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 2014 Suggested Answer The suggested answers are published for the purpose of assisting students in their understanding of the possible principles, analysis or arguments that may be identified in each question 1

2 SECTION A 1. Aba Limited, a private company incorporated in Hong Kong and limited by shares, is engaged in fashion design and clothing manufacturing for the European market. The founders are Mr. Chan and his wife, Mrs. Chan, who are the only directors and shareholders of Aba Limited. Mr. Chan is a famous fashion designer and Mrs. Chan is Aba Limited s chief operating officer. The company was established seven years ago. The business of Aba Limited has grown rapidly and the company has made handsome profits during these seven years. The main reason for the company s success has been due to the goodwill associated with Mr. Chan s name, as his fashion designs are widely welcomed by the market. Mr. Zhu, a famous designer in the PRC with more than ten years experience in fashion design, has approached Mr. Chan and made a proposal for a co-operation between him and Aba Limited. The following are the four key terms of the proposal: 1. Mr. Zhu helps Aba Limited to develop a market in the PRC. 2. Aba Limited s share capital is to increase, and Mr. Zhu shall acquire a total of 8% of the issued share capital at a fair value based on the company s latest audited financial statements. One-half of the 8% of the shares shall be allotted to Vivian Qi, Mr. Zhu s cohabiting girlfriend. 3. Aba Limited shall apply to list its shares on the main board of The Stock Exchange of Hong Kong Limited (the Stock Exchange ). 4. Mr. Zhu shall be appointed an executive director and Ms Qi, who has five years experience in fashion design, shall be appointed an independent non-executive director. Mr. Chan accepts Mr. Zhu s proposal in principal as he sees that this is the right time to capture the opportunity to expand Aba Limited s business into the PRC market. Mr. Chan also sees the advantage of raising capital to finance operations in the PRC market if Aba Limited were to list on the Stock Exchange. On the other hand, Mr. Chan is afraid of losing control of Aba Limited upon listing. As a result, he makes a counter-proposal regarding the structure and the composition of the board of directors. Mr. Chan proposes that he and Mrs. Chan 2

3 be designated as executive directors and that he should be the chairman of the board. He solely would have the authority to determine the composition of the board and the appointment of new directors. Mr. Chan proposes nominating the following persons to be the non-executive directors and the independent non-executive directors of Aba Limited for the purpose of satisfying the listing requirements: Non-executive director: Ms Ho, who is Mr. Chan s cousin, has been a housewife since she got married after graduating from university and has no traceable work experience. Independent non-executive directors: 1. Mr. Lee is a certified public accountant and is a former partner of Wong, Lee & Co., CPA, which has been Aba Limited s auditor for the past seven years. Due to poor health, Mr. Lee retired from Wong, Lee & Co., CPA eight months ago. 2. Mr. Yeung is a past executive officer of Aba Limited and was responsible for marketing. Due to personal reasons, Mr. Yeung resigned more than three years ago. He then was appointed as a director of Bee Limited, the supplier of Aba Limited. Mr. Chan proposes that Mr. Yeung be issued 1,000 shares in Aba Limited per annum as part of his remuneration package as an independent non-executive director. Moreover, Mr. Chan proposes that some board committees be formed, but not a nomination committee. He intends to act as the chairman of all board committees and also be the chief executive officer of Aba Limited. REQUIRED: 1. (a) As company secretary of Aba Limited, write a memorandum to Mr. Chan: (i) advising him of the problems with his proposed board composition; and (ii) presenting an analysis of the independence of the proposed independent non-executive directors, in accordance with the Listing Rules, for the purpose of listing of Aba Limited on the main board of the Stock Exchange. (16 marks) 3

4 Ans (a) Aba Limited Memorandum To : Mr. Chan From : Company Secretary Date : 6 June 2014 Subject : Proposed changes to board composition and appointment of new independent non-executive directors I. Composition of the board The board of directors usually comprises three types of director: executive director (ED), non-executive director (NED) and independent non-executive director (INED). Based on the proposals of Mr. Chan and Mr. Zhu, the board s new composition will be as follows: ED NED INED Mr. Chan Ms. Ho Ms. Vivian Qi Mrs. Chan Mr. Lee Mr. Zhu Mr. Yeung The new board will consist of total seven directors, namely three EDs, one NED and three INEDs. Listing Rule 3.10(1) The board must include at least three independent non-executive directors. The appointment of three INEDs (namely, Ms. Qi, Mr. Lee and Mr. Yeung) satisfies Listing Rules 3.10(1). However, their independence needs to be reviewed in accordance with Listing Rule 3.13 (details are set out in the answer to part II). Listing Rule 3.10A The company must appoint independent non-executive directors representing at least one-third of the board. The proportion of INEDs, i.e. three out of seven, meets the requirement that at 4

