THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES. Suggested Answers

Transcription

1 THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES Suggested Answers Level : Professional Subject : Corporate Secretaryship Diet : June 2009 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 SECTION A Question 1 (a) note the incorporation of the company adopt the common seal note the appointment of first director(s) fix the registered office note the appointment of first secretary appoint independent external auditors appoint tax representative, if any allot founder members shares transfer shares or issue new shares, if any decide the financial year end date resolve the location where the statutory books and accounting records are kept consider the opening of bank accounts (b) In Hong Kong, documents to be submitted to the Companies Registry by a non-hong Kong company that are not original should be certified in either English or Chinese by: A notary public practising in Hong Kong A solicitor practising in Hong Kong A certified public accountant with practising certificate within the meaning of S.2 Professional Accountants Ordinance An officer of court in Hong Kong who is authorized by law to certify documents for any judicial or other legal purpose A consular officer of the place of incorporation of the company; or A professional company secretary practising in Hong Kong, being members of The Hong Kong Institute of Chartered Secretaries An officer (director, manager or secretary) of the company An authorised representative of the company (c) Transfer of shares is a voluntary act between the transferor willing to sell and the transferee willing to buy the shares at agreed terms, or in some cases, between a beneficial owner and nominee, or a donor and donee. Transmission of shares is an operation of law transferring the title to the shares from the registered holder who has died or otherwise has become incapacitated to a person according to the relevant law. (d) A narrative statement as how the company has complied with the code provisions on internal control during the reporting period. The process applied for (i) identifying, evaluating and managing the significant risks; (ii) for reviewing effectiveness of the internal control system; and (iii) dealing with material internal control of any significant problem faced by the company. Information to assist understanding of the company s risk management processes and system of internal control. The board s acknowledgment of its responsibility for the system of internal control and for reviewing its effectiveness.

3 (e) Pursuant to the Hong Kong Code on Takeovers and Mergers (the Code ), a mandatory offer is required when: i. any person acquired 30% or more of the voting rights of a public company; ii. any one or more of persons acting in concert acquired voting rights and such acquisition has the effect of increasing their collective holding of voting rights of a public company to 30% or more; iii. any person, who holds between 30% to 50% of the voting rights, increases holding in the company by more than 2% from his/her lowest percentage holding within 12 months from the relevant acquisition; and iv. persons acting in concert collectively hold between 30% to 50% of the voting rights of a company and an increase of their collective holding by more than 2% from their lowest percentage holding within 12 months from the relevant acquisition. For the purpose of the Code, voting rights means all the voting rights currently exercisable at a general meeting of a company. Acquisition of voting rights includes the exercise of control or direction over voting rights other than by way of a revocable proxy given for no or nominal consideration for the purpose of a shareholders meeting only. (f) Established under Securities and Futures Ordinance (Chapter 571), the Market Misconduct Tribunal has jurisdiction to hear and determine in accordance with Part XIII and Schedule 9 of Securities and Futures Ordinance any question or issue arising out of or in connection with the proceedings on insider dealing instituted under section 252, and makes orders in respect of a person identified as having engaged in market misconduct pursuant to section 252(3)(b). The object of proceedings is to determine whether any market misconduct has taken place; the identity of any person who has engaged in the market misconduct; and the amount of any profit gained or loss avoided as a result of the market misconduct. (g) Peter and Paul can apply to the Registrar of Companies to deregister the company pursuant to S.291AA of the Companies Ordinance. Conditions set out in S.291AA of the Companies Ordinance must be fulfilled: All members of the company agree to the deregistration; The company has never commenced operation (though this condition is not applicable in this case), or ceased to carry on business for more than 3 months before the application; The company has no outstanding liabilities; and A notice of no objection should be obtained from the Commissioner of Inland Revenue. (h) To set up a new private company in Hong Kong, the following procedure should be followed: Tim and Tina propose a company name and then check the proposed name with the index of company names at the Companies Registry to ensure the propose company name is available for registration Prepare and print (1) memorandum containing name, domicile, liability and capital clauses, name and signature of founder member(s) who agree(s) to subscribe for the founder share(s), and objects clause which is optional, and (2) articles of association

