THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES. Suggested Answers

Transcription

1 THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES Suggested Answers Level : Professional Two Subject : Corporate Secretaryship Diet : December 2009 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

2 SECTION A 1(a) 1. Ascertain from the Companies Registry whether the proposed name, John Holding Limited, is available for registration 2. Pass a special resolution of the company in writing sanctioning the change of name 3. Give notice of the change of name within 15 days after the passing of the special resolution changing its name in a specified form (Form NC2) to the Companies Registry; and pay the necessary fee 4. Insert a copy of the special resolution in every copy of the company s memorandum and articles of association 5. Obtain a certificate of incorporation on the change of name from the Companies Registry. The name change takes effect from the date of the certificate 6. Inform the Inland Revenue Department of the change (Form 3110A) and arrange for the name appearing on the company s business registration certificate to be amended within one month after the change 7. Pass a resolution of the directors adopting a new common seal and destroying the old one. (b) If a company has not entered into a relevant accounting transaction since a specified date/the date of incorporation, the member(s) can declare the company dormant by passing a special resolution. A dormant company is exempt from the statutory requirements of holding annual general meetings, filing annual returns, appointing independent external auditors and preparing audited financial statements. Thus, being declared dormant helps it save the related costs during the dormancy period. (c) register of directors register of secretaries register of members register of charges register of debenture holders (if any) register of particulars relating to quasi-loans and credit transactions register of directors and chief executive s interests and short positions register of substantial shareholders interests and short positions

3 (d) Examples of the financial matters reserved for the board s decision are: Approval of audited annual financial statements and directors reports Approval of accounting policies Review of internal controls and reporting system efficiency Approval of borrowing or giving security over assets Acceptance of independent auditor s reports including management letters Approval of overall corporate budgets Setting financial priorities and performance indicators Approval of the capital expenditure budget Approval of individual expenditure items above a certain sum Lease or purchase of buildings or premises Major transactions not included in the budget (e) The audit committee plays a significant role in maintaining a relationship with the independent external auditors of the company. Some of its tasks are: to make recommendations to the board on the appointment, reappointment and removal of the independent external auditor, to approve the remuneration and terms of engagement of the external auditor, and to answer any questions on the resignation or dismissal of that auditor; to discuss with the independent external auditor before the audit commences the nature and scope of the audit and reporting obligations, and to ensure co-ordination where more than one audit firm is involved; to review and monitor the independent external auditor s independence and objectivity and the effectiveness of the audit process in accordance with applicable standard; and to develop and implement policy on the engagement of an independent external auditor to supply non-audit services. (f) The shareholders and investors would lose faith and confidence in the company and sell their shares. Falling of share prices may result. Financial institutions, lenders and creditors would cast doubt on the financial stability and governance standard of the company. Credit ratings will drop and credit lines will contract.. Failure to publish annual audited financial results in a timely manner constitutes a breach of the Listing Rules. The Stock Exchange may enforce disciplinary actions on the company and its directors. These include investigation, disciplinary hearings, and the issue of a private reprimand or a public statement of criticism against the company. In addition, the Stock Exchange will require the breach to be rectified or other remedial action to be taken within a stipulated time. If the breach is found to be material, the Stock Exchange may suspend or cancel the listing and trading of the company s securities. The directors may be privately reprimanded or publicly criticised for breaching their undertakings as directors to procure the company s compliance with the Listing Rules.

