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 PILOT PAPER Time allowed 3 hours Section A Compulsory questions Section B 5 long questions (attempt any 3) DO NOT OPEN THIS PAPER UNTIL INSTRUCTED TO DO SO BY THE INVIGILATOR Important Note: Candidates are allowed 15 minutes reading time to read through the question paper before the commencement of the examination between 2:15pm-2:30pm. During the reading time, all candidates must be silent and must not write or mark anything on their question papers or answer books. Candidates must close all their reference books, notes or other unauthorised materials and put these under their chairs. If any candidates write or make any marks during the reading time, or if they speak or in any other way communicate with anyone either in or outside the examination hall during this period or read any unauthorised materials, they will be disqualified from continuing this examination paper. Once candidates have opened the question paper, they are not allowed to leave the examination hall until 3:00pm. Page 1 of 12

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3 SUBJECT NO 19M CORPORATE SECRETARYSHIP PILOT PAPER The examination paper is divided into TWO Sections. Section A is compulsory and carries 40 marks. Candidates should attempt THREE questions from Section B, all of which carry 20 marks each. You should allow yourself approximately 70 minutes in total to answer the questions in Section A, and 35 minutes for each of the questions attempted in Section B. Unless otherwise stated, $ denotes Hong Kong dollars and Table A applies. Saturday afternoon 13 December 2008 Time allowed: 3 hours SECTION A (Compulsory answer ALL parts of this question) Question 1 Good Prospect International Limited is a company listed on the Main Board of the Hong Kong Stock Exchange and Luxembourg Stock Exchange. The board of directors has just received resignation letters from two independent non-executive directors, Mr. Chan and Mr. Cheng, who cite personal reasons for their resignation. Mr. Leung, who is the third independent non-executive director, is a professor in mechanical engineering at a university in Hong Kong. The board wishes to appoint Mr. Kwok and Mr. Chiu to replace Mr. Chan and Mr. Cheng in order to fulfil the Listing Rules requirement that there are at least three independent non-executive directors on the board. Mr. Kwok, who is a chartered surveyor, holds 1% of Good Prospect s shares in his own name. Carmen, Good Prospect s company secretary, has found out that Mr. Kwok is one of the beneficiaries of a family trust, the Trustee of which had acquired 5% of the equity interest in Good Prospect. Mr. Chiu is a retired businessman and is currently an independent non-executive director of 20 listed companies. To further expand the company s business, the board of directors of Good Prospect is in the process of negotiating a takeover bid for another listed group. In order to obtain the requisite funds of $200 million to finance the takeover bid, the board is considering raising new capital from the current shareholders by way of either a rights issue or an open offer. Page 3 of 12

4 Eric, a director of Good Prospect, has found out from Paul, the company's financial controller, that the interim accounts to be issued in two weeks time show a sharp rise in the company's net profit after taxation. With the potential takeover bid and the good interim results in mind, Eric advised Teddy to invest in Good Prospect. Teddy has been Eric s good friend for more than 15 years. Eric knows that Teddy's company is currently making huge losses and has a liquidity problem so he is providing Teddy with a short-term loan. In addition, he has instructed his stock broker to assist Teddy in acquiring Good Prospect shares on the Luxembourg Stock Exchange. Required: (a) Explain the validity of the appointment of the two independent nonexecutive directors. Comment on the disclosure issues relating to the resignation and appointment of independent non-executive directors in accordance with the provisions of the Main Board Listing Rules and the Securities and Futures Ordinance (Chapter 571). (b) Advise the board which method of raising capital, i.e. a rights issue or an open offer, should be adopted by Good Prospect, giving reasons for your answer. (c) Explain the legal consequences of Eric s advice and assistance to Teddy with reference to the Securities and Futures Ordinance (Chapter 571). (20 marks) (Total: 40 marks) Page 4 of 12

