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 HONG KONG CORPORATE LAW MAY 2013 Time allowed 3 hours Section A Compulsory case study Section B 5 long questions (attempt any 3) DO NOT OPEN THIS PAPER UNTIL INSTRUCTED TO DO SO BY THE INVIGILATOR Important Note: Candidates are allowed 15 minutes reading time to read through the question paper before the commencement of the examination between 9:15a.m.- 9:30a.m. During the reading time, all candidates must be silent and must not write or mark anything on their question papers or answer books. Candidates must close all their reference books, notes or other unauthorised materials and put these under their chairs. If any candidates write or make any marks during the reading time, or if they speak or in any other way communicate with anyone either in or outside the examination hall during this period or read any unauthorised materials, they will be disqualified from continuing this examination paper. Once candidates have opened the question paper, they are not allowed to leave the examination hall until 10:00a.m. Page 1 of 10

2 Case list for candidates reference 1. Adams v Cape Industries plc [1990] Ch Australian Securities & Investments Commission v Healey & Ors [2011] FCA Jones v Lipman [1962] 1 WLR Re City Equitable Fire Insurance Co Ltd. [1925] Ch Re PCCW Ltd [2009] 3 HKC Salomon v Salomon and Co. Ltd. [1897) AC Tett v Phoenix Property and Investment Company [1986] BCLC Tinios v French Caledonia Travel Service Pty Ltd (1994) 12 ACSR Wong Kar Gee Mimi v Hung Kin Sang Raymond [2011] 5 HKLRD 241 Page 2 of 10

3 SUBJECT NO 12M HONG KONG CORPORATE LAW MAY 2013 The examination paper is divided into TWO sections. Section A is a case study with compulsory questions which carries 40 marks. Candidates should attempt THREE questions from Section B, all of which carry 20 marks each. You should allow yourself approximately 70 minutes in total to answer the questions in Section A, and 35 minutes for each of the questions attempted in Section B. Unless otherwise stated, $ denotes Hong Kong dollars and Table A applies. Wednesday morning, 29 May 2013 Time allowed: 3 hours SECTION A (Compulsory answer ALL questions in this section) David was the company secretary of ABC Ltd. (ABC) from 1 January 2010 until 31 December During his secretaryship, David was owed secretary s remuneration by ABC. Up to 28 June 2011, ABC was a listed company on the Stock Exchange Hong Kong having logistics services as its substantial business. On 28 June 2011, a scheme of arrangement was proposed and approved by the shareholders of ABC. Under the scheme of arrangement: ABC would change its domicile from Hong Kong to the Cayman Islands; a new company, XYZ Ltd. (XYZ) would be incorporated in Hong Kong; (c) ABC would become a wholly owned subsidiary of XYZ; (d) shares of ABC would be subscribed by XYZ, whose shares would be introduced on the Stock Exchange of Hong Kong in place of the issued shares of ABC; (e) XYZ would subscribe for all the shares of ABC, i.e. 200,000,000 shares, at the price of HK$2 per share to raise $400 million; (f) XYZ would provide a loan of $50 million to ABC; and (g) both companies, i.e. ABC and XYZ, would focus management resources on their logistics and warehousing operation disposing of their non-core assets and businesses. (h) Every one share of ABC would be exchanged for one share of XYZ. Page 3 of 10

4 The scheme of arrangement was completed on 31 August Since then ABC became a wholly owned subsidiary of XYZ and was controlled fully by XYZ as an intermediate investment holding company of the group engaged in trading activities relating to electrical appliances. On 26 July 2012, the directors of ABC declared that ABC cannot, by reason of its liabilities, continue its business and that it is advisable to wind up the company and gave notice pursuant to section 241 of the Companies Ordinance calling for a creditors meeting to wind up ABC. On 29 July 2012, after David served a statutory demand on ABC, XYZ announced that it had already disposed of all its shareholdings in ABC to an independent third party on 23 July David later found that: (c) (d) On 25 January 2012, ABC transferred most of its valuable assets to XYZ in order to repay the $50 million loan (item (f) in the scheme of arrangement). The disposal of shares in ABC by XYZ to the independent third party was for a consideration of HK$2 only. Before the scheme of arrangement was approved, the majority shareholder of ABC, Peter, had transferred 1,000 shares to each of his 100 employees, who later voted for the scheme of arrangement. No prospectus was issued when XYZ was listed on the Stock Exchange Hong Kong by way of introduction. Explain the proper procedures to approve a scheme of arrangement under the Companies Ordinance and advise David as to whether he may challenge the scheme of arrangement approved. Explain the contents of a prospectus and the circumstances under which a prospectus may be exempt (i.e. no need to issue a prospectus in the raising of finances) (c) Advise the liquidator of ABC as to whether he may successfully recover ABC s assets transferred to XYZ on 25 January (d) Advise David as to whether he may successfully sue XYZ for the unpaid remuneration ABC owes him. (Total: 40 marks) Page 4 of 10