4 (g) When shares are issued at a price above the nominal value of the shares, or when shares are purchased at a price higher than the market price, the excess is share premium. A company can apply the share premium: to pay up unissued shares of the company to be issued to members of the company as fully paid bonus shares; to write off preliminary expenses of the company; and to write off expenses of, or commission paid or discount allowed on, any issue of shares (h) Pursuant to the Listing Rules, the secretary of the listed issuer must be a person who is ordinarily resident in Hong Kong and who has the requisite knowledge and experience to discharge the functions of secretary of the issuer and who: in the case of an issuer which was already listed on 1 December 1989, held the office of secretary of the issuer on that date; is a member of The Hong Kong Institute of Chartered Secretaries, a solicitor or barrister as defined in the Legal Practitioners Ordinance, or a professional accountant; or is an individual who, by virtue of his academic or professional qualifications or relevant experience, is, in the opinion of the Exchange, capable of discharging those functions. (i) It was resolved that the following transfer of shares be hereby approved: Transferor Transferee No. of shares Oxford Ou Peter Pang 100,000 It was further resolved that, subject to the presentation to the Company of the duly completed and stamped transfer documents, the particulars of the aforesaid transfer of shares and the transferee be entered in the Company s Register of Members. It was further resolved that the relevant old share certificate(s) be cancelled and a new share certificate be executed under the Common Seal and witnessed by a Director of the Company. (j) In the case of a private company, share certificates must be issued to the transferee within two months after the appropriate transfer documents are lodged by the company. In the case of a public company, share certificates must be issued within 10 business days after the appropriate transfer documents are lodged. The company may provide expedited services at a fee not exceeding the amount stipulated in the Listing Rules. The provision of expedited services is optional.

5 SECTION B 2 The expected market capitalisation for new listing must be at least $200 million. The expected market capitalisation of Quick Start is $200 million [$1 x ( ) million] which satisfies the initial market capitalisation. The profit test in Rule 8.05(1) sets out three conditions: (1) in the most recent year, the profit attributable to shareholders must not be less than $20 million; and in respect of the two preceding years, be in aggregate not less than $30 million; (2) management continuity for at least the three preceding financial years; and (3) ownership continuity and control for at least the most recent audited financial year. Quick Start recorded profits after tax of $10 million, $40 million and $62 million for 2006, 2007 and 2008 respectively. Quick Start satisfies all conditions of the profit test. The company must have sufficient management presence in Hong Kong. At least two of its executive directors should be ordinarily resident in Hong Kong. As Aron and Charles do not reside in Hong Kong, the company has to appoint an additional executive director who ordinarily resides in Hong Kong in order to fulfil the listing requirements. To meet the listing qualification, an applicant company must have a trading record of not less than three financial years. Quick Start fulfils this requirement. A listed company should have at least three independent non-executive directors on the board. Daniel and Eric will be appointed independent non-executive directors of the company. But their independence is questionable given that Daniel is the brother of Charles, a director and substantial shareholder, and that Daniel and Eric each hold a more than 1% shareholding interest in the company. The company needs to find three new candidates to fill the independent non-executive directorship positions, one of whom must possess the relevant financial management qualifications. There must be an open market in the securities, i.e. a minimum of 25% of the securities must be in public hands at all times. The expected market capitalisation at the time of new listing to be held by the public must be at least $50 million. According to the listing proposal, the company would issue 75 million new shares at a price of $1 each. The 40 million shares taken by the two major suppliers are not recognised as being held by members of the public by the Stock Exchange. The company only has a market capitalisation of $35 million ($75-40 m), representing 17.5% (i.e. 35/200 x 100%) being held by the public on flotation. It is unlikely the Stock Exchange will apply discretion to lower the percentage of public holding in view of the company s market capital not exceeding $10 billion. The directors should therefore consider increasing the amount of the market capitalisation to be offered to the public.

6 The company should adopt a fair basis of allocation in its offer to the public. It is doubtful that the major suppliers will be recognised as members of the public. Their agreements to subscribe for 40 million new shares may violate the fair basis rule of allocation unless this is disclosed in the prospectus. The latest audited financial statements must not have ended more than six months before the date of the listing documents. Quick Start s latest audited financial statements ended 31 December As the company s prospectus will be dated after 30 June 2009, Quick Start has to produce updated audited financial statements in the prospectus. Aron is a director of the company. He has an interest in another plant manufacturing the same products as Quick Start. It is unclear as whether this private business competes with or is likely to compete with Quick Start. If it turns out to be a competing business, Quick Start must prominently disclose in the prospectus the reason for the exclusion, a description of the excluded business with an explanation as to how such a business may compete with the company, and the fact demonstrating that the company is capable of carrying on its business independently. Quick Start should appoint an underwriter and sponsor when applying for listing. There should be two authorised representatives and a qualified secretary. To sum up, it seems that Quick Start can meet the major financial qualifications for listing on the Main Board of the Stock Exchange, but it needs to make some modifications as mentioned above to suit the overall requirements.