5 SECTION B (Answer THREE questions from this section) Question 2 Trans-global Holdings Limited is a public company incorporated in Hong Kong. The company s business activities include general trading, property development, transportation, lending money and the provision of guarantees. The issued capital of the company is 30 million shares of $1.00 each. Mr. Chan, Mr. Lee, Mr. Cheung and Mr Wong are the directors and shareholders of the company. Mr. Chan is a director of Neptune Limited, and 80% of this company s equity capital is held by Trans-global Holdings. Mr. Chan and Mr. Lee are the directors of Poly Finance Limited, a private company which does not belong to a group which contains a listed company. Poly Finance carries on the business of money lending in Hong Kong. The net assets of Trans-global Holdings as at financial year end 31 March 2008 are $100 million. The following transactions took place after the financial year end 31 March 2008: (a) Chelsea Limited, of which Mr. Chan is a majority shareholder, borrowed $500,000 from Trans-global Holdings. (b) Chelsea Limited borrowed $2 million from Poly Finance. (c) Shinny Limited, of which Mr. Wong is the managing director, obtained an advance of $5 million from Poly Finance. The loan was guaranteed by Transglobal Holdings. (d) Mr. Cheung bought a house to live in with his wife and children. He borrowed $6 million from Trans-global Holdings to pay for the house. The value of the property as per latest valuation report was $8 million. (e) Trans-global Holdings paid $7.5 million on behalf of Neptune. Required: (a) Explain the validity of all the above transactions pursuant to sections 157H and 157HA of the Companies Ordinance (Chapter 32). (b) Evaluate any FOUR exceptions stated in section 157HA of the Companies Ordinance (Chapter 32) and explain whether these exceptions are able to safeguard the interests of shareholders of a company. (Total: 20 marks) Page 5 of 12

6 Question 3 Metropolis International Limited, a listed company, entered into the following transactions after its financial year end 31 December 2007: (1) On 8 April 2008, Metropolis entered into an agreement with an independent third party, SEA Limited, to acquire from SEA a 100% equity interest in Magnificent Limited at a cash consideration of $40 million. (2) On 22 April 2008, Metropolis entered into an agreement with ITS Limited to acquire from ITS- a 40% equity interest in Solar Limited at a cash consideration of $380 million. Before this transaction, Metropolis did not have any equity interest in Solar. Hanny Limited holds a 20% equity interest in Metropolis, and ITS holds a 60% equity interest in Hanny Limited. Metropolis audited accounts include, amongst other things, group total assets of $3.8 billion, group turnover of $500 million, group profit after taxation of $294 million and group taxation of $56 million. Metropolis issued share capital is $800 million (i.e. 800,000,000 shares of $1.00 each). The average closing price of the Metropolis shares (i) before 8 April 2008 was $2.0 per share and (ii) before 22 April 2008 was $2.50. The audited accounts of Magnificent Limited for the year ended 30 September 2007 include total assets of $80 million, turnover of $20 million, profit after taxation of $12.6 million and taxation of $2.4 million. The audited accounts of Solar Limited for the year ended 31 December 2007 include total assets of $900 million, turnover of $220 million, profit after taxation of $151.2 million and taxation of $28.8 million. Required: (a) Explain whether each of the two transactions is a notifiable transaction and/or a connected transaction under Chapters 14 and 14A of the Main Board Listing Rules and state the category each transaction falls into, giving reasons for your classification. (15 marks) (b) Discuss whether any protection is given to shareholders in each of the above two transactions based on the compliance requirements of the Listing Rules. (5 marks) (Total: 20 marks) Page 6 of 12

7 Question 4 Heritage Holdings Limited, a listed company, GEN Investments Limited, a British Virgin Islands company and a wholly-owned subsidiary of Heritage, entered into a subscription agreement whereby Smart Investments Limited (which is a fund management company and lead manager of the issue)agreed to procure subscribers including institutional investors to subscribe for the bonds in an aggregate principal amount of $800 million. GEN issued $800 million bonds in registered form in $10,000 denomination and constituted by a trust deed to be entered into by GEN, Heritage and HK Trustee Limited as Trustee. The principal terms of the bonds are as follows: Date of the subscription agreement: 8 May 2008 Principal amount: HK$800 million Maturity date: 7 May 2013 Issue price: 100% of the principal amount of the bonds Interest: 4% Guarantee: The bonds are guaranteed by Heritage Holdings Limited, the holding company of GEN Investments Limited. Conversion: Bondholders have the right to convert the bonds into 400 million ordinary shares in Heritage Holdings Limited at a conversion price of $2.00 per share. Voting rights of bondholders: The bondholders do not have any voting rights in the members general meetings of GEN Investments Limited. Redemption: GEN Investments Limited may at any time redeem the whole or part of the outstanding bonds at 102% of the principal. The bondholders shall have no right to require GEN Investments Limited to redeem the whole or part of the bonds. Conditions: Completion of the subscription agreement is conditional upon approval of listing by The Stock Exchange of Hong Kong Limited. Listing: Applications have to be made for the listing of $800 million bonds on The Stock Exchange of Hong Kong Limited. Use of proceeds: The net proceeds from the issue of the bonds will be used for financing projects in Shenzhen, China as well as for general working capital. Reasons for issue of bonds: The issue can attract new capital inflow for financing projects on hand and for working capital purposes. Negative pledge: GEN Investments Limited and Heritage Holdings Limited will not, without prior written approval of the Trustee or the bondholders, incur any other indebtedness or engage in businesses other than indebtedness incurred or business engaged in connection with the bonds. Page 7 of 12

