or in reaction to an unusual event or condition affecting securities. It allows inside information to be adequately disseminated and assessed by the market and allows a period for public evaluation of the information. 5. The maximum period for which a trading halt may be granted is two trading days. 6. If the listed company fails to publish an announcement within the maximum period, the trading halt will lapse and its status will be changed to suspension automatically. 7. Trading of shares will resume in the trading session after publication of the announcement. (ii) What major benefits a trading halt and suspension will bring to the market and investors The implementation of trading halts benefits issuers, investors and other market participants in several ways and helps enhance market competitiveness. 1. It allows inside information to be adequately disseminated and assessed by the market in a timely manner and provides a framework for inside information to be adequately disseminated and assessed. 2. For shares listed on the Stock Exchange and an overseas exchange where the trading hours overlap with each other, it is possible to publish inside information in both markets simultaneously. Therefore, a trading halt helps avoid disadvantages to Hong Kong investors in terms of information access and trading opportunities, enhancing the Stock Exchange s competitiveness. 3. (b) Discuss: (i) In what circumstance the Stock Exchange will direct a trading halt and suspension in a listed company s securities. (7 marks) (ii) Whether Jaybee International Holdings Limited should take the 15

16 initiative to apply for a trading halt, and any remedial action that is available. (4 marks) (Total: 20 marks) Ans (b) Grounds for a trading halt 1. Unexplained unusual movements in the price or trading volume of the company s listed securities where the company s authorised representative cannot immediately be contacted or where the company delays in issuing an announcement as required under rule 13.10; or 2. Uneven dissemination or leakage of inside information in the market giving rise to an unusual movement in the price or trading volume of the company s listed securities. Grounds for suspension A suspension request (other than a trading halt) will only be acceded to in the following circumstances: 1. Where the company is subject to an offer, but only where terms have been agreed in principle and require discussion with major shareholders. Suspensions will normally be appropriate where no previous announcement has been made; 2. To maintain an orderly market; 3. Where there are certain levels of notifiable transaction, such as substantial changes in the nature, control or structure of an issuer, where publication of full details is necessary to permit a realistic valuation to be made of the securities concerned, or the approval of shareholders is required; 4. Where the company is no longer suitable for listing, or becomes a cash company; 5. Where the company is going into receivership or liquidation; or 6. Where the company confirms that it will be unable to meet its obligation to disclose periodic financial information in accordance with the Listing Rules. Whether Jaybee International Holdings Limited should take the initiative to apply for a trading halt and its remedial action 1. Any request for a trading halt or suspension must be made to the Stock Exchange by the company or its authorised representative or financial 16

17 adviser and must be supported by the specific reasons. 2. The granting of a trading halt or suspension by the Stock Exchange should only be made where necessary in the interests of all parties. 3. Unless the Stock Exchange considers that the reasons given in support of a trading halt or suspension request are in the interests of all parties, the Stock Exchange will expect a clarifying announcement to be published instead. 4. Thus, provided that the company publishes a clarifying announcement as soon as possible, it is not necessary to take the initiative to apply for a trading halt merely due to the above inadvertent clerical error. 17

18 4. A-Alley Limited Company (A Company), Baga Limited Company (B Company) and CatCare Association Limited (C Company) were all incorporated in Hong Kong in B Company is a holding company of a group of private companies, and it prepares the consolidated financial statements for its group. The following information is extracted from these three companies latest financial statements for the year ended A Company B Company C Company Type of company Public company Private company Guarantee company End date of annual financial statements 31 March 30 September 31 December HK$ million HK$ million HK$ million Total revenue Total assets Employees Ms Yung is a director of the above three companies. She is aware that the accounting reference period as stipulated by the Companies Ordinance (Cap. 622), which came into operation on 3 March 2014, is essential information not only in the preparation of financial statements, but also in determination of the date of the annual general meeting and filing date of the annual return of certain companies incorporated in Hong Kong. REQUIRED: 4. (a) Advise Ms Yung of the primary accounting reference date and the first accounting reference period of A Company, B Company and C Company under the Companies Ordinance. (6 marks) Ans (a) The primary accounting reference date and the first accounting reference period of A Company, B Company and C Company are as follows: A Company B Company C Company End date of annual On 31 March On 30 September On 31 18

