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 2011 Suggested Answers 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 Q1. Andy, Ben, Joyce and Kenneth were classmates when they studied fashion design at university nearly ten years ago. During their studies, they dreamed that one day they would have their own business selling fashion of their own design. Their dream has now come true now. They have recently incorporated a private company limited by shares to sell their fashion in the company name of ABJ & K Fashion Limited. The date of incorporation is 11 February As well as investing their own funds in the company themselves, they have invited Andy s aunt, Mrs. Chiu, to invest in the company. Both the authorised and issued capital is 3,000,000 ordinary shares of $1 each. Andy, Ben, Joyce, Kenneth and Mrs. Chiu are the founders of the company and the shareholdings are the ratio 2:2:2:3:1 respectively. All of them except Mrs. Chiu are the first directors of the company. Kenneth and Joyce are the chairman of the board and the first secretary of the company respectively. Messrs. Tong & Cheung & Co. will be appointed as the auditors and tax representative of the company. The financial year end will be fixed at 30 June. The registered office is situated at 3/F, 22 Tai Yau Road, Hong Kong. The quorum of directors meetings is two as fixed in the articles of association of the company. The board of directors appointed their friend, Jenny, as an additional director of the company on 25 February Jenny has experience in the fashion industry. According to the company s articles of association, a share qualification of 100,000 shares is required for every director of the company. Jenny acquired her required shares on 23 May Jenny signed an agreement on behalf of the company on 10 May 2011 to rent premises as one of the company s retail outlets. On 27 May 2011, the company received bad news from Andy: His aunt, Mrs. Chiu, passed away suddenly two weeks ago. Andy notified the company that Mrs. Chiu s son wished to have Mrs. Chiu s shares registered in his name. In addition, Joyce s husband has just been informed by his employer that he needs to move to Shanghai to set up a new business there. Joyce informed ABJ & K Fashion Limited that she would go with her husband to Shanghai and would primarily live in Shanghai in the near future. She plans to remain in her positions as both the secretary and a director of the company. However, she intends to 2

3 appoint her sister to be her representative to attend board meetings and to act on her behalf as a director if she is not in Hong Kong. REQUIRED: Q1 (a) Draft the minutes of the first board meeting for ABJ & K Fashion Limited. (Note: The appointment of Jenny as an additional director is NOT included in the minutes of the first board meeting) Ans (a) ABJ & K FASHION LIMITED (the Company ) Minutes of the First Board Meeting of the Company held at 3/F, 22 Tai Yau Road, Hong Kong on (Date) at (time). PRESENT: Kenneth (Chairman of the meeting) Joyce (Secretary of the meeting) Andy Ben Chairman Kenneth was in the chair. Quorum The quorum of two was present. Incorporation of Company There was tabled at this meeting the Certificate of Incorporation of the Company dated 11 February 2011 together with a printed copy of the Memorandum and Articles of Association of the Company. Common Seal It was resolved that the common seal, an impression of which is affixed in margin hereof, be adopted as the Common Seal of the Company. First Directors It was noted that the following persons were named in the Incorporation 3

4 Form (NC1) as the first directors of the Company. Kenneth Andy Ben Joyce Registered Office It was resolved that the registered office of the Company be situated at 3/F, 22 Tai Yau Road, Hong Kong. Secretary It was noted that Joyce was named as the first secretary in the Incorporation Form (NC1). Financial Year End It was resolved that the financial year end of the Company be fixed at 30 June and the first accounts of the Company be made up to 30 June Auditors It was resolved that Messrs. Tong & Cheung & Co., Certified Public Accountants, be appointed as the first auditors of the Company at a fee to be agreed with the directors. Tax Representative It was resolved that Messrs. Tong & Cheung & Co., Certified Public Accountants, be appointed as the tax representative of the Company. Founder Members Shares It was noted that the authorised and issued capital of the Company be $3,000,000 divided into 3,000,000 ordinary shares of $1 each. The founder members to the Memorandum of Association had taken up shares as follows: Andy Ben Joyce Kenneth 600,000 shares 600,000 shares 600,000 shares 900,000 shares 4

