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 JUNE 2016 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 Rita and Rosa are sisters. In 1990, Susan, Rita and Rosa incorporated a private limited company, Babbie Limited (BL), in Hong Kong to start their business. BL engages in the design and manufacture of infant-related products. The following is the shareholding structure of BL since incorporation (all shares are fully paid): Shareholder Number of shares Share capital $ Susan 80,000 8,000,000 Rita 10,000 1,000,000 Rosa 10,000 1,000,000 Total 100,000 10,000,000 The following were the directors of BL between 1990 and 2012: Name of director Description Susan - 1. All-Rita Limited BeRosa Limited A limited company incorporated in Hong Kong, of which Rita and her husband are directors and shareholders A limited company incorporated in the British Virgin Islands, of which Rosa and her son, Tony, are directors and shareholders During the period from 1990 to 2012, Susan was the key person responsible for the operation and management of BL. Under Susan s supervision, BL recorded remarkable growth. BL bought some office premises in Hong Kong. The return from such office premises is huge. BL s net asset value shown on its audited financial statements for the year ended 31 December 2015 is $800,000,000. In 2013, Susan reached retirement age and decided to emigrate to Canada. She resigned as a director of BL on 1 January Meanwhile, Rosa appointed Tony to act as a director and Tony replaced Susan in her role in the operation and management of BL. Susan has recently found that Tony, as a director of BL, signed the following agreements/deed/contract for BL: 2

3 1. Loan agreement with Jason on 1 June 2015, pursuant to which BL would provide a loan of $50,000,000 to Jason (Jason is Tony s son and he was 18 years old on 1 June 2015); 2. Deed of indemnity with a bank on 2 July 2015, pursuant to which BL would guarantee BeRosa Limited s repayment of a loan of $250,000, which was provided by the bank to BeRosa Limited; 3. Loan agreement with KKT Limited on 1 August 2015, pursuant to which BL would provide a loan of $200,000 to KKT Limited (Tony holds 10% of the issued shares in KKT Limited); 4. Loan agreement with himself on 2 August 2015, pursuant to which BL would provide a loan of $3,000,000 to Tony for the purpose of purchasing his residential home; and 5. Service contract with himself on 1 September 2015, pursuant to which Tony s guaranteed term of service as a director of BL is five years and BL would pay $1,000,000 to Tony as compensation for loss of office or consideration for retirement from office. Susan has also noticed that the business of BL has dropped rapidly and Tony has been absent from the office for few months without reasonable grounds. In his absence, Tony s personal assistant performed Tony s duties without proper board approval. During the first few months of 2016, the accounting records of BL were thrown into disarray. Some reimbursements were claimed by Tony without supporting evidence/receipts. Susan is considering removing Tony from office. However, she cannot find any relevant provisions in BL s articles of association in relation to the removal of a director. Meanwhile, Susan is also considering selling her 80,000 shares to a potential investor, GiTi Holdings Limited (GiTi), a Hong Kong listed company. 3

4 REQUIRED: 1. (a) Discuss whether the agreements, deed and contract signed by Tony during the period from June 2015 to September 2015 are prohibited under the Companies Ordinance. (10 marks) Ans (a) Whether the agreements, deed and contract signed by Tony during the period from June 2015 to September 2015 are permitted under the Companies Ordinance Under the Companies Ordinance, there is a general prohibition on a company making a loan or undertaking similar transactions to directors unless certain exceptions apply or prior shareholders approval has been obtained. 1. Loan agreement with Jason on 1 June 2015 The prohibition covers a wider category of persons connected with a director, which includes adult child. Jason is Tony s son and therefore Jason is connected to Tony under section 486 and 487 of the Companies Ordinance. Thus, the provision of a loan to Jason is prohibited. 2. Deed of indemnity with a bank on 2 July 2015 The prohibition includes the provision of a guarantee or security for a loan made by any person to a director. BeRosa Limited is connected to Tony because it is owned by Tony and his mother. However, if the amount of the loan does not exceed 5% of the company s net asset value, the transaction is exempt from the prohibition under section 505 of the Companies Ordinance. The loan amount is $250,000. BL s net asset value is $800,000,000. The percentage ratio is 0.03% ($250,000/$800,000,000). Thus, the provision of the guarantee to the bank in favour of BeRosa Limited s loan is not prohibited. 4