5 least one-third of the board are INEDs, in accordance with Listing Rule 3.10A Listing Rule 8.12 At least two executive directors must be ordinarily resident in Hong Kong. Mr. & Mrs. Chan are resident in Hong Kong, it satisfies Listing Rule If the board is aware of any non-compliance, additional ED shall be added to the new board as required by Listing Rule Listing Rule 3.10(2) At least one of the independent non-executive directors must have appropriate professional qualifications or accounting or related financial management expertise. Mr. Lee is a certified public accountant, so his appointment satisfies Listing Rule 3.10(2). However, Mr. Lee s independence needs to be reviewed in accordance with Listing Rule 3.13 (details are set out in the answer to part II). Listing Rule 3.09 Every director must have the character, experience and integrity required and should be able to demonstrate a standard of competence commensurate with his/her position as a director of a listed issuer. Mr. Chan, Mrs. Chan, Mr. Zhu, Ms Qi, Mr. Mr. Lee and Mr. Yeung have relevant work experience in fashion design and clothing manufacturing, so they probably satisfy the requirements of Listing Rule However, since Ms Ho has been a housewife since she got married after graduating from university and does not have any relevant work experience, her appointment as an NED may be questioned by the Stock Exchange in accordance with Listing Rule II. Independence of INEDs Every independent non-executive director must have the character, integrity, independence and experience to fulfill his/her role effectively. (Listing Rule 3.12) Assessing the independence of a non-executive director involves taking into account the factors set out in Listing Rule Independence is more likely to be 5

6 questioned if that person: (1) holds more than 1% of the total issued share capital of the company; (2) has received any interests in any company s securities as a gift or other financial assistance from a connected person or the company. However, the director will still be considered independent if he receives any interests in the company s securities as part of his director s fee; (3) is a director, partner or principal of a professional adviser which currently provides or has within one year immediately prior to the date of his proposed appointment provided services, or is an employee of such professional adviser, to the company; (4) has a material interest in any principal business activity of the listed group; (5) is on the board specifically to protect the interests of an entity whose interests are not the same as those of the shareholders as a whole; (6) is or was connected with a director, the chief executive or a substantial shareholder of the company within two years immediately prior to the date of his proposed appointment; (7) is, or has at any time during the two years immediately prior to the date of his proposed appointment been, an executive or director (other than an independent non-executive director) of the company; and (8) is financially dependent on the company. Appointment of Ms Qi as an INED Ms Qi s independence may be questioned by the Stock Exchange for the following reasons: (i) If she holds more than 1% of the total issued share capital of Aba Limited (Listing Rule 3.13(1)); (ii) If Mr. Zhu is appointed as the company s executive director, Ms Qi s relationship with Mr. Zhu may be an issue under Listing Rule 3.13(6), which provides that any person cohabiting as a spouse with a director is considered to be connected with that director; or (iii) Ms Qi is on the board specifically to protect the interests of Mr. Zhu, as stated in Listing Rule 3.13(5). Appointment of Mr. Lee as an INED 6

7 Mr. Lee is a former partner of Wong, Lee & Co., CPA, Aba Limited s auditor, and he retired eight months ago. Mr. Lee s independence is mostly to be questioned if his date of retirement is within one year immediately prior to the date of his proposed appointment as an INED of Aba Limited (Listing Rule 3.13(3)). Appointment of Mr. Yeung as an INED Mr. Yeung s independence may be questioned under Listing Rule 3.13(4) by virtue of his being a director of Bee Limited, a supplier of Aba Limited. However, Mr. Yeung s independence satisfies Listing Rules 3.13(7) and 3.13(2) as follows: (i) Mr. Yeung resigned as an executive officer of Aba Limited more than three years ago. This satisfies Listing Rule 3.13(7); and (ii) Mr. Yeung will still be considered independent if he receives shares from Aba Limited as part of his director s fee, as stated in Listing Rule 3.13(2). According to the above analysis, Ms Qi, Mr. Lee and Mr. Yeung do not satisfy the requirements of the Listing Rule 3.13 as being independent. The company should consider other appropriate persons to the board in order to meet the requirements of the Listing Rules. 1. (b) Name TWO board committees which shall be formed under Chapter 3 of the Listing Rules. What would be the composition and functions of the board committees for Aba Limited? What are the consequences if these committees are not formed? (12 marks) Ans (b) Chapter 3 of the Listing Rules requires a listed company to form an audit committee and a remuneration committee. AUDIT COMMITTEE Composition of Audit Committee 1. Comprised of non-executive directors only. (Listing Rule 3.21) 2. A minimum of three members, at least one of whom is an independent non-executive director with appropriate professional qualifications or accounting or related financial management expertise as required under rule 3.10(2). (Listing Rule 3.21) 7

8 3. The majority of members must be independent non-executive directors of the listed issuer. (Listing Rule 3.21) 4. The audit committee must be chaired by an independent non-executive director. (Listing Rule 3.21) 5. Based on Listing Rule 3.21, Mr. Chan shall not act as the chairman of the audit committee. 6. If Ms Ho does not satisfy Listing Rule 3.09, and Ms Qi, Mr. Lee and Mr. Yeung do not satisfy the independence requirements of Listing Rule 3.13, they do not meet the requirements of Listing Rule 3.21, and shall not be members of the audit committee. Functions of the Audit Committee 1. Oversees the company s financial matters, the financial reporting and financial system. 2. Handles the relationship between the company and its external auditors on matters including their appointment and reappointment, and their independence. 3. Works closely with the chief financial officer to ensure a sound, adequate and effective system of internal control. 4. The company must inform the Stock Exchange and publish an announcement immediately in accordance with Listing Rule 2.07C containing the relevant details and reasons if the company fails to set up an audit committee or at any time has failed to meet any requirements set out in Listing Rule The company shall set up an audit committee and/or appoint appropriate members to the audit committee to meet the requirements within three months after failing to meet such requirements. (Listing Rule 3.23) REMUNERATION COMMITTEE Composition of Remuneration Committee 1. Must be chaired by an independent non-executive director and comprise a 8