4 Execute an Incorporation Form (Form NC1) Check once again the proposed name with the Companies Registry Submit the registration documents including the memorandum, articles of association, a Form NC1 together with the necessary fee and capital duty The basic statutory fees will include an application fee of $1,720 plus capital duty of HK$1 per every $1,000 of authorised capital, payable to the Companies Registry. (i) i. Taken into account of the rules that (1) annual general meeting must be held each calendar year at intervals of not more than 15 months and (2) the audited financial statements of a company must be presented to its annual general meeting within 9 months after its financial year end, the deadline should fall on 30 September ii. For a private company, 21 clear days notice period is required for an annual general meeting. But a shorter notice to annual general meeting is permitted if all the members entitled to attend and vote at that meeting agreed (Article 52 of Table A). For a listed company, 21 clear days notice period is required for an annual general meeting pursuant to Article 52 of Table A (Saturdays, Sundays and public holidays within the notice period are taken into account). At the same time, a listed company has to comply with E.1.3 of Code of Corporate Governance Practices contained in the Listing Rules which states that at least 20 clear business days notice should be given for annual general meeting. In short, the notice of annual general meeting should not be less than 20 clear business days. Note that business day is defined under the Listing Rules as any day on which the Hong Kong Stock Exchange is open for the business of dealing in securities. (j) Documents to be filed with the Companies Registry after the final meeting: a copy of the special resolution authorising the disposal of the books, accounts and documents of the company after the expiration of a fixed period from the dissolution of the company within 15 days after the passing of the resolution the final statement of account of the winding up within one week after the final meeting a return of final meeting within one week after the final meeting a List of Dividends or Composition (Form 95) where applicable, within 30 days after the final meeting Forms 92 and 93 within 30 days after the final meeting, if the winding up continues for more than one year Form W5 within 21 days after the liquidator ceased to act

5 SECTION B Question 2 (a) Applying the 5 tests in order to determine the type of notifiable transactions: Assets Ratio: Value of the asset being realized Total assets of the listed issuer 1,100,000,000 4,000,000,000 X 100% X 100% = 27.5% Profits ratio: Profit attributable to the asset being realized Profit of the listed company X 100% 50,000,000* 80,000,000 X 100% = 62.5% * Assume net income is equivalent to profit attributable to the asset. Consideration Ratio: Consideration received Total market capitalization of the companies X 100% 1,000,000,000 2 x 100,000,000/0.1 X 100% = 50% Revenue Ratio: Revenue attributed to the assets being realized Revenue of the listed issuer X 100% 60,000,000 X 100% = 12% 500,000,000 Equity Capital Ratio: The test is not applicable as no issue of new shares is involved in this case. Each test above should be considered separately and the highest ratio should be taken for the purpose of determining the type of notifiable transaction. In this case, the highest ratio is 62.5% which falls between 25% or more but less than 75%, then the transaction is classified as a major transaction disposal according to the Listing Rules. Therefore, the disposal of the Property by Kepper is a major transaction.

6 Kepper is required to notify the Stock Exchange immediately, publish an announcement and issue circular to shareholders within 21 days after the publication of announcement relating to the disposal of the Property. It also has to seek shareholders approval in a general meeting or a written approval from shareholder(s) holding 50 per cent. of the nominal value of the securities which gives them the right to attend and vote at such a general meeting. No shareholder is required to abstain from voting in the even case. (b) A director of a listed company is a connected person to the listed company as defined under the Listing Rule 14A.11 (1). Zalt Limited is an associate of the director under the Listing Rules given that the director is directly interested in or controls the exercise of 30% or more of the voting power at general meetings of this company. An associate of a director is also defined as connected person under the Listing Rules. Then the transaction would be a connected transaction, in addition to the major transaction as explained in Part (a). Apart from the requirements under a major transaction, connected transaction needs independent shareholders approval. In other words, any shareholder who has a material interest in the transaction must abstain from voting at the meeting. An opinion by an independent expert as to whether the terms of transaction are fair and reasonable, and whether the transaction is in the interest of the company and its shareholders as a whole, together with the reasons for forming the opinion should be contained in the circular. A valuation report of the Property issued by an independent valuer should be included in the circular. A connected transaction on normal commercial terms is exempt from any reporting, announcement and independent shareholders approval requirements if each of the percentage ratios is less than 0.1%; or each of the percentage ratios (other than the profit ratios) is equal to or more than 0.1% but less than 2.5% and total consideration is less than HK$1 million. A connected transaction on normal commercial terms is only subject to the reporting and announcement requirements if each of the percentage ratios (other than the profits ratio) is less than 2.5%; or equal to or more than 2.5% but less than 25% and the total consideration is less than $10 million. On the fact that all percentage ratios in this case are above these thresholds, no exemption from those requirements will be granted. Question 3 (a) The guidelines for assessing the independence of a non-executive director are set out in Rule 3.13 of the Listing Rules of the Stock Exchange. In general, independence is more likely to be questioned if that person:- (1) holds more than 1% of the total issued share capital of the listed company; (2) has received an interest in any securities of the listed company as a gift, or by means of other financial assistance, from a connected person or the listed issuer itself; (3) is a director, partner or principal of a professional adviser which currently provides or has within

