THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES. Suggested Answers

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1 THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES Suggested Answers Level : Professional Subject : Corporate Secretaryship Diet : June 2006 The suggested answers are published for the purpose of assisting students in their understanding of what may be expected from a good candidate in the time allowed for each paper. They are in no way exhaustive nor model answer to the questions. They do not reflect the opinion of HKICS.

2 THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES CORPORATE SECRETARYSHIP (HKICS) JUNE 2006 Section A Suggested Answers 1. (a) For a private company, if there is only one member who is also the sole director, a reserve director (who is at least 18 years old) can be nominated to act in the place of the sole director in the event of his death. A reserve director can be nominated by the sole member in a general meeting or by written resolution. Within 14 days after the nomination, a notification of nomination as reserve director (Form D5) and an acceptance of nomination as reserve director (Form D6) should be filed with the Companies Registry. (b) Since implementation of Phase I of the ICRIS in February 2005, the general public may visit the Companies Registry s Cyber Search Centre on the internet anywhere anytime to conduct an information search on the current data of registered companies and digitised images of documents registered and kept by the Registrar of Companies. The general public may also conduct on-site searches at the Companies Registry s Public Search Centre during its office hours. (c) An adjourned meeting is a continuation of the original meeting although the resolutions passed at an adjourned meeting will be treated as having been passed on the date of the adjourned meeting. If there is insufficient time to finish the business as stated in the agenda of the meeting or time is required to count the votes cast in a poll, the chairman may seek the approval of the meeting to adjourn the meeting. When the need arises, the chairman may also use the chairman s power to adjourn the meeting to restore order. (d) A share warrant to bearer (which is also known as a bearer share) is a negotiable instrument issued by the company entitling the bearer to the number of shares in the company stated in the bearer share. A warrant is a right given to its holder to subscribe for a specific number of new shares at a specific price during a specific period. Hence, share capital is issued and raised in respect of a share warrant to bearer whereas share capital will only be issued in the future when the holder of a warrant exercises the right to subscribe for the shares during the exercise period. (e) When a public company issues secured debentures, the debentures will usually be accompanied by a trust deed, vesting the legal ownership of the debentures in the trustees. The debenture holders are then the equitable beneficiaries of a trust which is administered by those trustees. The trust deed will contain covenants by the company for payment of the principal and interest, serving notices of meetings to debenture holders, etc, and will give the trustees the power to appoint a receiver when the security becomes enforceable or the company is in breach of its covenants. 2

3 (f) The charge can be registered by delivering a Form M1 containing the charge details, an instrument creating the charge and the prescribed filing fee to the Companies Registry within five weeks of its creation. Otherwise, the charge will become void against the liquidator and any creditor (i.e. it ceases to be preferential). Nevertheless, the obligation to repay the loan is not prejudiced, and the money lent and secured by the charge becomes immediately repayable. (g) Every listed company on the GEM must ensure that, at all times, one of its executive directors assumes responsibility for acting as the company s compliance officer. The compliance officer s responsibilities must include, as a minimum, firstly, advising on and assisting the company s board of directors in implementing procedures to ensure that the company complies with the GEM Listing Rules and other relevant laws and regulations applicable to the listed company; and secondly, responding promptly and efficiently to all enquiries directed at him by the Stock Exchange of Hong Kong. (h) The principle of the Code is that the board should have a balance of skills and experience appropriate for the requirements of the business of the listed company. The board should ensure that changes to its composition can be managed without undue disruption. The board should include a balanced composition of executive and non-executive directors (including independent non-executive directors) so that there is a strong independent element on the board which can effectively exercise independent judgment. Non-executive directors should be of sufficient caliber and number for their views to carry weight. (i) The reasons for Hong Kong investors wanting to incorporate companies in offshore jurisdictions include secrecy of membership and directorship; fewer requirements such as no requirement on the appointment of a company secretary and the holding of an annual general meeting; no profits tax; no stamp duty on the transfer of shares; and more flexibility on investments. (j) A receiver is appointed primarily to realise the company s assets comprised in the debenture holders security; to distribute the proceeds of sale to the debenture holders in satisfaction of their claims; and to return any surplus or unrealised assets to the company which may then continue with its business or, if it is insolvent, go into liquidation. A receiver is not appointed with the object of winding-up the company and terminating its existence. This is the job of a liquidator. A liquidator is appointed to realise all the company s assets and settle the liabilities of the company, according to the ranking of claims. 3