9 majority of independent non-executive directors. (Listing Rule 3.25) 2. Based on Listing Rule 3.25, Mr. Chan shall not act as the chairman of the remuneration committee. 3. If Ms Qi, Mr. Lee and Mr. Yeung do not satisfy the independence requirements of Listing Rule 3.13, they do not meet the requirements of Listing Rule 3.25 and shall not be members of the remuneration committee. Function of Remuneration Committee 1. Advises the board on the remuneration policy and structure of the group. 2. Determines the remuneration package of executive directors and senior management employees and makes recommendations to the board on the same for non-executive directors. 3. If the company fails to set up a remuneration committee or fails to meet any requirements in rules 3.25 and 3.26, it must immediately publish an announcement containing the relevant details and reasons. 4. The company must set up a remuneration committee with written terms of reference and/or appoint appropriate members to meet the requirement(s) within three months after failing to meet them. (Listing Rule 3.27) Consequences if audit committee and remuneration committee are not formed The company, once listed, is obliged to comply with the Listing Rules. If the company breaches the Listing Rules, the Listing Committee may consider taking the following disciplinary procedure/action, in accordance with Listing Rule 2A.09, against the company: (1) issue a private reprimand (2) issue a public statement which involves criticism (3) issue a public censure (4) require a breach to be rectified or other remedial action to be taken within a stipulated period including, if appropriate, the appointment of an independent adviser to minority shareholders (5) suspend the listing (6) cancel the listing 9

10 1. (c) Discuss whether a nomination committee should be formed. What is the consequence if such a nomination committee is not formed? (7 marks) Ans (c) 1. The provisions in the Corporate Governance Code (Appendix 14) of the Main Board Listing Rules sets out the principles of good corporate governance, and two levels of recommendations: (a) code provisions; and (b) recommended best practices. 2. The company is expected to comply with, but may choose to deviate from, the code provisions. Deviation from the code provisions does not constitute a breach of the Listing Rules. The recommended best practices are for guidelines only. 3. The company must state whether it has complied with the code provisions for the relevant accounting period in its interim report and the annual report. If there has been any deviation from the code provisions, the company must give considered reasons for each deviation. 4. The company may choose to form or not to form a nomination committee: not to form the company shall explain by giving reasons in its interim report and the annual report. to form the formation of nominee committee is governed by code provisions (A.5.1 to A.5.5) as follows: Formation of nomination committee 5. The company shall establish a nomination committee which is chaired by the chairman of the board or an independent non-executive director and comprises a majority of independent non-executive directors. 6. The nomination committee should be established with specific written terms of reference which set out its authority and duties, including: (a) review the structure, size and composition (including the skills, knowledge and experience) of the board at least annually and make recommendations on any proposed changes to the board; (b) identify individuals suitably qualified to become board members; (c) assess the independence of independent non-executive directors; and (d) make recommendations to the board on the appointment or reappointment of directors and succession planning for directors. 10

11 7. Based on the above, it is recommended that the company establishes a nomination committee for the following reasons: Mr. Chan may act as the chairman of the nomination committee and maintain control Image of good corporate governance 1. (d) Discuss critically whether Mr. Chan should be the chairman of the board and the chief executive officer of Aba Limited if the company is to act in accordance with the Corporate Governance Code (Appendix 14) to the Listing Rules. (5 marks) (Total: 40 marks) Ans (d) 1. There are two key aspects of the management of the company: the management of the board and the day-to-day management of the business. There should be a clear division between these responsibilities to ensure a balance of power and authority, so that power is not concentrated in any one individual. 2. The roles of chairman and chief executive should be separate and should not be performed by the same individual. (Code provision A.2.1) 3. The division of responsibilities between the chairman and chief executive should be clearly established and set out in writing. (Code provision A.2.1) 4. The role of chairman is set out in code provisions A.2.2 to A.2.9, which primarily make him/her responsible for: providing leadership for the board ensuring that good corporate governance practices and procedures are established encouraging all directors to make a full and active contribution to the board s affairs and take the lead to ensure that it acts in the best interests of the issuer 5. For good corporate governance reasons, Mr. Chan may act as chairman of the board, but should not be the chief executive officer. The reason for any deviation from code provision A.2.1 should be explained in the interim report and the annual report. 11