5 3. Loan agreement with KKT Limited on 1 August 2015 The prohibition covers a body corporate with which the director is associated. An associated body corporate is one in which a director is entitled to exercise more than 30% of the voting power at any of its general meetings under section 488 of the Companies Ordinance. Tony holds 10% of KKT Limited. Thus, KKT Limited is not an associated body corporate of Tony. Thus, the loan to KKT Limited is not prohibited. 4. Loan agreement with Tony on 2 August 2015 A loan to a director for the purpose of purchasing his primary residence is exempt from the prohibition under section 509 of the Companies Ordinance, provided that the amount does not exceed 10% of the company s net asset value. The loan amount is $3,000,000. BL s net asset value is $800,000,000. The percentage ratio is 0.375% ($3,000,000/$800,000,000). Thus, the provision of the loan to Tony is not prohibited. 5. Service contract with Tony on 1 September 2015 Under the Companies Ordinance, the following transactions are prohibited unless disinterested members approval has been obtained: (i) A director s long-term employment (i.e. the term exceeds three years or more); and (ii) Payment to a director for loss of office. If Susan does not ratify Tony s conduct, the service contract for a five-year guaranteed term of service and the payment of $1,000,000 as compensation for loss of office is prohibited. 1. (b) State precisely the general principles for a director to perform his functions and exercise his powers; and critically evaluate whether Tony is in breach of his duty as a director of BL. (15 marks) 5

6 Ans (b) The general principles for a director in performing his functions and exercising his powers The following are the general principles for a director in performance of his functions and exercise of his powers. Principle 1: Duty to act in good faith for the benefit of the company as a whole A director owes a duty to act in the interests of all its shareholders, present and future. In carrying out this duty, a director must have regard to the need to achieve outcomes that are fair as between its members. Principle 2: Duty to use powers for a proper purpose for the benefit of members as a whole The primary and substantial purpose of the exercise of a director s powers must be for the benefit of the company. If the primary motive is found to be for some other reasons (e.g. to benefit one or more directors and to gain control of the company), then the effects of his exercise of his power may be set aside. This duty can be breached even if he has acted in good faith. Principle 3: Duty not to delegate powers except with proper authorisation and duty to exercise independent judgement Except where authorised to do so by the company s articles of association or any resolution, a director of a company must not delegate any of his powers. He must exercise independent judgement in relation to any exercise of his powers. Principle 4: Duty to exercise reasonable care, skill and diligence Reasonable care, skill and diligence means the care, skill and diligence that would be exercised by a reasonably diligent person with: (i) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director to the company; and (ii) the general knowledge, skill and experience that the director has. Principle 5: Duty to avoid conflicts between personal interests and the interests of the company A director of a company must not allow personal interests to conflict with the interests of the company. 6

7 Principle 6: Duty not to enter into transactions in which the directors have an interest A director must not enter into such transactions with the company unless he has complied with the requirements of the law. The law requires the director to disclose the nature and extent of his interest in respect of such transactions. Where applicable, he must secure the requisite approval of other directors or members. Principle 7: Duty not to gain advantage from use of position as a director A director of a company must not use his position as a director to gain (directly or indirectly) an advantage for himself, or someone else, or which causes detriment to the company. Principle 8: Duty not to make unauthorised use of company s property or information This is except where the use or benefit has been disclosed to the company in a general meeting and the company has consented to it. Principle 9: Duty not to accept personal benefit from third parties, which is conferred because of position as a director This is except where the company itself confers the benefit, or the company has consented to it by ordinary resolution, or where the benefit is necessarily incidental to the proper performance of any of his functions as director. Principle 10: Duty to observe the company s constitution and resolutions A director of a company must act in accordance with the company s constitution. He must also comply with resolutions that are made in accordance with the company s constitution. Principle 11: Duty to keep accounting records A director of a company must take all reasonable steps to ensure that the company keeps accounting records that are sufficient to show and explain the company s transactions and disclose with reasonable accuracy the company s financial position and financial performance. 7