4 SECTION B 2.(a) Mr Y should, first of all, arrange the signing of an instrument of transfer together with the bought and sold notes by Mr X as transferor and himself as transferee. He should present the transfer documents and the old share certificate to the company for approval of the transfer. The company will then pass a board resolution to approve the transfer and present the transfer documents together with a copy of the company s latest audited financial statements to the Stamp Office for adjudication of the stamp duty payable. Lastly, the register of members and register of transfers should be updated. (b) After the transfer of shares and resignation of Mr X as director, Mr Y would become the sole member and the sole director of the company. The sole director of a private company cannot also be the secretary of the company. Therefore Mr Y may either resign as secretary or appoint an additional director. (c) XY Limited Minutes of the board of directors meeting of the company held at [Place] on [Date] at [Time] Present Mr Y (Chairman of meeting) Mr X 1. Transfer of Shares The Transfer Deed for the following transfer was tabled before the meeting: Transferor Transferee No. of Shares Transferred Mr X Mr Y 500 RESOLVED: 1. That the transfer be approved and that a share certificate for the relevant number of shares be issued in the name of the transferee. 2. That the Common Seal of the Company be affixed to the share certificate. 3. That the share transfer be recorded in the Register of Transfers and Register of Members accordingly. 2. Resignation of Director RESOLVED: That the resignation of Mr X as Director of the Company be and is hereby accepted with immediate effect. 4

5 There being no other business, the meeting closed at [Time]. Chairman Company name Type of meeting Date, time, place of meeting Presentees and chairman Resolution for transfer of shares Resolution for resignation of director Close of meeting and place for chairman s signature (d) In order to change the company s name, Mr Y should ascertain from the Companies Registry whether the proposed name is available for registration. If it is Mr Y can pass a special resolution for the change of name in a general meeting (or record his sole member s decision for change of name) and submit a Form NC2 to the Companies Registry within 15 days after the date of the decision. Lastly, a copy of the special resolution should be inserted in every copy of the memorandum and articles of association. (e) That, subject to the approval of the Registrar of Companies, the name of the Company be changed to Y Limited with effect from the date of issue of the relevant certificate of incorporation on change of name. 5

6 3. (a) The term public limited company is not defined by the Companies Ordinance. If a limited company fails to satisfy the requirements of a private company which by its articles restricts the right to transfer its shares; and limits the number of members to 50, not including employees of the company and former employees who were members of he company whilst employed and who have continued to be members; and prohibits an invitation to the public to subscribe for any shares or debentures in the company, then it will be regarded as a public limited company. (b) The period of the profit and loss account of the company to be presented in the first annual general meeting is from 1 September 2004 to 31 December (c) PQR Limited must hold its first annual general meeting within 18 months after incorporation, i.e. by 1 March In determining the date of annual general meeting, attention should also be paid to section 122 of the Companies Ordinance, which provides that the audited accounts of a company must be presented to its annual general meeting within six months after its financial year end for public companies, i.e. 30 June 2006 for PQR Limited. Therefore, the latest date by which the company s first annual general meeting should be held is 1 March 2006, the earlier of the above two dates. (d) Since the company follows Table A as its articles of association, all the directors - i.e. A, B, C, D and E - shall retire at the first annual general meeting. (Article 91, Table A articles) (e) According to Article 109 of Table A articles, a director who has been appointed as managing director shall not, whilst holding that office, be subject to retirement by rotation or be taken into account in determining the rotation of retirement of directors. Hence, with the exception of A, all other directors - i.e. B, C, D and E - shall retire at the first annual general meeting. (f) Since PQR Limited is a public company, the latest date for filing the first annual return should be 42 days after the first annual general meeting, i.e. 42 days after 1 March 2006 or 11 April (g) A scrip dividend is a dividend in the form of shares (instead of cash) of the company distributed to the company s existing shareholders. Usually, the shareholder is given the choice of electing to take shares or cash. The company may issue fully paid shares in lieu of cash dividends to shareholders. Table A provides this authority and allows such an issue of shares to be financed either out of its profit and loss account or out of reserves. (h) Book closure means the register of members will be closed for a period during which any transfer of shares will not be updated into the register of members. In relation to the payment of dividends, the purpose of book closure is to ascertain a list of shareholders who are entitled to the payment of a dividend. 6