5 Mrs. Chiu 300,000 shares It was resolved that the affixing of the common seal of the Company onto the share certificates issued in connection herewith be approved and that any one director be authorised to sign the share certificates. End of Meeting There being no further business, the Chairman declared the meeting closed. Chairman Q1 (b) Discuss the validity of both the appointment of Jenny as a director and the agreement signed by Jenny. Ans (b) Jenny should acquire the qualification shares of 100,000 within two months after her appointment as a director on 25 February 2011 if no shorter period is required by the company s articles of association (section 155(1) of the Companies Ordinance). Although she acquired these shares on 23 May 2011, in fact her position as a director should have been vacated immediately after the end of the two-month period, i.e. on 24 April However, the agreement signed by Jenny on behalf of the company is valid notwithstanding the defect that afterwards be discovered in her qualification (section 157 of the Companies Ordinance). Q1 (c) Advise Mrs. Chiu s son of the ways for dealing with Mrs. Chiu s shares in ABJ & K Fashion Limited and the necessary documents to be submitted to the company in order to have Mrs. Chiu s shares registered in his name. Ans (c) If Mrs. Chiu has left a will and appointed executor(s), the probate should be submitted to ABJ & K Fashion Limited. However, if Mrs. Chiu died intestate, a letter of administration should be submitted to the company before dealing with the shares. If Mrs. Chiu s son is the executor or administrator, he may ask the company 5

6 to enter his name in the register of members by submitting to the company a letter of request if the company s articles of association permit. Alternatively, he can present to the company for registration a stamped instrument of transfer transferring the shares to his name. Q1 (d) Advise the board of directors of ABJ & K Fashion Limited on Joyce s intention to: i. remaining in her position as the secretary and a director after leaving Hong Kong; and ii. delegating her authority as a director to her sister, and relevant requirement(s) and procedures to be followed. Ans (d) If Joyce primarily lives in Shanghai, she cannot remain in place as the company secretary. The secretary of a company should ordinarily reside in Hong Kong (section 154 of the Companies Ordinance). However, she can remain in place as a director as there is no such requirement for a director. As there is no specific qualification requirement for being the secretary of a private company, the board of directors may consider appointing any one of them or any other person who ordinarily resides in Hong Kong as the secretary. The company can also appoint a body corporate with a registered office or place of business in Hong Kong to be the secretary. Joyce can appoint her sister as her alternate director. However, Joyce has no power to delegate her authority to an alternate director unless this is authorized by the articles of association of ABJ & K Limited or the power to do so is included in the terms of her appointment. If Joyce has the power to appoint an alternate director: the appointment is usually required to be in writing a board resolution should be passed to approve the appointment a Form D2A must be filed with the Companies Registry within 14 days the Register of Directors should be updated 6

7 SECTION B (Answer THREE questions from this section) Q2. ABC Great Trading Limited is a private company limited by shares incorporated on 4 August Its business is manufacturing and retailing garments. The company has a number of chain stores in which it sells its garments. Annie, Beatrice and Catherine are the only directors and shareholders of the company. The major supplier of the company is Beatrice Trading Limited, a Hong Kong company in which Beatrice is the sole director and shareholder. The shareholders of ABC Great Trading Limited find that maintaining the business is not easy as the competition in the garment industry is severe. The company has a cashflow problem and always delays payment to Beatrice Trading Limited. The shareholders are now considering whether to terminate the company. The assets of the company including machinery and finished products which, if realised, will be sufficient to settle the amount due to Beatrice Trading Limited, the only creditor of the company. REQUIRED: Q2 (a) Critically analyse different modes available for terminating ABC Great Trading Limited and advise the most appropriate method. Ans (a) The different modes for terminating ABC Great Trading Limited include: Members voluntary winding up If ABC Great Trading Limited s assets (including machinery and finished products) can be realised and are sufficient to settle the company s liabilities in full within a period not exceeding 12 months from the commencement of the winding up, a members voluntary winding up can be adopted to terminate the company. As ABC Great Trading Limited has more than two directors, a majority of the directors of the company must execute a certificate of solvency and state in the certificate that they have made full enquiry into the affairs of the company and have formed the opinion that the company will be able to pay its debts in full within a period not exceeding 12 months from the commencement of the winding up. 7