19 financial statements each year each year December each year Primary accounting reference date 31 March September December 2014 First accounting reference period (first financial year) 1 April 2014 to 31 March October 2014 to 30 September January 2015 to 31 December (b) The Companies Ordinance (Cap. 622) relaxes the criteria for companies to prepare simplified financial reports and directors reports (the reporting exemption). State what information does not need to be disclosed in the directors reports if a company meets the reporting exemption criteria. (5 marks) Ans (b) A reporting exemption means the exemptions available to private or guarantee companies (with the exception of a bank/deposit -taking company, an insurance company or a stockbroker) that are qualified to prepare simplified accounts and directors reports. Exemptions include no requirement to disclose or include the following information in the directors report: 1 a business review (section 388(3)(a)) 2 arrangements to enable directors to acquire benefits by the acquisition of shares or debentures 3 donations 4 directors reasons for resignation or refusal to stand for re-election 5 material interests of directors in transactions, arrangements or contracts of significance entered into by a specified undertaking of the company 4. (c) Critically analyse whether A Company and B Company meet the qualifying criteria for the reporting exemption under the Companies Ordinance. (9 marks) (Total: 20 marks) Ans (c) Analyse whether A Company and B Company meet the reporting exemption qualifying criteria A Company The Companies Ordinance specifies that a small private company / holding company of a group of small private companies (with the exception of a bank/deposit-taking company, an insurance company or a stockbroker) which 19

20 meets two of the following conditions in a financial year (size criteria) will be eligible to prepare simplified reports: total revenue / aggregate total revenue not exceeding HK$100 million total assets / aggregate total assets not exceeding HK$100 million employees / aggregate number of employees not exceeding 100 Although A Company satisfies the above size criteria, A Company is not eligible for the reporting exemption because A Company is a public company. B Company The Companies Ordinance specifies that an eligible private company / holding company of a group of small private companies which does not satisfy the above size criteria will still be eligible to prepare simplified reports if it meets two of the following higher size criteria with 75% approval from members and provided no member objects: total revenue / aggregate total revenue not exceeding HK$200 million, total assets / aggregate total assets not exceeding HK$200 million, employees / aggregate number of employees not more than 100 B Company satisfies the above higher size criteria (total revenue and total assets are below HK$200 million) and will be eligible for the reporting exemption if B Company meets the following requirements as well: 1. A resolution must be approved by members holding 75% of the voting rights, which means 75% of the voting rights of all members of the company (not 75% of the voting rights of members attending the general meeting). 2. No member votes against the resolution. 3. B Company must deliver the resolution to the Registrar for registration within 15 days after it is passed. 20

21 5. HugeGood Holdings Limited Company (HugeGood) is incorporated in Bermuda with limited liability and its shares are listed on the Growth Enterprise Market (GEM) of the Stock Exchange of Hong Kong. The financial year end date of HugeGood is 31 December each year. The following timetable shows the dates scheduled for the board meetings in which HugeGood considers and approves its financial results in 2015: Date of board meeting to consider and approve the financial results First quarterly results 28 April 2015 Half-year results 31 July 2015 Third quarterly results 2 November 2015 Annual results 19 February 2016 HugeGood has adopted the required standard of dealings, which is set out in rules 5.48 to 5.67 of the GEM Listing Rules, as the company s own code for regulating directors dealings in securities. REQUIRED: 5. (a) Explain concisely: (i) What the blackout period is, the exact dates of each of HugeGood s blackout periods in 2015, and the rules determining each blackout period. (10 marks) (ii) The effect on the blackout period if HugeGood announced on 31 March 2015 that the board meeting on 28 April 2015 should be postponed to 4 May (3 marks) Ans (a) (i) Blackout A blackout period, as set out in rule 5.56 of the GEM Listing Rules, is a period during which directors are prohibited from dealing in the securities of the company until the financial results are published. 21