8 Whether Tony is in breach of his duty as a director of BL Tony is in breach of his duty as a director of BL by reason of his following improper behaviour: 1. Tony was absent from office for a few months without reasonable grounds. This is in breach of Principles 1, 2, 4 and In his absence, Tony s personal assistant performed his duties without proper board approval. This is in breach of Principles 3 and During the period of first few months of 2016, the accounting records of BL were thrown into disarray. Some reimbursements were claimed by Tony without supporting evidence/receipts. This is in breach of Principle Entering into the loan agreement with Jason and the service contract with himself is prohibited under the Companies Ordinance. This is in breach of Principles 5, 6 and (c) Advise Susan: (i) Whether she has a right to remove Tony as a director and, if she does, the relevant procedures she should follow; and (11 marks) (ii) Suggestions on the composition of the board of directors after the removal of Tony and/or the completion of the disposal of Susan s 80,000 shares to GiTi. (4 marks) (Total: 40 marks) Ans (c) (i) Susan s right to remove Tony as a director and the relevant procedures 1. Section 462 of the Companies Ordinance provides that members have a statutory power to remove a director by an ordinary resolution before the end of his term of office. 8

9 2. Susan is a member of BL. She has a statutory power to remove Tony as a director of BL, notwithstanding any provision in BL s articles of association or any agreement between BL and Tony. 3. The ordinary resolution must be passed at a general meeting. A written resolution does not apply to the removal of a director (i.e. Tony). 4. Section 462 provides that a special notice is required for a proposed resolution to remove a director. 5. A special notice means a notice of such proposed resolutions must be given to the company by a member (i.e. by Susan) at least 28 days before the relevant general meeting. 6. BL must give its members notice of the proposed resolution at the same time and in the same manner as it gives notice of a general meeting. 7. If this is not practicable, BL must give its members notice of the proposed resolution at least 14 days before the meeting: (i) by advertisement in a newspaper circulating generally in Hong Kong; or (ii) in any other manner allowed by BL s articles of association. 8. On receipt of the special notice from Susan, BL must forthwith send a copy of the notice to Tony. Tony is entitled to receive the notice and to attend the general meeting. 9. Tony may then make a written representation of reasonable length to BL. He is also entitled to request BL to notify the members of his representations. If Tony s representations are not received in time by BL, the representations should be read out at the general meeting which considers the proposed resolution. 9

10 10. Once the ordinary resolution is passed, BL must notify the Companies Registrar by filing and submitting the form ND2A within 15 days. (ii) The composition of the board of directors after the removal of Tony and/or the completion of disposal of Susan s 80,000 shares to GiTi The board structure of BL needs to be changed as follows: Removal of Tony After the removal of Tony, only two corporate directors remain on the board: All-Rita Limited and BeRosa Limited. Section 456 of the Companies Ordinance requires every private company to have at least one director who is a natural person. So long as BL is not a member of a listed group, one director who is a natural person should be appointed. Completion of disposal of Susan s 80,000 shares to GiTi Upon the completion of disposal of Susan s 80,000 shares to GiTi, BL will become a non-wholly owned subsidiary of GiTi, which will hold 80% of the issued shares of BL. Thus, BL will be a member of a listed group. Section 456 of the Companies Ordinance restricts the corporate directorship in private company which is a member of a listed group. Thus, All-Rita Limited and BeRosa Limited should resign as directors of BL. 10

