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 : December 2008 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 1. (a) According to Article 109 of Table A articles, the managing director, i.e. Mr. Ho, shall not be subject to retirement by rotation or be taken into account in determining the rotation of retirement of directors. Hence, the number nearest to one-third of the remaining four directors i.e. one of the directors from among Mr. Chan, Mr. Lee, Mr. Cheung and Mr. Wong should retire from office in the 2008 annual general meeting (Article 91 of Table A articles). The one who has been longest in office since the last election should retire in the 2008 annual general meeting, in this case Mr. Wong. (b) When voting is by a show of hands, every member personally (or corporation attending the general meeting through a corporate representative) present and entitled to vote has one vote only, regardless of the number of shares held by the member. If voting is conducted by poll, the number of shares held by a member determines the number of votes that the member can cast and a member need not use all the votes in the same way. A poll must be demanded before voting (or if voting has been conducted by a show of hands on or before the declaration of the result by the chairman of the meeting) takes place and a member represented by proxy can only vote on a poll or join in demanding a poll. (c) A director may be removed from office by passing an ordinary resolution in a general meeting by special notice (i.e. 28 days before the day of the general meeting at which the resolution is considered by the members of the company). The board of directors, on receipt of a special notice of an intended resolution to remove a director, should send a copy of the notice to the director concerned and despatch notice of the general meeting to the members and to the director concerned at least 21 days before the meeting. The director s written representations concerning his removal, if any, must be sent to members or read out at the meeting (as the case may be). After passing the ordinary resolution for the removal, a Form D2A (Notice of change of secretary and director) should be filed with the Companies Registry within 14 days and the register of directors should be updated. (d) The certification includes the company has not since incorporation issued any invitation to the public to subscribe for any shares or debentures in the company and that if the number of members is in excess of 50 as at the date of the annual return, the excess are persons who under section 29(1)(b) of the Companies Ordinance are not to be included in the calculation of 50. Second, all directors of the company in office at any time during the period covered by the return have, either before the commencement of the period or before their respective appointments, been supplied with a copy of the latest version of the Nonstatutory Guidelines on Directors Duties published by the Companies Registry for their information and reference. (e) The chairman of company meetings can determine the points of order and may adjourn a meeting if so required, e.g. for a poll vote. Subject to the company s articles of association, the chairman may demand a vote be conducted by poll and may have a casting vote in the case of a tie.

3 (f) The documents for registering a company limited by guarantee include the memorandum and articles of association, and the Incorporation Form (Form NC1G). The memorandum of association must contain the name clause stating the name of the company; the domicile clause stating that the registered office of the company is situated in Hong Kong; the objects clause specifying the proposed activities and powers of the company; a liability clause specifying that the liability of the members is limited; the guarantee clause specifying the amount which each member has undertaken to contribute, which is an amount not exceeding $100 to the assets of the company if it is wound up; and the names, addresses and descriptions of the subscribers to the memorandum and the same particulars of the witness to the signatures of the subscribers. The articles of association contain the internal regulations for the company and must state the number of members with which it proposes to be registered. (g) First, share capital is the equity capital but loan capital is the debt capital which increases the gearing of the company. Second, share capital cannot be paid back to the shareholders and is subject to restrictions on reduction of capital whereas loan capital is normally repaid to investors. Third, dividends will only be distributed to shareholders when the company has available profits for distribution whereas interest on loan capital must be paid to investors whether the company makes a profit or not. Fourth, distribution to shareholders cannot save tax for the company whereas interest on loans is tax deductible. (h) The final meeting should consider the accounts of the winding-up presented by the liquidators and pass a special resolution to authorise disposal of the books, accounts and documents of the company after the expiry of a fixed period from the dissolution of the company. The liquidators should convene the final general meeting by giving at least one month s notice in the Gazette and despatch a notice, together with the proxy form, to the members. (i) Relevant information, in relation to a corporation, means specific information about the corporation; a shareholder or officer of the corporation; or the listed securities of the corporation or their derivatives, which is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but which would, if it were generally known to them, be likely to materially affect the price of the listed securities. (j) After registration, the charge becomes enforceable and can provide security for the creditor concerned. The details concerning the charge become public information and can be found from the Companies Registry by conducting a company search. The company s creditors can consider the company s assets available as security for their loans. Non-registration of a registrable charge will make the charge become void against the liquidator and any creditor. Therefore, the lender will lose its/his/her protection, (i.e. priority in recovering the money lent to the particular borrower by realising the charged assets) and can claim only as an unsecured creditor. However, the money lent is still a debt owed by the borrower to the lender.