8 Creditors voluntary winding up Creditors voluntary winding up under section 228A or section 241 of the Companies Ordinance may be adopted for liquidating the company if the board of directors of ABC Great Trading Limited considers that the company is insolvent. Compared with the members voluntary winding up, this kind of winding up is not so time- and cost-efficient as the procedures are more complicated. The procedures include holding creditors meetings and appointing a committee of inspection if creditors think fit. Deregistration Under section 291AA of the Companies Ordinance, an application to deregister a private company (including a dormant company under section 344A) can be made if: All the members of the company agree to the deregistration The company has ceased to carry on business or ceased operation for more than three months immediately before the application The company has no outstanding liabilities Since ABC Great Trading Limited is a private company, if the company has ceased operation for more than three months and all the shareholders agree to the deregistration, an application can be made to deregister the company. However, this procedure is also subject to a waiver of debt executed by Beatrice Trading Limited for the amount owed by the company. Although a members voluntary winding up is more time- and cost-efficient than a creditors voluntary winding up, deregistration is the most appropriate way to dissolve ABC Great Trading Limited as the company does not need to go through the costly and timely winding up processes (e.g. appointment of liquidator) and does not need to publish relevant information in the gazette at the company s own cost (e.g. notice to creditors and notice of final meeting). 8

9 Q2 (b) Assume that the shareholders of ABC Great Trading Limited finally decide to cease the company s operations. However, they still want to maintain the company s existence as they have put a great deal of effort into the company and they are not sure whether they will start business up again in the near future. Propose and explain to the shareholders the most appropriate method to fulfil their requirements and advise them of the formalities they will need to follow. Ans (b) Under section 344A of the Companies Ordinance, a private company is allowed to declare itself a dormant company if it has not entered into a relevant accounting transaction or it specifies a date after which it will not enter into a relevant accounting transaction. A dormant company is exempt from the statutory requirements of holding annual general meetings, filing annual returns, appointing auditors and preparing audited accounts; however the company still needs to pay a business registration fee every year. Declaring ABC Great Trading Limited dormant is therefore an efficient way of maintaining the company if no relevant accounting transaction occurs. The company will then be exempt from the above-mentioned statutory requirements and paying the relevant fees, e.g. audit fee, to maintain its existence. If the shareholders recommence the company s business in the future, they would not need to go through the incorporation procedures again in order to re-activate the company. In order for the company to become dormant, the following formalities should be followed: Convene and hold a board meeting to authorize the convening of a general meeting and the issue of a notice Despatch a notice to those members who are entitled to attend the meeting Pass a special resolution at the general meeting to: Declare that the company will become dormant either as from the date of delivery of the special resolution to the Companies Registry or as from a specified date 9

10 Authorize directors to file the special resolution to the Companies Registry Declare that prior to the company ceasing to be dormant, the directors shall deliver to the Companies Registry a further special resolution declaring that the company intends to enter into a relevant accounting transaction Thereafter, the special resolution must be filed with the Companies Registry within 15 days. 10

11 Q3. Silver & Bronze Limited is a private company limited by shares with 10,000 issued and fully paid-up voting shares. Anderson, Benny, Charlie, Dickson and Eddie are the shareholders of the company. The equity ratio is 3:3:1:1:2. Charlie and Dickson are the only directors of the company. On 1 February 2011, Anderson and Benny asked the directors of the company to convene an extraordinary general meeting to consider altering the company s articles of association. At the beginning of March 2011, Anderson and Benny found that the directors had still not yet started the process to convene a general meeting. They convened a general meeting themselves on 6 March 2011, arranging for the meeting to be held on 3 April Eddie, who intended to vote for the resolution, found that he would not be able to attend the meeting. He appointed his wife, Janet, to attend the meeting on his behalf. All the shareholders attended the meeting personally on 3 April 2011 except for Eddie, who had appointed Janet as his proxy to attend and vote on his behalf. Even though Anderson, Benny and Janet agreed to the resolution for the alteration of the company s articles of association at the extraordinary general meeting, Charlie and Dickson argued that the resolution could not be passed as Janet was not a shareholder of the company and therefore she could not vote. They also argued that the general meeting was not properly convened. REQUIRED: Comment on the validity of the above issues with regard to the laws of meeting. Ans Section 113 of the Companies Ordinance provides that members holding not less than one-twentieth of the paid-up capital and carrying the right of voting at a general meeting of a company can ask the directors to convene a general meeting. If the directors do not within 21 days from the date of the deposit of the requisition proceed duly to convene a meeting for a day not more than 28 days 11