11 SECTION B 2. Eugene Chin is a director and a shareholder holding 75% of the issued shares of Enzzo Limited (EL), a private company incorporated in Hong Kong. The company has expanded rapidly and recorded remarkable profits in the past few years. Sally Hui is the company s financial controller. She has advised Eugene that the company s financial performance meets the listing requirements of the Stock Exchange of Hong Kong Limited (SEHK). She has proposed that the company may further expand its business by raising funds, and one of the feasible ways of doing this is to offer its shares to the public for subscription by initial public offer (IPO). Eugene is not familiar with the listing requirements and the relevant listing rules. He is aware that certain companies may list on the SEHK by way of introduction. REQUIRED: Moreover, one of Eugene s friends has told Eugene that a listing of shares on SEHK means selling all the company s shares to the public. 2. (a) Critical analyse to what extent the following sentence is correct. Listing of shares on the SEHK means selling all the company s shares to the public. (10 marks) Ans (a) Upon listing, EL shall issue/allot shares to the public for subscription. However, it is not necessary to sell all the company s shares to the public. Only a portion of shares must be sold to the public so that EL meets the public float requirement of the Listing Rules. After listing, EL has to ensure the sufficiency of public float (i.e. at least 25% of the issued shares must at all times be held by the public). 11

12 The Stock Exchange may accept the public float of between 15% and 25% if the company with an expected market capitalisation at the time of listing over HK$10 billion. In case of EL has more than one class of shares are listing and will apply for a new class of shares for listing. Provided that the total number of issued shares of EL held by public is 25% or more, the Stock Exchange may accept the public float of 15% for such new class of shares if the expected market capitalisation at the time of listing of not less than HK$50 million for Main Board or HK$30 million for GEM. The Listing Rules provide that the core connected persons of the company will not be regard as the public and shares held by a core connected person will not be considered as being in public hands. Core connected person means a director, chief executive or substantial shareholder of the company or any of its subsidiaries or a close associate of any of them. The SEHK will not recognise a person as a member of the public if this person is: i. any person whose acquisition of shares has been financed directly or indirectly by a core connected person; or ii. any person who is accustomed to take instructions from a core connected person in relation to the acquisition, disposal, voting or disposition of shares of the company registered in his name or otherwise held by him. Conclusion It is not true to say that listing of shares on SEHK means selling all the company s shares to the public because Eugene, as a shareholder and a director of EL, may hold shares in EL so long as EL meets the public float requirement. However, Eugene needs to accept that he will lose a certain degree of control in EL, since certain transactions may require the prior approval of EL's independent shareholders. 12

13 2. (b) Explain to Eugene and advise the type of listing method (i.e. IPO or introduction) that is most suitable for EL. (10 marks) (Total: 20 marks) Ans (b) An initial public offering (IPO) is the most common method of listing. Listing by introduction is another way. SEHK s procedures for vetting and approving a new listing by introduction are identical to those for IPOs. IPO An offer for subscription by IPO means a company offers new shares to the public for subscription and the interested members of the public subscribe for the shares during the IPO. Funds raised from the issue of new shares will generate proceeds for the company's future use. Introduction A company may also list on the SEHK by way of introduction. Introduction is generally appropriate in the following circumstances: (a) Where the shares of the company concerned have already been listed on another stock exchange (for instance, the company is already listed on an overseas stock exchange but is now seeking a listing in Hong Kong for the purpose of increasing its recognition and enhancing its corporate image); (b) Where the shares of the company are distributed in specie by a company to its shareholders or to the shareholders of another listed company (for instance, spinning-off a significant business operation from an already-listed company); or (c) Where a holding company is formed and its shares are issued in exchange for those of listed subsidiary. 13

14 In these situations the company's shares are already widely held by a large number of shareholders prior to listing. There will not be any new shares to be offered to the public for subscription. The company will not raise funds through this way of listing. Conclusion Due to the non-fund raising nature of introduction, this listing method may not be a good choice for EL. Offering EL s new shares to the public for subscription by IPO is more suitable. 14