12 SECTION B 2. On 1 January 2013, amendments to the Securities and Futures Ordinance (Cap. 571) (SFO) came into effect. The new Part XIVA of the ordinance gives statutory backing to the Listing Rules and imposes a general obligation of disclosure of inside information on listed corporations. REQUIRED: 2. (a) State concisely what may constitute inside information. Give EIGHT examples of possible inside information which may trigger disclosure under Part XIVA of the SFO. (8 marks) Ans (a) Section 307A(1) of the SFO states that there are three key elements to inside information: (a) the information about the particular corporation must be specific about: (i) the corporation; (ii) a shareholder or officer of the corporation; or (iii) the listed securities of the corporation or their derivatives; and (b) the information must not be generally known to that segment of the market which deals or which would likely deal in the corporation s securities; and (c) the information would, if so known be likely to have a material effect on the price of the corporation s securities The definition of inside information is the same as that of relevant information used in section 245 of the SFO. The following events or circumstances are common examples where a disclosure obligation arises: Changes in performance, or the expectation of the performance, of the business; Changes in financial condition, e.g. cashflow crisis, credit crunch; Changes in control and control agreements; Changes in directors and (if applicable) supervisors; Changes in directors service contracts; Changes in auditors or any other information related to the auditors activity; Changes in the share capital, e.g. new share placing, bonus issue, rights issue, share split, share consolidation and capital reduction; 12

13 Issue of debt securities, convertible instruments, options or warrants to acquire or subscribe for securities; Takeovers and mergers (corporations will also need to comply with the Takeovers Codes that include specific disclosure obligations); Purchase or disposal of equity interests or other major assets or business operations; Formation of a joint venture; Restructurings, reorganisations and spin-offs that have an effect on the corporation s assets, liabilities, financial position or profits and losses; Decisions concerning buy-back programmes or transactions in other listed financial instruments; Changes to the memorandum and articles (or equivalent constitutional documents); Filing of winding up petitions, the issuing of winding up orders or the appointment of provisional receivers or liquidators; Legal disputes and proceedings; Revocation or cancellation of credit lines by one or more banks; Changes in value of assets (including advances, loans, debts or other forms of financial assistance); Insolvency of relevant debtors; Reduction of real properties values; Physical destruction of uninsured goods; New licenses, patents, registered trademarks; Decrease or increase in value of financial instruments in portfolio which include financial assets or liabilities arising from futures contracts, derivatives, warrants, swaps protective hedges, credit default swaps; Decrease in value of patents or rights or intangible assets due to market innovation; Receiving acquisition bids for relevant assets; Innovative products or processes; Changes in expected earnings or losses; Orders received from customers, their cancellation or important changes; Withdrawal from or entry into new core business areas; Changes in the investment policy; Changes in the accounting policy; Ex-dividend date, changes in dividend payment date and amount of dividend; changes in dividend policy; Pledge of the corporation s shares by controlling shareholders; or Changes in a matter which was the subject of a previous announcement. 13

14 2. (b) Discuss when inside information should be disclosed and who should be liable for any non-disclosure. Ans (b) I. When should inside information be disclosed (6 marks) Section 307B(1) of the SFO states that a listed corporation must, as soon as reasonably practicable after any inside information has come to its knowledge, disclose the information to the public. Before the information is fully disclosed to the public, the corporation should ensure that the information is kept strictly confidential. Where the corporation believes that the necessary degree of confidentiality cannot be maintained, it should immediately disclose the information to the public. If a corporation needs time to clarify the details of, and the impact arising from, an event or a set of circumstances before issuing a full announcement to properly inform the public, the corporation should consider issuing a holding announcement which; (a) details as much of the subject matter as possible; and (b) sets out reasons why a fuller announcement cannot be made. The corporation should make a full announcement as soon as reasonably practicable. The information contained in an announcement must not be false or misleading as to a material fact, or false or misleading through the omission of a material fact. II. Who should be liable for any non-disclosure Section 307G of the SFO states that every officer of a listed corporation must take all reasonable measures from time to time to ensure that proper safeguards exist to prevent a breach of a disclosure requirement in relation to the corporation. If a listed corporation is in breach of a disclosure requirement, an officer of the corporation: (a) whose intentional, reckless or negligent conduct has resulted in the breach; or (b) who has not taken all reasonable measures from time to time to ensure that proper safeguards exist to prevent the breach, is also in breach of the disclosure requirement. 14

15 An officer, in relation to a corporation, means a director, manager or secretary of, or any other person involved in the management of, the corporation. 2. (c) Describe the rationale behind safe harbours and advise the disclosure exemption under section 307D of the SFO. (6 marks) (Total: 20 marks) Ans (c) Safe harbours allow non-disclosure of inside information. To strike an appropriate balance between requiring timely disclosure of inside information and preventing premature disclosure which might prejudice a corporation s legitimate interests, the SFO provides for safe harbours which permit a corporation to withhold disclosure of inside information under specified circumstances. Section 307D of the SFO sets out the safe harbours. A listed corporation is not required to disclose any inside information if and so long as: the disclosure is prohibited under, or would constitute a contravention of a restriction imposed by, an enactment or an order of a court; the corporation takes reasonable precautions for preserving the confidentiality of the information; the confidentiality of the information is preserved; the information concerns an incomplete proposal or negotiation; the information is a trade secret; the information concerns the provision of liquidity support from the Exchange Fund established by the Exchange Fund Ordinance (Cap. 66) or from an institution which performs the functions of a central bank (including such an institution of a place outside Hong Kong) to the corporation or, if the corporation is a member of a group of companies, to any other member of the group; the disclosure is waived by the SFC under section 307E(1), and any condition imposed under section 307E(2) in relation to the waiver is complied with. 15