12 after the date on which the notice convening the meeting is given, the requisitionists, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a meeting, but any meeting so convened shall not be held after the expiration of three months from the date of the deposit of the requisition. As the directors of Silver & Bronze Limited did not proceed to convene a general meeting to consider altering the company s articles of association within 21 days after the deposit of the requisition for convening a general meeting on 1 February, Anderson and Benny (holding not less than one-twentieth of the paid-up capital with voting rights) could convene a general meeting themselves on 6 March for the meeting to be held on 3 April (within three months from the date of the deposit of the requisition). The requisition should state the objects of the meeting and should be signed by Anderson and Benny, the requisitionists, and deposited at the registered office of the company (section 113 of the Companies Ordinance). A company may by special resolution alter its articles of association (section 13(1) of the Companies Ordinance) and not less than 21 days' notice, specifying the intention to propose the resolution as a special resolution, is required for the relevant meeting (section 116 of the Companies Ordinance). As Anderson and Benny had convened the general meeting on 6 March for the meeting to be held on 3 April, not less than 21 days' notice had been given for the meeting in accordance with section 116 of the Companies Ordinance. Section 114A provides that if the articles of the company do not make other provision, two members personally present shall be a quorum. Article 55 of Table A mentions that two members present in person or by proxy shall be a quorum. As all the five shareholders of Silver & Bronze Limited attended the general meeting personally or by proxy, a quorum had been formed if the company adopted Table A. Section 114C of the Companies Ordinance also provides that, except for companies not having a share capital, any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a member or not) as his proxy to attend and vote at the meeting instead of him. Unless the articles otherwise provide, a proxy shall not be entitled to vote except on a poll. So even though Janet is not a member, she 12

13 could still act as a proxy for Eddie to attend the meeting subject to lodging a duly completed and signed proxy form with the company s office within the prescribed time limit as stated in the company s articles of association. A resolution put to the vote of the general meeting shall be decided on a show of hands unless a poll is demanded (article 60 of Table A) and on a show of hands every member present in person shall have one vote, and on a poll every member shall have one vote for each share of which he is the holder (article 64 of Table A). On a poll votes may be given either personally or by proxy (article 69 of Table A). So if Table A is adopted by Silver & Bronze Limited, Janet could not vote on a show of hands (section 114C of the Companies Ordinance). Besides, the resolution for the alteration of the company s articles of association could not be passed on a show of hands if only Anderson and Benny voted for the resolution. However, Janet could demand or join in demand for a poll (section 114D of the Companies Ordinance). So, Janet, Anderson and Benny could demand or join in demand a poll (article 60 of Table A) if the resolution could not be passed by a show of hands. On a poll, if Anderson, Benny and Janet voted for the resolution (8,000 out of 10,000 votes, i.e. not less than three-fourths of the votes cast), the special resolution for the alteration of the company s articles of association could be successfully passed (section 116 of the Companies Ordinance). 13