22 Blackout period of HugeGood in 2015 The company shall inform the Stock Exchange and publish an announcement immediately after the board meeting for approval of the preliminary announcement for year, half-year or quarterly results. Thus, the date of the board meeting is exactly the same as the publication date of the results announcement. First quarterly results for three months ended 31 March 2015 Date of board meeting to consider and approve the financial results: Publication date of results announcement: 28 April April 2015 Blackout period: 31 March 2015 to 28 April 2015 Rule 5.56 of GEM listing rules: During the period of 30 days immediately preceding the publication date of the quarterly results or, if shorter, the period from the end of the relevant quarterly period, publication date of the results up to the Half-yearly results for the six months ended 30 June 2015 Date of board meeting to 31 July 2015 consider and approve the financial results: Publication date of results 31 July 2015 announcement: Blackout period: 1 July 2015 to 31 July 2015 Rule 5.56 of GEM listing rules: During the period of 30 days immediately preceding the publication date of the half-year results or, if shorter, the period from the end of the relevant half-year period up to the publication date of the results Third quarterly results for the nine months ended 30 September 2015 Date of board meeting to 2 November 2015 consider and approve the financial results: Publication date of results 2 November 2015 announcement: Blackout period: 3 October 2015 to 2 November 2015 Rule 5.56 of GEM listing rules: During the period of 30 days immediately preceding the publication date of the quarterly results or, if shorter, the period from the end of the relevant quarterly period, up to the publication date of the results Annual results for the year ended 31 December 2015 Date of board meeting to 19 February

23 consider and approve the financial results: Publication date of results 19 February 2016 announcement: Blackout period: 31 December 2015 to 19 February 2016 Rule 5.56 of GEM listing rules: During the period of 60 days immediately preceding the publication date of the annual results or, if shorter, the period from the end of the relevant financial year, up to the publication date of the results (ii) Effect on the blackout period if HugeGood announced on 31 March 2015 that the board meeting on 28 April 2015 should be postponed to 4 May 2015 The original blackout period is 31 March 2015 to 28 April Pursuant to GEM rule 5.56, the company must notify the Stock Exchange in advance of the commencement of each blackout period. Once the blackout period has commenced, the commencement date of the blackout period cannot be changed (i.e. on 31 March 2015), but the end date will be extended to 4 May Thus, the whole blackout period will become 31 March 2015 to 4 May Pursuant to GEM rule 5.56, directors are not allowed to deal in the securities of the company in any period of delay in publication of a results announcement. 5. (b) HugeGood proposes granting new options to directors to subscribe for the company s securities. Discuss whether granting new options to directors is prohibited during the blackout period. (Assume that the date of board meeting on 28 April 2015 remains unchanged) (7 marks) (Total: 20 marks) Remark: the following calendar is for reference only. Ans (b) To grant new options to directors to subscribe for the company s securities, HugeGood must comply with the following GEM listing rules: 23

24 GEM rule which restricts the time of grant of options HugeGood may not grant any option during the period commencing one month immediately before the date of the board meeting for approving the company s financial results for any year, half-year or quarterly period, and ending on the date of the results announcement. Moreover, no option may be granted during any period of delay in publishing a results announcement. GEM rule 5.53 The grant to a director of options to subscribe or purchase the company s securities shall be regarded as dealing by the director if the exercise price of the options is fixed at the time of such grant. However, if the options are granted to a director on terms whereby the exercise price of options is to be fixed at the time of exercise, the dealing is to be regarded as taking place at the time of exercise, not at the time of such grant. Conclusion Granting of any option to directors during the following blackout periods is prohibited: 31 March 2015 to 28 April July 2015 to 31 July October 2015 to 2 November January 2016 to 19 February 2016 HugeGood may only grant options to directors on terms whereby the exercise price of the options is to be fixed at the time of exercise during the following blackout period: 31 December 2015 to 18 January