16 3. Million Money Limited is a private limited company incorporated in Hong Kong. Mr. Anderson, Mr. Bruce and Mr. Charles are directors and shareholders of the company. The company s financial year-end date is 31 December and the company will hold its forthcoming annual general meeting on 30 June On 1 June 2014, Ms Judy approached Mr. Anderson and expressed her intention to invest in the company and proposed to subscribe for 2,000 shares at a consideration of HK$4,000. She also proposed that the company should hold general meetings of shareholders more regularly (i.e. more frequently than the annual general meeting). Mr. Anderson promised Ms Judy that he would discuss and consider her proposals at the forthcoming annual general meeting. REQUIRED: 3. (a) As company secretary of Million Money Limited, draw up a list of requisites which will affect the VALIDITY of holding a general meeting. (10 marks) Ans (a) There are two types of general meetings of shareholders: (i) annual general meetings (AGMs), which must be held annually pursuant to the Companies Ordinance; and (ii) extraordinary general meetings (EGMs), which are meetings of shareholders other than AGM. The following are the requisites for holding a valid general meeting: I. Properly convened General meetings must be convened by any of the following persons: 1. the board of directors; 2. the company secretary on the instruction of a director; 3. members holding not less than one-twentieth (i.e. 5%) of the paid-up capital and carrying the right to vote at a general meeting can request the directors convene a general meeting; II. Properly notified 1. Notice for the AGM must be given to all shareholders and the auditors. Notice may be given personally or by post or by electronic means to registered addresses within Hong Kong. 2. The place, date and time of meeting must be clearly provided in the notice. 16

17 3. Period of the notice - not less than 21 clear days (excluding the day on which notice is served and the day of the meeting) for an AGM, and for any special resolution at an EGM - 14 clear days for any ordinary resolution at an EGM 4. Shorter notice is valid if agreed to by: - all members (i.e. 100%) entitled to attend and vote at an AGM - a majority in number holding at least 95% of the nominal value of voting shares or, if there is no share capital, 95% of the voting rights for an EGM III. Quorum 1. At least two members present in person or by proxy. A member who also acts as proxy for all the other members of the company cannot by himself form the quorum and hold a general meeting. 2. In the case of a company having only one member, one member personally present or by proxy may be a quorum. IV. Proxy 1. Any member who is entitled to attend and vote at a general meeting may appoint a proxy to attend and vote on his behalf (if allowed by articles). A proxy need not be a member of the company. 2. A duly completed and signed proxy form which reaches the company less than 48 hours before the meeting is void. V. Chairman of general meeting Most articles of association provide that within a specified time, if the chairman of the board is not present, and no director who presents at the meeting is willing to act, the members present may elect one member to be the chairman of the meeting. VI. Methods of voting 1. By show of hands: one vote per person regardless of how many shares are held. 2. By poll: one vote for each share. 3. Right to demand a poll: A member holding 10% of the voting rights or five persons may demand a poll on or before the declaration of results of a vote by a show of hands. VII. Resolutions passed in meetings 17

18 1. A special resolution needs to be passed by at least three-quarters (75%) of the votes of members. 2. An ordinary resolution needs to be passed by simple majority of more than one-half (50%) of the votes of members. 3. The chairman s declaration that a resolution is carried is conclusive. XIII. Adjournment A general meeting may be adjourned by an ordinary resolution. No notice of the adjourned meeting is required unless adjourned sine die or fresh business is to be discussed or notice is required by the articles. IX. Properly recorded in the minutes 1. All resolutions (passed or not passed) must be properly recorded in the minutes, which are deemed to be evidence of the proceedings if they are signed by the chairman of the meeting. 2. The minutes of meetings of members must be kept in minutes books. 3. (b) Draft the minutes of the forthcoming annual general meeting of Million Money Limited. (Additional information: i. There is no provision for rotation and retirement of directors in the company s Articles of Association. ii. An agenda item for change of company name to Million Money Plus Limited will be considered and, if though fit, approved at the forthcoming annual general meeting. iii. Candidates may make reasonable assumptions of any other necessary information not available from the question.) (10 marks) (Total: 20 marks) Ans (b) Million Money Limited (the Company ) (Incorporated in Hong Kong with limited liability) Minutes of the Annual General Meeting of the Company held at [Place] on 30 June 2014 at [Time] 18

19 Directors: Mr. Anderson (Chairman of meeting) Mr. Bruce Mr. Charles Shareholders: Mr. Anderson Mr. Bruce Ms. Charles In Attendance: Ms Ellen (Secretary of meeting) Mr. Keith (Partner of LL & Co., CPA, Auditor) Chairman Mr. Anderson took the Chair of the meeting. 1. Notice and Quorum The chairman declared that due notice of the meeting had been given to all shareholders and a quorum was present. Accordingly, the meeting was duly convened and constituted. 2. Voting The chairman informed the meeting that since no shareholder had demanded a poll vote, resolutions should be decided on a show of hands. 3. Audited Financial Statements It was RESOLVED that the audited financial statements of the Company for the year ended 31 December 2013 together with the Directors and Independent Auditor s Reports thereon be adopted. 4. Declaration of Final Dividend It was RESOLVED that a final dividend of HK$0.10 per share for the year ended 31 December 2013 be declared to shareholders whose names appeared in the Company's register of members. 5.Directorate It was RESOLVED that there being no provision in the Articles of Association of the Company with respect to the rotation and retirement of directors of the Company, all directors remain in office, and that the Board be authorised to fix their remuneration. 19