14 Q4. Brilliant & Excellent Limited is a Hong Kong private company limited by shares. It has engaged in watch manufacturing since its incorporation in The company s issued and paid-up capital is $150,000,000 divided into 150,000,000 ordinary shares of $1 each. David, Edward and Freddie have been the company s only directors and shareholders in the ratio of 3:3:4 since the company s incorporation. They plan to raise share capital through an initial public offer on the Hong Kong Stock Exchange to finance the company s future development. At the initial public offer, the company will offer for subscription 100,000,000 new ordinary shares at $4 per share. David is stationed in Hong Kong and is responsible for the company s Hong Kong operations. Edward and Freddie primarily live in Mainland China from where they oversee the operations of the company s factories. The board of directors plans to appoint two independent non-executive directors. One is Peter, a brother of Freddie. Another one is Patrick, a former audit manager of the company s auditor who has recently resigned. An extract from the company s audited financial statements for year ended 31 March for the last three years is shown below: $ million $ million $ million Revenue from operating activities Profit attributable to shareholders Cash flow from operating activities REQUIRED: Discuss if Brilliant & Excellent Limited can satisfy the qualifications for listing on the Main Board of the Hong Kong Stock Exchange by evaluating 14

15 the different criteria it needs to meet the basic listing requirements. Ans The following should be considered when determining if Brilliant & Excellent Limited satisfies the listing qualifications: The company must meet the profit test [Rule 8.05(1) of Listing Rules], market capitalization/revenue/cashflow test [Rule 8.05(2)] or market capitalization/revenue test [Rules 8.05(3)]. Brilliant & Excellent Limited is able to meet the profit test since: 1) the profits attributable to shareholders of the company for 2009, 2010 and 2011 are $18 million, $20 million and $25 million respectively which satisfy the requirement of at least $50 million in the last three financial years with at least $20 million in the most recent year, and aggregate profits of at least $30 million in the two preceding years) 2) management continuity for at least the three preceding financial years 3) ownership continuity and control for at least the most recent audited financial year However, Brilliant & Excellent Limited is unable to satisfy the market capitalization/revenue/cashflow test as the revenue of the company for 2011 is $490 million which is below the requirement of at least $500 million for the most recent audited financial year and the market capitalization is only $1,000 million [( ) million x $4] which is below the requirement of $2 billion at the time of listing; this is despite the fact that the company is able to meet the requirement of positive cashflow from operating activities of at least $100 million in aggregate for the three preceding financial years. Brilliant & Excellent Limited is also unable to satisfy the market capitalization/revenue test as the company s revenue for 2011 is below the requirement of at least $500 million for the most recent audited financial year and the market capitalization is below the requirement of $4 billion at the time of listing. The expected market capitalization of Brilliant & Excellent Limited is $1,000 million which satisfies the requirement of the expected market capitalization of at least $200 million at the time of listing. 15

16 The expected market capitalization at the time of listing which is held by the public of Brilliant & Excellent Limited will be $400 million (100 million x $4) which meets the requirement of at least $50 million and which represents 40% (100/250 million x 100%) which is above the requirement of at least 25% total issued share capital held by the public. The company must have sufficient management presence in Hong Kong. This normally means that at least two of its executive directors must be ordinarily resident in Hong Kong. Edward and Freddie are not ordinarily resident in Hong Kong as they primarily live in Mainland China. So, at least one additional executive director, who is ordinarily resident in Hong Kong, should be appointed as an executive director in addition to David to fulfil the listing requirement. A listed company should have at least three independent non-executive directors on the board and at least one of them must have appropriate professional qualifications or accounting or related financial management expertise. Although Patrick seems to have appropriate accounting expertise, the independence of both Patrick and Peter is likely to be questioned. This is because Patrick is a previous employee of the auditor of the company who has recently resigned while Peter is a brother of Freddie, a director and substantial shareholder of the company. The company should therefore appoint three other persons to be the independent non-executive directors, one of whom must possess appropriate accounting or related financial management qualifications. To conclude, the company can satisfy the qualifications for listing on the Main Board of the Hong Kong Stock Exchange through the profit test but needs to fulfil the conditions on the appointment of an additional executive director and appointment of three appropriate independent non-executive directors. 16