7 one year immediately prior to the date of his proposed appointment provided services, or is an employee of such professional adviser; (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 listed issuer 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 listed group; and (8) is financially dependent on the listed group. Rule 3.13(1) indicates that the independence of a director holding more than 1% of the total issued share capital of the listed company is more likely to be questioned. Mr. Wong s shareholding interest in XYZ is below the threshold and his independence may not be challenged in this respect. An independent non-executive director should not have involved in any material business dealings with the listed company (Rule 3.13(4)) and should be financially independent to the listed company concerned (Rule 3.13(8)). Being the landlord of XYZ s office premises, Mr. Wong turns out to have financial interest in the business of the company. He may not in prima facie satisfy the independence requirement of the Listing Rules. However, the question does not provide information about the lease amount or how material it is to XYZ and Mr. Wong. If the lease amount is immaterial compared to the total assets of XYZ as a whole and Mr. Wong is not financially dependent on the revenue of the lease, the board may justify Mr. Wong to act as an independent director. The board may disclose such to the Stock Exchange and seek an opinion on whether Mr. Wong could act as independent non-executive director of the company before his official appointment. (b) The company secretary has to follow up the procedure of appointing the director: 1. Check the provisions of the articles of association of the company governing the appointment of directors 2. Check the independence of the director if the appointing director is an independent nonexecutive director 3. Convene and hold a board meeting to (i) approve the appointment of the new director, and (ii) note the receipt of general declarations of interest in contracts, if any 4. Inform the Stock Exchange of the appointment immediately thereafter the board s approval 5. Publish an announcement including information as set out in Rule 13.51(2) and post it onto the websites of the Stock Exchange and the company 6. The director will sign and lodge with the Stock Exchange as soon as practicable after his/her appointment a Declaration and Undertaking with regard to Directors (Form B). An independent director should also submit to the Stock Exchange a written confirmation of the factors concerning his/her independence provided under Rule The new director must sign a letter of consent to act as director contained in D2A. Filing the same with the Companies Registry within 14 days after the appointment a notification of changes of director and secretaries (D2A). 8. Update the Register of directors and inform the company s bankers of the appointment and send them a copy of the relevant Form D2A

8 Question 4 (a) Mr. Johnson is a director of a listed company. He has a duty to disclose his interests and short position in shares (both voting and non-voting), underlying shares and debentures of the listed corporation of which he is a director pursuant to Part XV of the Securities and Futures Ordinance. He is obliged to disclose any event in consequence of which he becomes or ceases to be interested in, or changes his interest in the securities of the company. The fact that Mr. Johnson acquired the 10,000 shares of Rossy gives rise to his duty to disclose. He has to notify the Stock Exchange and Rossy at the same time, within three business days following the day when the duty to disclose arises. The time to disclose runs from the time the fact of the relevant event comes to the director s knowledge (i.e. Wednesday in this case). Business day means a day other than a public holiday and normally includes Saturday but not Sunday. Thus the last day of notice would fall on Saturday in the week when Mr. Johnson returned to the office. He should use Form 3A Director s/chief executive notice interests in shares of listed corporation for notifying the Stock Exchange and the company. (b) Rossy Development Limited Code on Directors Dealings in Securities of the Company 1 We require the directors of Rossy Development Limited ( the Company ) to observe high standard in the conduct regarding transaction in securities of the Company ( Securities ). Directors must practise honesty and integrity in dealing in the Securities and comply with all applicable laws and regulations. I. Strict Prohibitions 1. Directors must not deal in any of the Securities at any time when they are in possession of unpublished price-sensitive information in relation to those Securities. 2. Directors must not deal in the securities of other listed corporations when, by virtue of their position as director of those listed corporations, they are in possession of unpublished pricesensitive information in relation to those securities. 3. During the period commencing one month immediately preceding the earlier of: (a) the date of the board meeting for the approval of the Company results for any year, half-year, quarterly or any other interim period; and (b) the deadline for the Company to publish an announcement of its results for any year or half-year under the Exchange Listing Rules, or quarterly or any other interim period, and ending on the date of the results announcement, Directors must not deal in any Securities except for exceptional circumstances and with leave from the board. [NB: With effective from 1 April 2009, new Rule applies as following. Marks should be awarded for either versions.! "#$#%&