8 Required: (a) Explain the advantages and disadvantages to GEN Investments Limited of issuing the bonds. (b) Advise investors of the advantages and disadvantages to them of subscribing for GEN s bonds. (Total: 20 marks) Page 8 of 12

9 Question 5 Hanson Investments Limited, a listed company, has an issued share capital of $1.2 billion divided into 1.2 billion ordinary shares of $1.00 each carrying a right to vote. Robin is the chief executive officer of Hanson, while Mandy and Judy are neither directors nor executives of Hanson. Required: In the context of Part XV of the Securities and Futures Ordinance, explain whether Robin, Mandy and Judy are required to make notification of their interests in each of the following situations, giving reasons for your answers: (a) In January 2008, Robin had acquired 12 million ordinary shares in Hanson, while Mandy had also acquired 24 million ordinary shares in Hanson in the same month. (2 marks) (b) Robin and Mandy entered into a concert party agreement in February 2008, under which Robin purchased 48 million ordinary shares in Hanson. (2 marks) (c) In March 2008, Mandy entered into another concert party agreement with Judy, under which Judy purchased 60 million ordinary shares in Hanson. (2 marks) (d) In April 2008, Bright Trustee Limited, trustee of a discretionary trust of which Robin is the discretionary object, purchased 36 million ordinary shares in Hanson. (2 marks) (e) In May 2008, Robin and Mandy terminated their concert party agreement and sold their shares in the stock market. (2 marks) (f) Future changes to the share capital of the company as in each of the following situations: (i) A rights issue (ii) Allotment of shares to a new investor (iii) Repurchase of 10% of the issued share capital (iv) Reduction of capital (Total: 20 marks) Page 9 of 12

10 Question 6 Mr. Ma, Mr. Wong Mr. Kong and Mr. Ho are directors and shareholders (holding 45%; 45%; 5%; 5% respectively) of Best Hope Limited, a private company. The authorised share capital of the company is $40 million divided into 40 million ordinary shares of $1.00 each. The company has adopted Table A as its articles of association, although this has been modified since incorporation. The quorum for directors meetings and shareholders meetings are four. A director must hold at least 200,000 ordinary shares in the company. Required: (a) As the company secretary, advise the board the courses of action to be taken in the following circumstances, giving reasons for your answer: (i) Miss Au, friend of Mr. Ma, wished to invest HK$500,000 in the company. The issued share capital before this new allotment of shares is HK$40 million divided into 40 million ordinary shares of $1 each. (ii) One week later, Miss Au advised you that she did not want to subscribe for the shares in her own name and has requested her friend Miss Ng to subscribe for the 500,000 shares of $1.00 each on her behalf. (iii) Mr. Ho deposited a requisition to pass a written resolution pursuant to section 116B of the Companies Ordinance to remove the company s auditors, Messrs. Lee & Wong. (iv) The company has not been able to contact Mr. Kong for seven months, and no reason has been given for his absence from board meetings. (b) One of the agenda items for a forthcoming board meeting is to consider the future listing of the company s shares on the Stock Exchange of Hong Kong. As the company secretary, prepare a memorandum for discussion at the board meeting explaining the merits and demerits of listing the company s shares on the Stock Exchange. (Total: 20 marks) END OF EXAMINATION PAPER Page 10 of 12

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