15 3. Gofulo Limited (GL) is a Hong Kong company incorporated in The following is an extract from GL s articles of association: The directors shall provide for the safe custody of the seal, which shall only be used by the authority of the directors, and every instrument to which the seal shall be affixed shall be signed by a director and shall be countersigned by the secretary or by a second director or by some other person appointed by the directors for the purpose. Mr Yan, a director of GL, is negotiating an investment project. GL is required to execute the following agreement and deed under the common seal early next week: 1. Co-operation agreement with business partners (the Agreement); and 2. Mortgage deed with a bank (the Deed). Mr Yan has just found that the common seal is broken and needs to be repaired. This will take approximately two weeks. Mr Yan is aware that the Companies Ordinance (Cap. 622) specifies some provisions governing the use of common seal and he is worried about the validity of executing the Agreement and the Deed without affixing the common seal. REQUIRED: 3. (a) Discuss the validity of executing the Agreement and the Deed without affixing the common seal. (13 marks) Ans (a) 1. The Companies Ordinance (Cap 622) (CO) has abolished the mandatory requirement for a company to have a common seal. 2. The requirement for keeping and using the common seal is no longer mandatory. Thus, keeping and using a common seal has become optional. 15

16 3. Pursuant to section 127 of the CO, if a company keeps a common seal, the company may choose to execute a document under its common seal or, alternately without using its common seal. 4. If a company chooses to execute a document under its common seal, the seal must be affixed in accordance with the provisions of its articles. 5. If a company chooses to execute a document without a common seal, a company may execute the document in the following manner pursuant to section 127(3) of the CO: (a) in the case of a company with only one director, by having it signed by the director on the company s behalf; or (b) in the case of a company with two or more directors, by having it signed on the company s behalf by: (i) the two directors or any two of the directors; or (ii) any of the directors and the company secretary of the company. 6. Section 127(5) further provides that a document signed in accordance with section 127(3) and expressed to be executed by the company has effect as if the document had been executed under the company s common seal. 7. Under section 128(1), a company may execute a document as a deed without using its common seal by: (a) executing it in the manner in accordance with section 127; (b) having it expressed to be executed by the company as a deed; and (c) delivering it as a deed. 16

17 8. Although GL s articles of association provide the manner in which the common seal shall be affixed, GL may rely on sections 127(3) and (5) of the CO to execute the Agreement and the Deed without affixing a common seal even without amending the article because section 127(3) provides an alternative method of executing documents. 9. Thus, execution the Agreement and the Deed without the common seal is considered valid provided that the Agreement and the Deed are executed in accordance with sections 127 and (b) Advise Mr Yan whether GL should or should not adopt a new common seal, and what actions and resolutions should be taken and passed by GL on this matter. (7 marks) (Total: 20 marks) Ans (b) 1. The CO gives flexibility to companies and allows them to keep, adopt and use their common seals, though the requirement is no longer mandatory. There is no specific provision in the CO on any procedural requirement for a company to adopt or cancel its common seal. 2. The procedures for adopting or cancelling a common seal are a matter for the company to decide, having regard to the applicable provisions in its articles and the usual practice and procedures for adoption or cancellation of a common seal. 3. GL may execute any documents either without a common seal or with a common seal. If GL decides to execute any documents without a common seal in the future, no action is required. 4. If GL decides to keep and adopt a new common seal, before it can be affixed to any documents the new common seal must be adopted and authorised by the following board resolutions: 17

18 Cancelation of old common seal RESOLVED that the old Common Seal of the company be cancelled and destroyed. Adoption of new common seal FURTHER RESOLVED that the new Common Seal, an impression of which appears in the margin hereof, be and is hereby adopted as the Common Seal of the company. Execution of common seal RESOLVED that the Agreement and the Deed be and are hereby approved and that two Directors or any one Director and the Company Secretary of the Company be and are hereby authorised to execute and affix the Common Seal of the Company to the Agreement and the Deed. 18