25 6. Mr Lung is a director and a shareholder of All-One Holdings Limited Company (All-One), Baby-2 Limited Company ( Baby-2) and Cata-3 Limited Company (Cata-3). All three companies are incorporated in Hong Kong and limited by shares. The following diagram illustrates the group structure of these three companies. All-One 100% 70% Baby-2 Cata-3 Mr Lung proposes streamlining the company structure by vertical amalgamation. The new company structure will be as follows: Amalgamated company (All-One and Baby-2) 70% Cata-3 REQUIRED: 6. (a) Briefly advise Mr Lung what vertical amalgamation is and the conditions that must be satisfied in order to utilise the court-free regime for amalgamation provided in the Companies Ordinance. (10 marks) Ans (a) Vertical amalgamation Under the court-free amalgamation procedure of the Companies Ordinance, intra-group amalgamations can be carried out without having to involve a court. A vertical amalgamation is between a holding company and one or more of its wholly-owned subsidiaries. Once the amalgamation is completed, a single 25

26 continuing entity (i.e. All-One) is referred to as the amalgamated company and the shares of the amalgamating subsidiary (i.e. Baby-2) will be cancelled. Conditions that must be satisfied in order to utilise the court-free regime for amalgamation provided in the Companies Ordinance 1. Each amalgamating company must be a Hong Kong incorporated company limited by shares. 2. Each amalgamating company must be part of the same wholly-owned group of companies. 3. Each director of an amalgamating company who voted in favour of the amalgamation must make a specified solvency statement. 4. Each amalgamating company must be solvent, and the amalgamated company must be able to pay its debts for the following 12 months after the amalgamation takes place. 5. If any amalgamating company has created a floating charge, each person entitled to that security must give written consent to the amalgamation proposal. In unusual circumstances, the consent of other beneficiaries of any other security may also be required. 6. No creditor of an amalgamating company will be prejudiced by the amalgamation. 7. Secured creditors must be notified in writing of the proposed amalgamation. The directors of each amalgamating company must also publish a notice of the proposed amalgamation in an English newspaper and a Chinese newspaper. 8. The amalgamation must be approved by each amalgamating company s shareholders. The shareholder approval process must be in accordance with the procedures set out in the articles of association of each amalgamating company. 9. Shares of the amalgamating subsidiary will be cancelled without payment or other consideration pursuant to section 680(2) of the Companies Ordinance. 6. (b) State concisely the formalities needed to effect Mr Lung s proposed amalgamation and the consequence upon completion of the vertical amalgamation. (10 marks) (Total: 20 marks) 26

27 Ans (b) For the purposes of effecting Mr Lung s proposed amalgamation of companies, each of All-One and Baby-2 (instead of either All-One or Baby-2) must complete the following formalities: 1. The board of directors of each of amalgamating companies, namely All-One and Baby-2, must issue a notice to convene its extraordinary general meeting respectively. 2. Shareholders of each of All-One and Baby-2 must consider and approve the proposed amalgamation by special resolution on poll, but not by written resolution, pursuant to section 680(3) of the Companies Ordinance, respectively. 3. All-One and Baby-2, must deliver the following documents to the Registrar of Companies (the Registrar) for registration within 15 days after the approval of the amalgamation proposal: (a) (b) (c) the approved amalgamation proposal (Form NAMA1); a certificate required by section 683(1) (Form NAMA2); a certificate issued by the directors of each amalgamating company (Form NAMA3), stating that the amalgamation has been approved in accordance with: i. Division 3 of Part 13 of the Companies Ordinance; and ii. The articles of the amalgamating company. 4. The amalgamated company (i.e. All-One) must also deliver the following documents to the Registrar for registration within 15 days after the approval of the amalgamation proposal: (d) a notice of appointment of the directors of the amalgamated company (Form NAMA4); (e) a certificate issued by the directors, or the proposed directors, of the amalgamated company stating that where the proportion of the claims of the amalgamated company s creditors in relation to the value of that company s assets is greater than the proportion of the claims of an 27

28 amalgamating company s creditors in relation to the value of that company s assets, no creditor will be prejudiced by that fact (Form NAMA5). As soon as practicable after the documents (a) to (e) above are registered, the Registrar will issue a certificate of amalgamation, specifying a date as the effective date of the amalgamation. Consequence upon completion of the vertical amalgamation The amalgamated company (i.e. All-One) succeeds to all property, rights and privileges, and all liabilities and obligations of the amalgamating company (i.e. Baby-2). END 28