7 3(a) Meadow Properties Limited (Incorporated in Hong Kong under the Companies Ordinance) (Stock Code: 00XX) NOTICE OF 2010 ANNUAL GENERAL MEETING NOTICE IS HEREBY GIVEN that the Annual General Meeting of members of the Company will be held at the Ballroom, 1st Floor, High Street Hotel, 10 High Street, Kowloon, Hong Kong on Tuesday, 5 January 2010 at 3:00 p.m. for the following purposes: As ordinary business 1. To consider and receive the audited Financial Statements, the Report of the Directors and the Independent Auditor s Report for the year ended 30 September, To declare a final dividend of $0.1 per share for the year ended 30 September, To re-elect retiring Directors as Directors. 4. To approve the directors fees payable to Directors for the year ending 30 September, To appoint Able & Associates, Certified Public Accountants, as the Independent External Auditors for the ensuing year, and authorise the Directors to fix their remuneration. As special business 6. To consider and, if thought fit, pass with or without amendments, the following resolutions as Ordinary Resolutions: ORDINARY RESOLUTIONS (A) THAT a general mandate be and is hereby unconditionally given to the Directors to issue and deal with additional shares not exceeding 20% of the aggregate nominal amount of the existing issued share capital of the Company at the date of this Resolution until the next Annual General Meeting ( Relevant Period ), such mandate to include the granting of offers or options (including bonds and debentures convertible into shares of the Company) which might be exercisable or convertible during or after the Relevant Period. (B) THAT: (a) subject to paragraph (b) below, the exercise by the Directors during the Relevant Period (as hereinafter defined) of all the powers of the Company to repurchase shares of HK$0.50 each in the capital of the Company in accordance with all applicable laws and the requirements of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited or of any other stock exchange as amended from time to time, be and is hereby generally and unconditionally approved; (b) the aggregate nominal amount of shares of the Company to be repurchased by the Company pursuant to the approval in paragraph (a) above shall not exceed 10% of the aggregate nominal amount of the share capital of the Company in issue at the date of this Resolution, and the said approval shall be limited accordingly; and (c) for the purposes of this Resolution, Relevant Period means the period from the passing of this Resolution until whichever is the earliest of: (i) the conclusion of the next Annual General Meeting of the Company; (ii) the expiration of the period within which the next Annual General Meeting of the Company is required by law to be held; and (iii) the date on which the authority set out in this Resolution is revoked or varied by an ordinary resolution of the shareholders in general meeting. (C) THAT the general mandate granted to the Directors to issue and deal with additional shares pursuant to Ordinary Resolution No. 6(A) set out in the notice convening this meeting be and is hereby extended by the addition thereto of an amount representing the aggregate nominal amount of the share capital of the Company repurchased by the Company under the authority granted

8 pursuant to Ordinary Resolution No. 6(B) set out in the notice convening this meeting, provided that such amount shall not exceed 10% of the aggregate nominal amount of the issued share capital of the Company at the date of the said Resolution. Hong Kong, 1 December 2009 Registered office: 1/F, Meadow Plaza 111 Queen s Road Central Hong Kong By Order of the Board Nancy Leung Company Secretary (b) To attend and chair the annual general meeting. To arrange for the chairpersons of the audit and remuneration committees and, where applicable, the nomination committee or their delegates to attend the annual general meeting to answer questions. To ensure that appropriate steps are taken to provide effective communication with shareholders and that the views of shareholders are communicated to the board as a whole. To explain the detailed procedures for conducting a poll and then answer any questions from shareholders regarding voting by way of a poll at the commencement of the meeting. To ensure that all resolutions voted on at the meeting are taken by poll. To adjourn the meeting and declare the voting results at the adjourned meeting.