19 4. Xabat Holdings Limited (XHL) is a Mainland Chinese company whose shares are listed on the main board of Stock Exchange of Hong Kong. The following diagram illustrates the shareholding structure of XHL: Bakko Limited Cadam Limited Public Float Mr Xian 5% 31% 64% Xabat Holdings Limited Manuel Yip 10% 10% 80% Abarran Limited Mr Xian is the chief executive officer of XHL. Abarran Limited (AL) is a private company incorporated in Hong Kong. Manuel Yip is a shareholder of AL and he does not have any relationship with XHL or with any connected persons of XHL. Mr Que is Mr Xian s cousin and a past director of XHL. He resigned as a director of XHL on 1 July REQUIRED: 4. (a) (i) Explain the differences between the following terms pursuant to Chapter 14A of Main Board Listing Rules: substantial shareholder and controlling shareholder connected subsidiary and commonly held entity (4 marks) (ii) Identify the connected persons of XHL in the above diagram and advise the reason of the connection. Ans (a) Differences between substantial shareholder and controlling shareholder (4 marks) The term substantial shareholder refers to a person, or a corporation, who is entitled to exercise or control the exercise of 10% or more of the voting power at 19

20 any general meeting of XHL. The term controlling shareholder refers to any person, or a corporation, who is: (1) entitled to exercise or control the exercise of 30% or more of the voting power at the general meeting of XHL, or (2) in a position to control the composition of a majority of the board of directors of XHL. Differences between connected subsidiary and commonly held entity The term connected subsidiary refers to a non-wholly owned subsidiary of XHL where any connected persons of XHL can exercise or control the exercise of 10% or more of the voting power at such a subsidiary s general meeting. The term commonly held entity refers to a company whose shareholders include: (1) XHL or its subsidiaries; and (2) any connected persons of XHL who can exercise or control the exercise of 10% or more of the voting power at any general meeting of that company. Identify the connected persons of XHL The following persons or entities are connected persons of XHL pursuant to Chapter 14A of the listing Rules: Name of person/entity Reasons Mr Xian Being the chief executive officer of XHL Cadam Limited Being a substantial shareholder of XHL holding more than 10% of the issued shares. 4. (b) Critically analyse whether XHL entering into the following agreements will constitute a connected transaction for XHL: (i) A loan agreement with AL, under which XHL will provide a short-term loan to AL; (4 marks) 20

21 (ii) A share transfer agreement with Manuel Yip, under which XHL will acquire 2% of AL s issued shares from Manuel Yip; and (4 marks) (iii) A co-operation agreement with Mr Que, under which XHL and Mr Que will set up a joint venture for a business project. (4 marks) (Total: 20 marks) Ans (b) Analyse whether XHL entering into the following agreements will constitute connected transactions for XHL For general interpretation, any transaction between a listed company and its connected person is a connected transaction. However, some transactions between XHL, a listed company, and independent third parties will also constitute connected transactions pursuant to Chapter 14A of Listing Rules by the reasons mentioned in the following parts (i) and (ii): (i) A loan agreement with AL, in which XHL will provide a short-term loan to AL AL is not a connected person of XHL. Mr Xian is a connected person of XHL. Both XHL and Mr Xian are shareholders of AL. Mr Xian holds 10% of shareholding in AL. Thus, AL is a commonly held entity of XHL pursuant to rule 14A.27. The provision of loan is a financial assistance pursuant to rule 14A.24(4). The financial assistance provided by XHL to AL is a connected transaction pursuant to rule 14A.26. (ii) A share transfer agreement with Manuel Yip, in which XHL will acquire 2% of AL s issued shares from Manuel Yip 21

22 Manuel Yip is an independent third party and not a connected person of XHL. AL is 10% owned by XHL, 10% by Mr Xian, and 80% by Manuel Yip. Mr Xian is a controller of XHL pursuant to rule 14A.28(1), where controller means a director, chief executive or controlling shareholder of XHL. AL is a commonly held entity of XHL pursuant to rule 14A.27 and AL s substantial shareholder includes a controller of XHL. XHL acquiring an interest in AL from Manuel Yip, who is not a connected person, is a connected transaction pursuant to rule 14A.28. (iii) A co-operation agreement with Mr Que, in which XHL and Mr Que will set up a joint venture for a business project Mr Que is a past director of XHL and resigned more than 12 months ago. He is not a connected person of XHL pursuant to rule 14A.07(2). However, Mr Que is Mr Xian s cousin. Thus, Mr Que is a deemed connected person of XHL by virtue of being a relative of Mr Xian pursuant to rule 14A.21(1). Entering into an agreement to set up a joint venture is a transaction pursuant to rule 14A.24(5). Thus, XHL entering into a co-operation agreement with Mr Que, a deemed connected person, to set up a joint venture constitutes a connected transaction for XHL. 22