20 6. Re-appointment of Auditor It was RESOLVED that LL & Co., CPA be re-appointed as the Company's Auditor until the conclusion of the following annual general meeting, and that the Board be authorised to fix the Auditor's remuneration. 7. Issued of new shares It was RESOLVED that the directors be authorised to issue 2,000 new shares to Ms. Judy at a consideration of HK$4, Change of Company Name It was RESOLVED that the following resolution be passed as a SPECIAL RESOLUTION: That, subject to the approval of the Registrar of Companies, the name of the Company be changed from Million Money Limited to Million Money Plus Limited with effect from the date of issue of the relevant certificate of incorporation on change of name. Conclusion There being no other business, the Chairman declared that the meeting closed at [Time]. Chairman 20

21 4. Base Star Limited is a limited company incorporated in Bermuda and its shares have been quoted on the Main Board of the Hong Kong Stock Exchange since 2 January On the date of listing, Base Star Limited entered into service contracts with all its directors, but no prior shareholders approval was obtained for the terms of the service contracts. Since then, composition of the board has remained unchanged. The chairman proposes appointing Mr. Lee as an additional executive director and has agreed with Mr. Lee to add the following term to his service contract: Either party may terminate the appointment by giving two years notice or pay compensation equivalent to two years emoluments to other party. The chairman also proposes to add the above term to the service contracts of the existing directors. If all existing directors agree with the chairman s proposal, the company will enter into a revised service contract with each of the existing directors. REQUIRED: 4. (a) Discuss critically whether entering into the service contracts with Mr. Lee and the existing directors are connected transactions, and whether shareholders approval is required. (7 marks) Ans (a) Code provision D.1.4 of the Corporate Governance Code (Appendix 14) of the Main Board Listing Rules states that listed issuers should have formal letters of appointment for directors setting out the key terms and conditions of their appointment. Shareholders approval any service contract for a director of the listed company or any subsidiary must be approved by shareholders if it is for a duration that may exceed three years, or which expressly requires that if it is to be terminated by the listed company, the listed company must give more than one year s notice or pay compensation of more than one year s pay. (Listing Rule 13.68) Variation of service contract service contracts entered into before 31 January 2004 are exempt from the need for shareholder approval. However these exempt contracts must be noted in the annual report. Any variation or renewal of any such service contract must comply with the shareholders approval requirement if relevant. (Listing Rule 13.69) Exemption from a connected transaction provisions a service contract between the listed company and a director is exempt from the connected transaction 21

22 provisions of the Listing Rules. (Listing Rule 14A.31(6)) Conclusion Service contracts between Base Star Limited and its existing directors are exempt connected transactions, and so are exempt from reporting, announcement and independent shareholders approval. Mr. Lee s service contract (which expressly requires Base Star Limited to give a period of two years notice or to pay a compensation equivalent to two years emolument to Mr. Lee when terminating his appointment) requires shareholders approval. Shareholders approval is also required if Base Star Limited adds a term to the existing directors service contracts which expressly requires the company to give a period of two years notice or to pay a compensation equivalent to two years emolument to the directors when terminating their appointments, because the consideration represents more than one year s notice or one years pay in lieu. 4. (b) Describe in what circumstances a listed company has general obligations to issue circulars to its shareholders. (13 marks) (Total: 20 marks) Ans (b) The Listing Rules impose obligations on a listed company to issue circulars to its shareholders in a wide range of situations. Whenever shareholder s approval is required, the notice of meeting must have an explanatory note accompanying it explaining why approval is sought; this explanatory note is set out in a circular. The following are types of transactions or matters which require that a company issues a circular: 1. Notifiable transactions most notifiable transactions require a circular; however if the transaction is only a share transaction or a disclosable transaction then no circular is required (Listing Rules and 14.38). 2. Connected transactions most connected transactions require a circular unless they fall within one of the exemptions. 22

23 3. Company name shareholders approval is needed for a change of name of a Hong Kong incorporated company and therefore a circular is required. 4. Memorandum and articles of association shareholders approval is needed for a change in the memorandum or articles of association of a Hong Kong incorporated company and therefore a circular is required. 5. Withdrawal of listing a circular is required (Listing Rule 6.11). 6. Loans to directors if classified as a connected transaction, a circular is required, unless the transaction falls within one of the exemptions. 7. Service contracts if shareholder approval is required for the service contract (Listing Rules and 13.69) then a circular is required. 8. Capitalisation issues a listing document in form of circular must be given to each shareholder informing them of the capitalisation issue (Listing Rule 7.29). 9. Shares, convertible securities, warrants and options consent of the shareholders shall be obtained prior to allotting, issuing or granting shares, convertible securities, warrants and options (Listing Rule 13.36). 10. Issue of shares by subsidiaries if a major subsidiary intends to issue shares so as to materially dilute the percentage equity interest of the listing company in the subsidiary, this is a deemed disposal under Chapter 14. If the deemed disposal constitutes a major transaction or a very substantial disposal, shareholder approval and therefore a circular is required. 11. Option schemes adopting a new employee share option scheme requires shareholder approval (Listing Rule 17.02) and therefore a circular is required. Certain further grants of options to directors, the chief executive or substantial shareholders or their associates may require specific shareholder approval and thus a circular would be required (Listing Rule 17.04). 12. Repurchases the director s general mandate must be approved each year and the annual report or separate circular must include an additional explanatory statement on any repurchase mandate (Listing Rule 10.06). 13. Election or re-election of directors where shareholders to vote on electing or 23