9 4(a) Linda can terminate her own company by de-registration if the company fulfils the following conditions pursuant to section 291AA of the Companies Ordinance: 1. All members of the company agree to the deregistration 2. The company has never commenced operation, or ceased to carry on business for more than three months before the application 3. The company has no outstanding liabilities; and 4. A notice of no objection should be obtained from the Commissioner of Inland Revenue. Linda can follow the procedures below: (1) To prepare a written resolution of the sole member of Lola Fashion Limited approving the deregistration of the company. (2) Then apply for a written notice of no objection from the Commissioner of Inland Revenue under section 88B of the Inland Revenue Ordinance by submitting a Form IR1263 and a fee of HK$350 which is non-refundable. (3) Subsequent to the issue of the notice of no objection, submit to the Companies Registry the following items: - An Application for Deregistration of a Defunct Private Company (Form DR1) together with the Information Sheet; - A written notice of no objection from the Commissioner of Inland Revenue which is issued not more than three months prior to the date of the application in the DR1; and - A fee of HK$420 which is non-refundable. The Registrar will publish a notice of the proposed deregistration in the Gazette. If the Registrar of Companies receives no objection during the three-month period, the second Gazette Notice will be published whereupon the company will be dissolved. If Linda can find a buyer for her company, she can sell her entire issued shares in Lola Fashion Limited to the buyer. The French company may be the prospective buyer. (b) The French company has the following options: 1. To set up a new company in Hong Kong as its wholly-owned subsidiary in which the French company (as parent company) holds the entire shareholding interest; or 2. To register itself as a non-hong Kong company under Part XI of the Companies Ordinance. Option 1 The procedure for setting up a new private company in Hong Kong is: Check the proposed name with the index of company names at the Companies Registry Print a memorandum of association with the French company as the founder shareholder, and articles of association Execute a Incorporation Form (NC1) Once again check the proposed name with the Companies Registry Submit registration documents together with $1,720 and capital duty payable to the Companies Registry Apply for business registration certificates for the office and retail outlets

10 Option 2 According to section 333(1) of the Companies Ordinance, any foreign company which intends to register as a non-hong Kong company must within one month of establishing a place of business in Hong Kong deliver to the Companies Registry the following documents for registration: the original of the charter, statute or memorandum and articles of association of the company, or their certified copies. They should be in either English or Chinese. Otherwise a certified English or Chinese translation should be submitted a Form N1 containing the name, place of incorporation, date of establishment of the place of businesses in Hong Kong, the address of principal place of business in Hong Kong and in the place of incorporation, and address of the registered office in the place of incorporation the date of appointment of directors, secretary and the authorised representative in Hong Kong and their particulars the original or a certified copy of the certificate of incorporation, together with a certified English or Chinese translation if the certificate is not in English or Chinese if required under section 333(3) of the Companies Ordinance, the original or a certified copy of the company's latest accounts in the form required by the law of the place of its incorporation the prescribe fee for registration a certified and translation of documents if they are not in English or Chinese