23 5. Jason Chan, on behalf of his father, Ken Chan, received a notice of a general meeting issued by Uobby HK Limited (Uobby), a private company incorporated in Hong Kong. Ken is a registered member of Uobby holding 2,000 shares, representing 20% of the issued shares of Uobby. Unfortunately, Ken passed away in an accident last week. REQUIRED: Jason intends to attend and vote at the general meeting of Uobby. However, he is not a registered member of Uobby. 5. (a) Discuss the eligibility of Jason to attend the general meeting of Uobby and advise Jason what actions he should take. (6 marks) Ans (a) Jason is not a registered member of Uobby and he is not eligible to attend and vote at the general meeting of Uobby unless he has completed the following registration before the time fixed for the general meeting: Jason should notify Uobby in writing that he wishes to be registered as a member of Uobby in respect of Ken s 2,000 shares by submitting sufficient evidence of the grant of probate of the will or letters of administration to Uobby. According to section 158 of the Companies Ordinance, a director of Uobby must within two months of receiving Jason s notification either: (a) register Jason as a member of Uobby in respect of the shares; or (b) send Jason notice of refusal of registration. If a director of Uobby refuses to complete the registration, Jason may request a statement of the reasons for the refusal. Then Uobby must, within 28 days after receiving Jason s request: (a) send Jason a statement of the reasons; or (b) register Jason as a member of Uobby in respect of the shares. 23

24 Moreover, Jason may apply to the Court for an order to register him as a member of Uobby in respect of the shares, if the Court is satisfied that the application is well-founded. After Jason s name is duly registered in the Register of Members of Uobby, Jason will be eligible to attend and vote at the general meeting because only persons whose names registered in the Register of Members of Uobby before the time fixed for the general meeting are eligible to attend and vote. 5. (b) Critically analyse the differences between the transfer of shares and the transmission of shares. (14 marks) (Total: 20 marks) Ans (b) The differences between transfer of shares and transmission of shares are as follows: Transfer of shares Transmission of shares Meaning: Transfer means transferring the shares in the name of a shareholder to another person on a voluntary basis. Transmission of shares means the passing of property or title in shares by the operation of law from a shareholder to his legal representative on the happening of a certain event like death, insolvency or lunacy. Nature of action: It is a deliberate action taken by a shareholder. It is not a deliberate action of a shareholder, but a result of operation of law after the shareholder dies or becomes insane or bankrupt. Who takes initiative: The transferor or transferee takes initiative. The legal heir of the deceased shareholder takes the initiative. Parties involved: Two parties, i.e. the transferor and transferee to the transfer of shares are involved. The legal heir of the deceased shareholder is involved. Documents Instrument of transfer, and Sold and Bought Notes 24 Certain documents such as a court order of insolvency,

25 required: have to be duly executed by the transferor and transferee. probate, letter of administration or death certificate are required for the transmission of shares. Stamp duty: Stamp duty is payable on the market value of shares. No stamp duty is payable on the transmission of shares. Consideration: There must be an adequate consideration for the transfer of shares, unless they are transferred by way of gift. The question of consideration does not arise in the case of transmission of shares, as it is due to the operation of law. Company s right of refusal: The directors of the company can refuse the transfer of shares on certain grounds. Transmission of shares cannot be refused because it is conducted under the operation of the law or upon the death of a member. 25