24 re-electing a director, the circular with the notice of general meeting to shareholders must contain the details of the directors specified in Listing Rule 13.51(2) (Listing Rule 13.74). 14. Increase in authorised capital the circular with the notice of general meeting to approve an increase in authorised capital must state whether the directors have any present intention of issuing any of the increased authorised capital (Listing Rule 13.57). 24

25 5. Billion Computer Limited is a private company limited by shares and incorporated in Hong Kong. The core business of Billion Computer Limited is computer programming. REQUIRED: Ms. Chu is a shareholder and holds 4% issued share capital of Billion Computer Limited. Her friend, Mr. Lo, is a millionaire and his son, Abraham Lo, will have his 17th birthday next month. Mr. Lo wants to acquire Ms Chu s entire shareholding for his son as a birthday gift. 5. (a) Advise Abraham Lo the modes of holding the shares before and after a person is 18 years of age. How should the shares be transferred? Ans (a) Modes of holding shares The following are the general modes of holding shares: (10 marks) 1. Nominee holder holding shares by other persons. This may conceal ownership. 2. Corporate holder held by a corporation. 3. Shares held in trust a trustee holds the shares for the benefit of a beneficiary by a declaration of trust. The company recognises the trustee as a member of the company. 4. Sole holder held by one person only. 5. Joint holders shares may be jointly held by two persons. Any transfer must be signed by both. Any company notice will be sent to the first-named holder only. If one holder dies, the whole of the ownership goes to the survivor. Since Abraham Lo is under 18, he is a minor holder. The company s articles of association may prohibit a minor from owning shares because a minor is unable by law to perform contractual obligations of a commercial nature. Abraham Lo may instead consider holding the shares under modes nos. 1 to 3 above. After Abraham s 18th birthday, he may hold the shares solely (by mode no. 4) or jointly with Mr Lo (by mode no. 5). Transfer of shares in a private company (a) The buyer and seller of the shares are required to execute and present the duly stamped instrument of transfer, and a bought note and a sold note, to the company for the directors approval. (b) The documents mentioned in item (a) above must be presented to the Stamp Office, together with a certified copy of the latest audited financial statements of the company, for adjudication of stamp duty. An adjudication fee and any stamp 25

26 duty must be paid as required. (c) Time limit for stamping: (i) instrument of transfer - one/before the date of execution, if executed in Hong Kong; - within 30 days after the date of execution, if executed outside Hong Kong. (ii) Bought note and sold note - within 2 days after the sale or purchase, if effected in Hong Kong; - within 30 days after the sale or purchase, if effected elsewhere. (d) Stamp duty: (i) instrument of transfer - HK$5 for adjudication. (ii) Bought note and sold note - Ad valorem duty at the rate of 0.2% of the consideration or net asset value of the shares (as shown in the latest audited financial statements), whichever is higher. (e) Penalties for late stamping are as follows: Length of Delay not exceeding one month exceeding one month but not exceeding two months exceeding two months Penalty double the amount of stamp duty four times the amount of stamp duty ten times the amount of stamp duty (f) After the approval of the transfer of shares by the directors, the company secretary will: (i) update the register of transfers and the register of members; and (ii) cancel the old share certificate and issue a new share certificate under the company s seal. 5. (b) Processing a transfer of shares in a Hong Kong listed company involves the Central Clearing and Settlement System (CCASS). Discuss the features, operations, transactions and members of CCASS. (10 marks) (Total: 20 marks) Ans (b) 1. Features of Central Clearing and Settlement System (CCASS) (a) The Stock Exchange has a T+2 settlement period, which means that trades are usually settled in CCASS, which is operated by the Hong Kong Securities Clearing Company Limited (HKSCC), a wholly owned subsidiary of Hong Kong Exchanges and Clearing, two business days after they are executed. (b) CCASS provides clearing and settlement services under which securities are credited or debited to participants' CCASS stock accounts and funds are 26