11 5(a) Dear Annie, I refer to your relating to the proposed share option scheme. Overall the draft terms are fine except for some of the terms which may need modifications in order to comply with rule of the Listing Rules. I set out below certain key points for consideration: (i) The maximum number of shares which may be issued upon exercise of all options to be granted under the scheme must not exceed 10% of the issued ordinary shares of the company in issue as at the date of approval of the scheme. We may seek shareholders approval for refreshing the 10% limit when it is necessary in future. But the refreshed limit must not exceed 10% of the shares in issue as at the date of approval of that limit. The company may seek a separate shareholders approval for granting options beyond the 10% limit provided the options in excess of the limit are granted to participants specifically identified before the approval is sought. In any event, the limit of shares issued or to be issued upon exercise of all outstanding options granted under all options of the company should not exceed 30% of ordinary shares of the company from time to time. The exercise price per share must not be less than the nominal value of each share. The life of scheme must not be more than 10 years. The exercise price or the number of ordinary shares subject to options granted and to the scheme can be adjusted in the event of a capitalisation issue, rights issue, sub-division or consolidation of shares or reduction of capital. Though the Listing Rules do not preclude directors power from cancelling options granted but not exercised, or terminating a share option scheme, interests of grantees or participants will be affected by the directors sole discretion. It is more equitable that such proposals should be put forth to the independent shareholders in general meeting for decision. In any event, there should be a provision for the treatment of options granted under the scheme but not yet exercised at the time of the termination. (ii) It appears that some key terms are missing from the list. Please clarify the following: The purpose of the share option scheme should be specified. The terms should set out the maximum entitlement of each participant under the scheme. The total number of ordinary shares issued and to be issued upon exercise of the options granted to each participant in any 12-month period must not exceed 1% of the ordinary shares of the company in issue unless a separate approval is obtained from shareholders. We have to state whether the exercise of the options will be linked with performance targets. The circumstances under which the options will automatically lapse should be provided in the scheme. The scheme document may include the expiry of the option period; and provisions governing the exercise of options upon the death of participants, cessation of employment or directorship of the company and its subsidiaries, and the winding up of the company. (iii) As independent non-executive directors are eligible participants under the proposed scheme, I would like to make a remark of some limitations imposed on them. The Listing Rules provide where any grant of options to an independent non-executive director of the listed issuer, or any of their respective associates, would result in the securities issued and to be issued upon exercise of all options already granted or to be granted to such person in the 12-month period up to and including the date of such grant representing in aggregate over 0.1% of the relevant class of securities in issue; and having an aggregate value, based on the closing price of the securities at the date of

12 each grant, in excess of $5 million, such grant of options must be approved by the shareholders of the listed issuer. In this case, the company has to send a circular setting out all the details to the shareholders for approval at a general meeting. In addition, the independent director and his/her associates must abstain from voting on this motion at the relevant general meeting. An independent non-executive director can approve the grant of options to the other independent non-executive directors of the company except for any grant of options to himself/herself. The above are not conclusive. Please let me know if you need my further input to the revised draft proposal. Regards Jenny Ip (b) The company should not grant options after an unpublished price sensitive event has occurred or before the release of an announcement of that event if it is so required. In particular, a grant should not be made during the period commencing one month preceding the earlier of the date of board meeting for approving annual, interim or annual results; and the deadline for announcing those results under the Listing Rules and ending on the date of the results announcement (Main Board Listing Rule 17.05).

13 6(a) The project can be financed by a rights issue by which new shares are offered to all existing shareholders for subscription on a pro-rata basis at a specific price. The percentage of shareholding of each shareholder will not be affected if the shareholder will subscribe for the offered shares. Some conditions apply to rights issue: The company has to publish a prospectus stating all details of the rights issue. The issue should be fully underwritten unless it has prior consent from the Stock Exchange. Shareholders should have the right to dispose of their rights for subscription or to apply for excess shares not taken up by other shareholders. The rights issue is conditional on independent shareholders approval if the issue would increase the existing issued share capital or market capitalisation of the company by 50%; or if the rights issue is made within the first 12 months of the commencement of dealing the securities on the Stock Exchange; or if no arrangements are made for the disposal of the excess rights shares, and it is wholly or partly underwritten or sub-underwritten by a director, chief executive, or substantial shareholder of the company or their associates. (b) Debt financing including - Borrowing from banks or financial institutions by way of overdraft, credit trading line, term loan, syndicate loan, mortgage, machine loan, hire purchase, floating charge on stock, etc. - Issue of debentures, bonds or promissory notes to existing shareholders or associated parties, calling shareholders loans from majority shareholders Disposal of assets of the company - Sell and lease back the office, warehouse premises or valuable machinery; disposal of part of the equity in the subsidiary to a joint venture partner Spin-off of the subsidiary The subsidiary has a trading record and management continuity for more than three financial years. It has also generated a steady profit in the past few years. The directors may conduct a feasibility study as to whether the subsidiary meets the listing qualification (in either the Main Board or GEM) for a spin-off. In addition, the parent listed group has to fulfil the requirements for separate listing of its subsidiary set out in Practice Note 15 of the Listing Rules. A spin-off will not dilute the shareholding of the controlling shareholders at the holding company level.