26 6. MasterGood Holding Limited was incorporated in the Cayman Islands. It is registered as a non-hong Kong company and its shares are listed on the Main Board of the Hong Kong Stock Exchange (SEHK). Katy Leung holds the following positions in the following roles for the company: 1. company secretary; 2. authorised representative (under the Companies Ordinance) as the company is a non-hong Kong company; and 3. authorised representative (under the Listing Rules) as the company s shares are listed on the SEHK. Katy has tendered her resignation to Eddie Yu, chairman of the board of directors, and plans to leave Hong Kong for a long vacation. Eddie is unfamiliar with the concept of authorised representative and he queries why Katy may act as the authorised representative under the Companies Ordinance and the Listing Rules. REQUIRED: Advise Eddie of the requirements and responsibility of an authorised representative under the Companies Ordinance and the Listing Rules, and explain whether the role of the authorised representative under the Companies Ordinance and the Listing Rules may be taken on by two different persons. (Total: 20 marks) Ans Under the Companies Ordinance Every non-hong Kong company registered in Hong Kong must authorise at least one of the following persons/firms to be its authorised representative: 26

27 i. a natural person who resides in Hong Kong, ii. a solicitor corporation as defined by section 2(1) of the Legal Practitioners Ordinance (Cap. 159), iii. a corporate practice as defined by section 2(1) of the Professional Accountants Ordinance (Cap. 50), or iv. a firm of solicitors or practicing certified public accountants (section 774 of the Companies Ordinance). The authorised representative is responsible for accepting on the company s behalf service of any process or notices required to be served on the company (section 774 of the Companies Ordinance). The following forms must be filed with the Companies Registry: Application for Registration as Registered Non-Hong Kong Company (Form NN1) within one month after the appointment of the first authorised representative and establishment of a place of business of a non-hong Kong company in Hong Kong. Notification of Termination of Authorisation of Authorised Representative of Registered Non-Hong Kong Company (Form NN2) within one month after the termination date of the authorised representative, i.e. the date on which either a termination notice is given by the company to the authorised representative (Notice) or the authorised representative resigns. The authorised representative shall cease to act on the expiry of 21 days from the date of filing of the Form NN2 with the Companies Registry or the date of termination of the authorisation stated in the copy of the Notice submitted with the filed form, whichever is later. Return of Change of Authorised Representative of Registered Non-Hong Kong Company (Form NN8) within 1 month after the date of the change of authorised 27

28 representative Return of Change in Particulars of Authorized Representative of Registered Non-Hong Kong Company (Form NN8C) within 1 month after the date of the change of in particulars of authorised representative Under the Listing Rules Every listed company must appoint two authorised representatives. Unless agreed by the Hong Kong Stock Exchange in exceptional circumstances, the two authorised representatives should either be two directors or one director and the company secretary of the company (rule 3.05 of the Listing Rules). The authorised representative is responsible for acting at all times ( particularly before the commencement of trading in the morning) as the company s principal channel of communication with the Hong Kong Stock Exchange. The authorised representatives must provide the Hong Kong Stock Exchange with their personal contact details including home, office, mobile and other telephone numbers, address, correspondence address (if the authorised representatives are not based at the registered office), facsimile numbers, and any other contact details prescribed by the Hong Kong Stock Exchange from time to time (rule 3.06(1) of the Listing Rules). The authorised representatives should ensure that suitable alternates are appointed whenever they are outside Hong Kong. The Hong Kong Stock Exchange must be informed in writing of how such alternates may be contacted (rule 3.06(2) of the Listing Rules). The listed company should not terminate the role of authorised representative until a replacement has been appointed. Both the listed company and the former authorised representative should immediately notify the Hong Kong Stock Exchange for the termination, stating the reason why the appointment was terminated. 28

29 Further, the listed company and the new authorised representative should immediately notify the Hong Kong Stock Exchange of the new authorised representative appointment (rule 3.06(4) of the Listing Rules). The Authorised Representatives/Company Secretary Form (Form FF001M) with the authorised representative s personal contact details must be lodged with the Hong Kong Stock Exchange. No announcement needs to be published for a mere change of authorised representative. Conclusion A registered non-hong Kong company which is listed in Hong Kong can appoint its company secretary (one person) as its authorised representative to perform the dual role (i.e. the role under the Companies Ordinance and Listing Rules). This dual role may also be undertaken by two different persons so long as they fulfill the relevant requirements for their appointments. END 29