5 SECTION B (Answer THREE questions from this section) 2. Four Seasons Ltd. is in the process of winding up and Summer is appointed as the liquidator. He has established the following: The company has a bank balance of $520,000 at Kowloon Bank. The company purchased a premises in Wan Chai for $20 million and it is the subject of a charge to Wan Chai Bank for $10 million. The current market price of the premises is $8 million. (c) The company has other unencumbered assets, which are worth $2m. (d) The company owes its 20 employees wages of $58,000 and severance payments of $108,000 each. (e) The company owes its non-executive director a total amount of directors fees of $1 million. (f) The company owes $2 million to its suppliers. (g) The company has not paid its $100,000 tax bill for the year of assessment 2012/13. (h) Summer s liquidator s fee is $100,000. Advise Summer as to how the assets of the company should be distributed. (For the purpose of this part, ignore the operation of the Protection of Wages on Insolvency Ordinance). (14 marks) Advise Summer as to his powers as a liquidator of the company under the Companies Ordinance. (6 marks) (Total: 20 marks) Page 5 of 10

6 3. Sandy, a shareholder of M Ltd, is considering selling her shares in the company. The articles of association of M Ltd require an outgoing shareholder to first offer his or her shares to the existing shareholders at a price agreed by the parties, or, in the case of disagreement, a price fixed by an independent accountant. Gary, a director of M Ltd, is the only person interested in buying Sandy s shares. However, Sandy thinks that the price he is offering to her is far lower than she expected, and she suspects that Gary has substantially understated the profit that the company will earn from a recent contract. Gary refuses to disclose the details of that contract. Advise Sandy whether she can sell her shares to an outsider, and what the legal consequences of such a sale would be. (12 marks) Advise Sandy whether she can get access to the contract which is instrumental to the valuation of her shares. (8 marks) (Total: 20 marks) Page 6 of 10

7 4. Alan, who is a professional accountant, has been a director of Kowloon Properties Ltd., a listed company on the Stock Exchange of Hong Kong, for many years. At a board meeting held on 6 September 2012, Alan, together with other directors of the company, approved the accounts of the company, which were included in the company s 2012 annual report. It was later found that the annual report failed to correctly disclose $1.5 billion of short-term liabilities by classifying them incorrectly as non-current liabilities. In addition, some guarantees of short-term liabilities for $2.5 billion that had been given after the balance date of 31 March 2012 were not mentioned in the annual report. When these omissions were disclosed to the public, the share price of Kowloon Properties Ltd. dropped significantly and its trading on the Stock Exchange Hong Kong was suspended. David is the major shareholder of the company and is very angry. Advise David as to whether the company may successfully take any legal action against Alan and other directors of the company. Advice David as to whether he may successfully apply for a disqualification order against Alan and other directors of the company under the Companies Ordinance. (Total: 20 marks) Page 7 of 10

8 5. Helen is the company secretary of Taiwan Properties Ltd., a private company incorporated in Hong Kong. Recently, there have been rumors that one of the company s shareholders, Dreamie, who is also a major shareholder of a listed company on the Stock Exchange of Hong Kong, has been involved in market misconduct and is also under the investigation of the Independent Commission Against Corruption for other commercial crimes. Helen has been approached by some journalists for a record of Dreamie s shareholding in Taiwan Properties Ltd.. Helen is very anxious about this as the company is going to apply for listing on the Stock Exchange of Hong Kong early next year. She would like to reject these journalists requests. Advise Helen as to whether she may reject the requests of the journalists to disclose the record of Dreamie s shareholding in Taiwan Properties Ltd.. (5 marks) Explain to Helen the basic requirements to list Taiwan Properties on the Stock Exchange of Hong Kong, particularly the financial and capitalisation requirements. (c) If the company does list on the Stock Exchange of Hong Kong, what are the requirements in the Listing Rules for Helen continue to be qualified as its company secretary? (5 marks) (Total: 20 marks) Page 8 of 10

9 6. Hung Hom Development Ltd. is a private company incorporated in Hong Kong with an authorised and issued share capital of $500,000, i.e. 500,000 shares x $1 each. Sandy is a shareholder of Hung Hom Development Ltd. and she owns 40,000 shares in the company. Recently, Sandy heard from her friend, Anthony, who owns 20,000 shares in the company, that there are rumors that the company s managing director has used the company s money to subsidise his own business. Sandy would like to raise this issue in the company s general meeting.. Advise Sandy as to the procedures she, as a shareholder of the company, may follow in calling a general meeting to discuss her concerns with other shareholders. Advise Sandy as to the procedures required to remove the managing director of the company. (Total: 20 marks) End of Examination Paper Page 9 of 10

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