9 3. During the period of 60 days immediately preceding the publication date of the annual results or, if shorter, the period from the end of the relevant financial year up to the publication date of the results; and during the period of 30 days immediately preceding the publication date of the half-year and quarterly results or, if shorter, the period from the end of the relevant half-year or quarter period up to the publication date of the results, Directors must not deal in any Securities except for exceptional circumstances and with leave from the board.] 4. Where Directors are sole trustee, the provisions of this Code will apply to all dealings of the trust as if they were dealing on their own accounts, except for a bare trust case. 5. The restrictions on dealings by Directors contained in this Code will be regarded as equally applicable to any dealings by the Directors spouses or by or on behalf of any minor children and any other dealings in which for the purposes of Part XV of the Securities and Futures Ordinance Directors are or are to be treated as interested. It is the duty of the Directors, therefore, to seek to avoid any such dealing at a time when they are not free to deal. 6. When Directors places investment funds comprising Securities under professional management, discretionary or otherwise, the managers must nonetheless be made subject to the same restrictions and procedures as Directors themselves in respect of any proposed dealings in the Securities. II. Notification 7. Directors must not deal in any Securities without first notifying in writing the Chairman of the Board or the Chairman of the Corporate Governance Committee for the specific purpose and receiving a dated written acknowledgement. The designated person being notified must not be the Directors dealing in the Securities concerned. In each case, the Corporate Governance Committee will give a response to a request for clearance to deal to the relevant Director within five business days of the request being made; and (b) such clearance to deal will be valid for no longer than five business days of that clearance being received. 8. The Company Secretary will maintain a written record of the notification, acknowledged and receipt of written confirmation by the relevant Directors. 9. Directors who act as trustees of trusts must ensure that their cotrustees are aware of the identity of the Company and their directorship so as to enable their cotrustees to anticipate possible difficulties. Directors having funds under management must likewise advise their investment managers. 10. Directors who are beneficiary, but not a trustee, of a trust which deals in Securities must endeavour to ensure that the trustees notify them after they have dealt in the Securities on behalf of the trust, in order that they in turn may notify the Company. They must ensure that the trustees are aware of the Company and their directorship. 11. The register maintained in accordance with Section 352 of the Securities and Futures Ordinance is made available for inspection at every meeting of the board. 12. Directors must as a board and individually endeavour to ensure that any employee of the Company or director or employee of a subsidiary company who, because of his/her office or employment in the Company or a subsidiary, is likely to be in possession of unpublished pricesensitive information in relation to the Securities or securities of any other listed corporations does '

10 not deal in the Securities or those securities at a time when he/she would be prohibited from dealing by this Code if he/she were a director. III. Handling of Reported Violation 13. The Corporate Governance Committee will address all reported violation. The Chairman of the Corporate Governance Committee shall immediately notify the board of any such report. 14. All reports will be promptly investigated by the Corporate Governance Committee, and appropriate corrective action will be recommended to the board. 15. Directors are obliged to respond to any specific enquiry directed by the Corporate Governance Committee relating to compliance and/or non-compliance with this Code and the required standard of dealings in the Securities prescribed in the Listing Rules from time to time. 16. The Corporate Governance Committee has the authority to retain outside legal counsel, accountants, private investigators, or any other resource deemed necessary to conduct a full and complete investigation. IV. Confirmation of Compliance 17. Each Director should give a confirmation of compliance with this Code within one month of the end of each financial year and such a confirmation should be directed to the Chairman of the Corporate Governance Committee. 18. Each Director should respond promptly to any enquiry relating to his/her compliance with this Code upon a request of the Corporate Governance Committee. Question 5 (a) The resolution is for the purpose of shareholders granting a general mandate to the directors of the company to repurchase up to 10% shares of the company within the Relevant Period. This saves the time and cost of calling a general meeting for seeking shareholders approval when the directors decide to repurchase the company share. With this mandate, directors can repurchase shares in a speedy and flexible way. (b) Timothy Telecommunication Limited is a listed company. The basic rule for a listed company to repurchase its own shares is that fully paid shares may be purchased only out of distributable profits of the company or out of the proceeds of a fresh issue of share made for the purpose of the repurchase of the repurchase. A listed company cannot buy back its shares out of capital as opposing to a private company. (c) (i) Share repurchases can be made either on a stock exchange (on-market repurchases) or off the market. An off-market share repurchase must be approved by the Chairman of the Takeover Committee and by a special resolution passed by independent shareholders. An ordinary resolution passed by members at a general meeting granting a general mandate to directors to share repurchase is only applicable to on-market repurchase. In other words, the directors cannot rely on the general mandate to affect the repurchase with the investment bank. Instead they have to seek a separate shareholders approval in general meeting. (