27 recorded in the participants' money ledgers on settlement day. (c) Securities settlement is effected through electronic book transfers by debit and credit entries to CCASS participants stock accounts on T+2 (two business days after the trade), while money settlement is effected through the overnight bulk clearing process of the inter-bank clearing system operated by Hong Kong Interbank Clearing Bank Limited (HKICL). 2. Operation of CCASS: The system is operated on a continual net settlement basis (CNS) on an electronic platform (real time gross settlement). (a) No physical handling of the scrip: scripless settlement. (b) Funds are netted off on gross purchases and sales and not on an individual share basis. (c) CNS eliminates the risk of counterfeit or lost share certificates or forged transfer forms. (d) Stock brokers or banks do not usually allow clients to make an immediate sale when they deposit physical share certificates to their account. (e) The cost of obtaining physical share certificates is high. 3. Transactions: (a) Transactions are classified into two categories: Exchange trades (securities executed on the Stock Exchange); and non-exchange trades (securities not executed on the Stock Exchange but for which settlement instructions, clearing agency transactions and investor settlement instructions are carried out on CCASS systems or between the parties themselves). (b) Exchange trades are settled under the CNS system on a net basis and HKSCC becomes the settlement counterparty for both the buying and selling broker. (c) As the settlement counterparty, HKSCC acts as the settlement guarantor to both parties for all Exchange trades. (d) Non-Exchange trades such as broker-custodian transactions, stock borrowing and lending, stock pledging and portfolio movements are settled under settlement instructions (SI) which are conducted on a trade-for-trade basis. Both participants are required to input SIs to effect settlement with identical stock code, quantity, payment amount, settlement date. (e) Non-Exchange trades such as investor-intermediary transactions are settled under investor settlement instructions (ISI) which are conducted on a trade-for-trade basis between investor participants and brokers or custodians who are CCASS participants to be settled in CCASS. Broker participants are required to input ISIs to effect settlement with information including the stock code, quantity, payment amount, settlement date, while the investor participants are required to give identical instruction to CCASS. (f) Non-Exchange trades are not guaranteed by CCASS. 27

28 4. Members of CCASS include: (a) broker participants; (b) clearing agency participants; (c) custodian participants; (d) investor participants; (e) stock lender participants; and (f) stock pledgee participants (General Rules of CCASS 302) Status of members of CCASS (a) Members of CCASS are not recognised as the registered shareholders of listed company. Shares are registered in the name of HKSCC (Nominees) Limited. (b) There is no direct communication between CCASS participants and the listed companies. (c) Participants can attend the general meetings of the listed companies only as the authorised representatives of HKSCC (Nominees) Limited. (d) Shares are held on trust and CCASS acts as the trustee for the benefit of the investors. 28

29 6. Zee Limited, a private company incorporated in Hong Kong, is insolvent. The company has approximately 100 creditors. The board of directors is aware that any creditor may file a petition with the court for an order to wind up the company. REQUIRED: You are the company secretary of Zee Limited. The chairman wants your advice on a compulsory winding up by the court. 6. (a) Discuss in what circumstances a company may be wound up by the court. (7 marks) Ans (a) A company may be wound up by the court in the following circumstances: 1. the company has passed a special resolution that the company be wound up by the court; 2. the company has not commenced its business within a year from its incorporation, or has suspended its business for a whole year; 3. the company has no members; 4. the company is unable to pay its debts. A company shall be deemed to be unable to pay its debts if: - a creditor whose debt exceeds HK$10,000 serves a notice on the company requiring payment and is not paid within three weeks; - an execution in favour of a creditor of the company is returned unsatisfied in whole or in part; or - the court is satisfied that the company cannot pay its debts, taking into account its contingent and prospective liabilities. 5. the memorandum or articles of the company provides that the company is to be dissolved in a certain event and that event occurs; or 6. the court is of the opinion that it is just and equitable that the company should be wound up. On the application of the Registrar for the winding up of a company, the company may be wound up by the court if it appears to the court that: (a) the company is being carried on for an unlawful purpose or for any purpose lawful in itself but is impossible to be carried out by a company; or (b) throughout a period of not less than six months ending on the date of the winding-up petition the company: (i) has not had, in the case of a private company, at least one director; or (ii) has not had, in the case of a company not being a private company, at least two directors; or (c) throughout the period referred to in paragraph (b) above, the company 29

30 has not had a company secretary; or (d) the company has failed to pay the annual registration fee payable under Schedule 8 of the Companies Ordinance; or (e) the company has been persistently in breach of its obligations under the Companies Ordinance. 6. (b) Describe in detail the powers of a liquidator and the consequences of the commencement of a winding up by the court. (13 marks) (Total: 20 marks) Ans (b) Powers of a liquidator in a winding up by the court: The liquidator in a winding up by the court shall have power with the sanction either of the court or of the committee of inspection: 1. to bring or defend any legal action on behalf of the company; 2. to carry on the business of the company, so far as may be necessary for the beneficial winding up; 3. to appoint a solicitor to assist him in the performance of his duties; 4. to pay any classes of creditors in full; 5. to make any compromise or arrangement with creditors; 6. to compromise all calls and liabilities to calls, debts, and liabilities capable of resulting in debts, and all claims, present or future, certain or contingent, ascertained or sounding only in damages; 7. to sell the real and personal property and things in action of the company by public auction or private contract; 8. to do all acts and to execute, in the name and on behalf of the company, all deeds, receipts, and other documents, and for that purpose to use, when necessary, the company's seal; 9. to prove, rank, and claim in the bankruptcy or insolvency of any contributory, and to receive any balance against the contributory s estate; 10. to draw, accept, make, and endorse any bill of exchange or promissory note in the name and on behalf of the company; 11. to raise on the security of the assets of the company any money requisite; 12. to take out in his official name letters of administration to any deceased contributory for obtaining any money due from the contributory; 13. to appoint an agent to do any business which the liquidator is unable to do himself; 14. to do all such other things as may be necessary for winding up the affairs 30