17 Q5. You are the company secretary of a corporation listed on the main board of the Hong Kong Stock Exchange. Thomas Wong, a non-executive director, has just been appointed as a member of both the company s remuneration and audit committees. The chairman of the board asks you to provide an induction to Thomas on his joining these committees. REQUIRED: With reference to the Hong Kong Listing Rules, write a memorandum to Thomas as an induction on his joining the remuneration and audit committees. (Instruction: Make any assumptions you think are necessary) Ans To: Mr. Thomas Wong From: (name), the Company Secretary Subject: Induction on joining the company s Remuneration and Audit Committees Date: (date) Thank you for joining the remuneration and audit committees of the company. I would like to take this opportunity to introduce the structure, roles and duties of the committees. Remuneration Committee The remuneration committee of the company now consists of the following members: Chan Woon Man (Committee Chairman & INED) Cheung Mei Kei (INED) Wong Shu Sing (INED) 17

18 Thomas Wong (NED) This complies with the Code on Corporate Governance Practices issued by the Hong Kong Stock Exchange requiring a majority of the members of the remuneration committee to be independent non-executive directors. The remuneration committee should consult the chairman and/or chief executive officer about the proposals relating to the remuneration of other executive directors and have access to professional advice if considered necessary. The company has formulated terms of reference of the remuneration committee which include the following duties: to make recommendations to the board on the company s policy and structure for all remuneration of directors and senior management and on the establishment of a formal and transparent procedure for developing policy on such remuneration to have the delegated responsibility to determine the specific remuneration packages of all executive directors and senior management and make recommendations to the board of the remuneration of non-executive directors to review and approve performance-based remuneration by reference to corporate goals and objectives resolved by the board from time to time to review and approve the compensation payable to executive directors and senior management in connection with any loss or termination of their office or appointment to ensure that such compensation is determined in accordance with relevant contractual terms and that such compensation is otherwise fair and not excessive for the company to review and approve compensation arrangements relating to dismissal or removal of directors for misconduct to ensure that such arrangements are determined in accordance with relevant contractual terms and that any compensation payment is otherwise reasonable and appropriate to ensure that no director or any of his associates is involved in deciding his own remuneration The remuneration committee should make available the above terms of reference, explaining its role and the authority delegated by the board. 18

19 Audit Committee The audit committee of the company now consists of the following members which complies with rule 3.21 of the Listing Rules: Chan Woon Man, FCCA (Committee Chairman & INED) Wong Shu Sing (INED) Wong Chi Fai (INED) Thomas Wong (NED) The committee comprises non-executive directors only, with a minimum of three members and at least one is an independent non-executive director with an appropriate professional qualification. The chairman of the committee is an independent non-executive director. I am the secretary of the audit committee and responsible for ensuring that full minutes of the committee meetings have been kept. Draft and final versions of minutes of the audit committee meetings are sent to all members of the committee for comment and records respectively, in both cases within a reasonable time after the meeting. The terms of reference of the audit committee include the following duties: to be primarily responsible for making recommendations to the board on the appointment, reappointment and removal of the external auditor, and to approve the remuneration and terms of engagement of the external auditor, and any questions of resignation or dismissal of that auditor to review and monitor the external auditor s independence and objectivity and the effectiveness of the audit process in accordance with applicable standards to develop and implement policy on the engagement of an external auditor to supply non-audit services to monitor the integrity of the company s financial statements and the company s annual report and accounts, half-year report and, if prepared for publication, quarterly reports, and to review significant financial reporting judgments contained in them members of the committee must liaise with the company s board of 19

20 directors, senior management and the qualified accountant and must meet, at least once a year, with the company s auditors the committee should consider any significant or unusual items that are, or may need to be, reflected in such reports and accounts and must give due consideration to any matters that have been raised by the company s qualified accountant, compliance officer or auditors to review the company s financial controls, internal control and risk management systems to discuss with the management the system of internal control and ensure that management has discharged its duty to have an effective internal control system to consider any findings of major investigations of internal control matters as delegated by the board or on its own initiative and management s response where an internal audit function exists, to ensure co-ordination between the internal and external auditors, and to ensure that the internal audit function is adequately resourced and has appropriate standing within the company, and to review and monitor the effectiveness of the internal audit function to review the group s financial and accounting policies and practices to review the external auditor s management letter, any material queries raised by the auditor to management in respect of the accounting records, financial accounts or systems of control and management s response to ensure that the board will provide a timely response to the issues raised in the external auditor s management letter to report to the board on the matters set out in this code provision to consider other topics, as defined by the board The audit committee should make available the above terms of reference, explaining its role and the authority delegated by the board. This induction brief aims to give you an introduction to the committees you are joining. I also attach the minutes of the two committees meetings over the past 12 months for your reference. I will be pleased to provide any appropriate information regarding the committees which you require. 20