7 4. (a)(i) Before he became a director of the listed company, Mr M s duty of disclosure arose on 8 May 2006 because he held a notifiable interest of 5.5% and became a substantial shareholder after acquiring an additional 3% voting shares of the listed corporation. However, he did not need to disclose his interest in debentures as the notifiable interest of a substantial shareholder does not include debentures. (ii) After becoming a director of the listed company on 1 June 2006, Mr M has a duty to disclose his interest in shares (voting or non-voting) and debentures of the listed company. (b) When Mr M first acquired a notifiable interest in 5% or more of the voting shares of the listed corporation, notification should be made in his capacity of a substantial shareholder within three business days of 8 May 2006, i.e. by 11 May After becoming a director, he has a duty to disclose his interests in his capacity as a director of ABC Holdings Limited within ten business days of 1 June 2006, i.e. by 13 June (c) A short position arises if a person holds, writes or issues financial derivatives under which he has a right to require another person to take the underlying shares; he is under an obligation to deliver the underlying shares; he has a right to receive money if the price of the underlying shares declines; he has a right to avoid a loss if the price of the underlying shares declines; or he borrow shares under a securities borrowing and lending agreement. Based on the above information, Mr M does not have any short position. (d) Every listed company is required to keep a register of directors and chief executives interests and short positions and a register of substantial shareholders interests in shares and short positions in its registered office or its principal place of business in Hong Kong. The listed company must inform the Registrar of Companies of the whereabouts of these registers if they are not kept in the company s registered office or its principal place of business in Hong Kong. Within three business days of receipt of a notification, the listed company concerned must record the information received in the relevant register. If the listed company is an authorised financial institution or is the holding company of an authorised financial institution, it must notify the Hong Kong Monetary Authority of the information received on or before the following business day. The registers must also be open for public inspection during business hours and must be made available free-of-charge to members or to any other person on payment of $10 or less. Any person may require a copy on payment of $2 or less per page. Even if a company ceases to be listed, these registers and any related index must be kept for six years after the delisting. 7

8 5.(a) An initial public offering is a method of bringing a company s securities to the stock market. It normally involves a new issue of shares to raise capital to fund the business or to purchase shares from the original shareholders. (b) The sponsor s role includes sponsoring capital issues and the sale of securities to the public generally. The sponsor will advise on the form that the issue should take, timing, any capital reorganisation that may be required, and the issue price. They will also be responsible for the accuracy of the information provided in the listing particulars. (c) The public float refers to the number of issued shares held by public investors compared with the total number of issued shares (excluding unlisted and non-equity shares) of a listed company. The idea of a public float is to ensure an open market in the securities. At least 25% of the company s total issued share capital must at all times be held by the public. A lower percentage of between 15% and 25% may be accepted if the company s expected market capitalisation at the time of listing is over $10 billion. (d) First, when the directors are aware of notifiable transactions or of price-sensitive information, they should refrain from dealing in the securities of the company, up to the time of publication of a formal press announcement. Secondly, directors are prohibited from dealing in the securities of the company during the period from one month immediately preceding the preliminary announcement of the annual results to the publication of the interim report of the company. Thirdly, before a director deals in any securities of the company, he should first notify the chairman of the board of directors or a designated director and receive a dated written acknowledgement. If the chairman wishes to deal in any securities of the company, he should notify the board of directors at a board meeting or a designated director and receive a dated written acknowledgement. Fourthly, the directors should ensure that written records of the above notifications and acknowledgement are kept by the listed company. (e) First, the company can raise capital in a larger market. Second, the reputation and image of the company can be raised. 8

9 6.(a) A company may be wound up voluntarily, either through a members voluntary winding up or a creditors voluntary winding-up (under sections 228/241, or section 228A, of the Companies Ordinance). A members voluntary winding up should be the most cost-and time-effective because it does not need the appointment of a committee of inspection and the holding of creditors meeting (both of which are required by a creditors voluntary winding-up). (b) If the members voluntary winding-up is chosen, the company must be solvent, i.e. able to settle all of its debts in full. Therefore, the directors should hold a board meeting to authorise the execution of a certificate of solvency and the convening of an extraordinary general meeting to consider the passing of a resolution to put the company into members voluntary winding-up. The directors must state in the certificate that they have made a 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. A statement of the company s assets and liabilities must be attached to the certificate. The statement of assets and liabilities need not be audited, but it must be made up to the latest practicable date. In practice, this means that it should be not more than three months old. The certificate must be made not more than five weeks before the date of the resolution to wind up or on that date, but must be executed before the resolution is passed. (c) Since CBA Limited is a private company, if it has ceased operation for more than three months and has executed a deed of waiver of the debts from its only creditor, Ho Trading Company, it may apply to the Companies Registrar for deregistration under section 291AA of the Companies Ordinance. First of all, Mr Chan, Mr Cheung and Mr Ho must agree to this arrangement. Then, the application can be made by submitting the following to the Companies Registry: an application for deregistration (Form DR1); a letter of no-objection from the Commissioner of Inland Revenue issued not more than three months prior to the date of application stated in the Form DR1; the name and address of a person to be given notice of the deregistration; and the prescribed fee of $420. (d) Since the company is a private company, it may 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. Relevant accounting transactions are transactions required by section 121 of the Companies Ordinance to be entered into the company s books of account but which do not include any transaction which arises from the payment of any fee required to be paid by any ordinance. The advantages of being dormant are that the company is exempt from the statutory requirements of holding annual general meetings, filing annual returns, appointing auditors and preparing audited accounts while maintaining the company s existence. Hence, the shareholders may re-activate the company in the future without going through the incorporation procedures again should they want to recommence business. 9