11 (ii) The following procedures should be followed for off-market repurchase: Ensure that the share repurchase is authorized by the company s article of association and there are distributable profits or proceeds from a fresh issue of shares made for the purpose. Hold a board meeting to consider the share repurchase, approve the relevant share purchase contract and authorize the convening of a general meeting for passing a relevant special resolution. Inform the Stock Exchange and Securities and Futures Commission of the proposed share repurchase and submit for their comments and approval a draft announcement regarding the proposed repurchase. Post the announcement on the websites of company and the Stock Exchange. Dispatch an explanatory statement together with a notice of general meeting and a copy of the proposed share purchase contract to those who are entitled to attend the meeting. Post the explanatory statement and the notice of a general meeting on the websites of company and the Stock Exchange. Hold the general meeting to pass the special resolution. Voting is made by poll, available to independent shareholders only. Execute the share purchase contract, the relevant instrument of transfer, and bought and sold notes. The relevant share certificate(s) should be returned and cancelled. Report to the Stock Exchange by submitting a Next Day Disclosure Return not later than 30minutes before the earlier of the commencement of the morning trading session (ie before 9.30 am) or any pre-opening session (ie 9.00 am) on the business day following the execution of the share purchase contract. Arrange for stamping of the transfer documents within 2 days after the execution of the share purchase contract. Submit to the Companies Registry the special resolution within 15 days and Form SC2 within 14 days of the date on which the shares being repurchased are delivered to the company. Update the register of members. Share certificate(s) will be destroyed. Question 6 (a) Firstly, check the borrowing power of the company against its provisions in memorandum and articles of association to ascertain the following: 1. whether the company has the power to borrow and give security for loans; 2. whether the borrowing will exceed the borrowing power of the company and of its directors; and 3. whether the borrowing is for a purpose authorized in its objects clause (if objects clause is present in the memorandum of association).. If the above are satisfied, then go ahead to review the loan and charge documents and get the transaction ready for approval by the board and registration: Convene a board meeting to approve the loan and creation of charge; Register the charge with the Companies Registry within five weeks after the date of its creation. It is the duty of Lib Holding Limited to register the charge, though, as a normal practice, the solicitors acting for the borrower will make the necessary arrangements. Deliver the following documents to the Companies Registry for registration: - Form M1-a mortgage or charge details - An instrument, if any, by which the charge is created or evidenced - A filing fee of $340

12 The fixed charge on the premises needs to be registered with the Land Registry within 1 month of its creation. (b) Get ready the placing agreement specifying, inter alia, the details of allottee, the number, issue price and class of the shares proposed to be placed, payment terms, completion timeframe and any restrictions on disposal of the shares by the investor. For placing shares for cash consideration, shares are not permitted to be issued at a discount of more than 20% under normal circumstances. Check whether there is sufficient unissued authorised capital to cover the proposed new issue of shares Ensure prior general mandate for issue of new shares can sufficiently cover the proposed new issue of shares. If not, the company has to hold a general meeting to obtain shareholders approval regarding such an issue. Arrange for the letter of application for shares to be signed by the proposed allottee and ensure that payment for shares or an undertaking to pay has been received from the investor. Convene a board meeting to note the receipt of letter of application for shares and approve the allotment of shares, the issue of share certificates and the affixing of the security seal to the share certificate(s). Publish an announcement giving details of the placing on the websites of the company and the Stock Exchange. File a formal application for listing of and for permission to dealing in the new shares being placed (Form C1) with the Stock Exchange. Issue the share certificates within 10 days after the date of allotment. File a declaration (Form F) with the Stock Exchange. Submit a Next Day Disclosure Return to the Stock Exchange in respect of the change in issued share capital by 9.00 am on the next business day. Such a return is required under Listing Rule 13.25A(2)(i) irrespective of the percentage of change in issued share capital arising from a placing. File with the Companies Registry a return of allotments (Form SC1) within one month after the date of allotment. Update the register of members