21 Q6. You are the company secretary of Prosperous Future Development Limited, a private company incorporated in Hong Kong. Betty Fong, a shareholder holding 5,000 ordinary shares in the company, has just informed the board of directors that she has recently lost her share certificate No. 20. She therefore requests that the company issue a new share certificate as a replacement. Betty also tells the board that she is considering liquidating her investment in the company in order to finance her son s further studies. She therefore asks the board whether the company can buy back her shares for a consideration of $500,000. The company s distributable profits are $300,000. REQUIRED: Q6 (a) Write a reply letter to Betty explaining the formalities regarding the company s issue of a new share certificate in place of the lost one. (Instruction: A full letter is not required. You are only required to write the content of the letter) Ans (a) Re: Replacement of lost share certificate With reference to your reporting the loss of your share certificate No. 20 and requesting a replacement, we would like to advise you of the formalities regarding the replacement of the lost share certificate as follows: 1) Please submit an application for the issue of a new certificate, a letter of indemnity or a bank guarantee with a fee of (amount of fee, if any) covering the issue of a new certificate. 2) If all the documents under above item 1 are in order, we will arrange to pass a board resolution to approve the cancellation of the lost certificate and the issue of a new certificate. 3) We will also record the cancellation and issue of the certificate in the register of members. 21

22 4) Finally, we will issue a new share certificate and notify you to collect the new certificate when it is available. If you have any further queries, please do not hesitate to contact us. Q6 (b) Prosperous Future Development Limited asks Betty to sign a letter indemnifying the company in respect of the lost share certificate. Draft the indemnity letter to be signed by Betty. Ans (b) INDEMNITY FOR LOST SHARE CERTIFICATE To: Prosperous Future Development Limited (company address) I, Betty Fong of (registered address), do hereby request Prosperous Future Development Limited to issue a duplicate certificate to me for 5,000 shares of the Company registered in the name of Betty Fong, for the following original certificate being lost: Certificate No. No. of Shares Type of Shares 20 5,000 Ordinary In consideration of the Company agreeing to issue the duplicate certificate requested by me, I do hereby agree to keep indemnified the Company and hold the Company harmless from and against all claims, liabilities, losses, charges, damages, costs and expenses which may be made against or suffered or incurred by the Company by reason or in consequence of the issue of such duplicate certificate or otherwise howsoever in relation thereto. Date this 3 day of June 2011 SIGNED by Betty Fong ) in the presence of : ) ) Betty Fong 22

23 Q6 (c) Advise the board if it is feasible for the company to purchase Betty s shares. Ans (c) Fully paid shares may be purchased out of the company s distributable profits or out of the proceeds of a fresh issue of shares made for the purpose of a repurchase. Private companies may also make repurchases out of capital. If the consideration for the repurchase of Betty s shares is $500,000, then it exceeds the distributable profits, $300,000, by $200,000. The repurchase would then be partly out of capital. This can be done only if the is company is able to pay its debts for a year after the repurchase (section 49K of the Companies Ordinance). The repurchase of shares out of capital should also be authorised by the company s articles of association and approved by a special resolution in a general meeting. The company may also repurchase Betty s shares partly out of the proceeds of a fresh issue of shares. This should also be authorised by the company s articles of association and approved by a special resolution in a general meeting. In order to do this, there should be sufficient unissued authorised capital to cover the intended issue of new shares. Otherwise, an increase in authorised capital should be made. So Prosperous Future Development Limited can repurchase Betty s shares partly out of distributable profits, proceeds of a fresh of shares and/or out of capital subject to the fulfilment of the above conditions. END 23