4 SECTION B 2.(a) A share certificate should be issued to Nelson after he pays the company HK$10,000 as consideration for his shares in the company upon incorporation and his name and other particulars should be entered into the register of members. Nelson can transfer half of his shares to Susan after incorporation by presenting a properly stamped instrument of transfer (and bought and sold notes, which need not be presented to the company) for approval at the first board meeting. Share certificates should be cancelled and issued accordingly and the registers of members and transfer to be updated. The details of Nelson (as the first director) should be entered in the register of directors after incorporation. Susan can be appointed as a director in the first board meeting. She should sign her consent to act as a director in the Form D2A (Notification of Change of Secretary and Director) which should be filed with the Companies Registry within 14 days. The details of Susan should be entered in the register of directors after appointment. As Susan was named as the first secretary, her details should also be entered in the register of secretaries. Nelson can look after the company s book-keeping and accounts as long as he has accounting knowledge. However, he cannot be appointed as the independent auditor as he is a director. (b) Nelson Business Consulting Limited (the Company ) (Incorproated in Hong Kong with limited liability) Minutes of the first Meeting of the Board of Directors of the Company held at the Conference Room of address on 14 October 2008 at 2:30 p.m. Present: Nelson (Chairman of meeting) Susan (Secretary of meeting) Chairman Nelson was in the chair. Incorporation of Company There was tabled at this meeting the Certificate of Incorporation of the Company (No.xxxxxx) dated 14 October 2008 together with a printed copy of the Memorandum and Articles of Association. Common Seal It was RESOLVED that the Common Seal, an impression of which is affixed in the margin hereof, be and is hereby adopted as the Common Seal of the Company. First Director

5 It was NOTED that Nelson was named in the Incorporation Form (NC1) as the first director of the Company. Appointment of Director It was RESOLVED that Susan be hereby appointed as a director of the Company with effect from 14 October Registered Office It was RESOLVED that the registered office of the Company be situated at Room /F Wan Chai Building, 33 Wan Chai Road, Hong Kong. First Secretary It was NOTED that Susan was named in the Incorporation Form (NC1) as the first secretary of the Company Financial Year End It was RESOLVED that the financial year end of the Company be fixed at 31 December and that the first accounts of the Company be prepared for the period from the date of incorporation (i.e. 1 October 2008) to 31 December Auditors It was RESOLVED that Messrs Lam & Co., Certified Public Accountants, be appointed as the first independent auditors of the Company at a fee to be agreed with the directors. Tax Representatives It was RESOLVED that Messrs Lam & Co., Certified Public Accountants, be appointed as the tax representatives of the Company. Founder Member s Shares It was NOTED that Nelson had taken up 10,000 shares as signatory to the Memorandum and Articles (or founder member). It was RESOLVED that the affixing of the Common Seal of the Company onto the share certificate issued in connection therewith be approved and that Nelson s particulars be entered in the Register of Members. Transfer of Shares It was RESOLVED that the transfer of 5,000 shares from Nelson to Susan be and is hereby approved. It was FURTHER RESOLVED that when properly executed and stamped instrument of transfer is received, the transfer of shares be duly entered in the register of members and register of transfers and that share certificates be issued in respect of the transfers and the Common Seal of the Company be affixed thereto and that the relevant share certificate in respect of the transferor be cancelled accordingly. End of Meeting There being no further business, the meeting closed at 3:30 p.m. Chairman 3.

6 Joan & John Limited Memorandum To : The board of directors From : Alice Au, Company Secretary Date : 5 December 2008 Re : Requirements on distribution to shareholders With reference to your recent discussion over the proposed distribution to shareholders in the forthcoming results announcement, I would like to provide further information concerning the requirements on distribution including the payment of a dividend and the procedures for a bonus issue of shares of the company. The company cannot distribute a dividend based solely on its ability to generate return on its investments. Dividends must be paid out of a company s profits available for distribution, i.e. its accumulated realised profits less its accumulated realised losses. Furthermore, since the company is listed, it may only pay a dividend if at any time the amount of its net assets is not less than the aggregate of the company s called-up capital and its undistributable reserves and if, and to the extent that, the dividend payment does not reduce the amount of these assets to less than the aggregate. The payment and rate of a final dividend must be recommended by the directors in a board meeting and approved by members at the forthcoming annual general meeting. Before recommending a dividend, the directors may set aside such sums out of the company s profits as reserves or carry forward any profit which they consider should not be distributed. Hence, even if the company can pay a dividend, you may exercise your judgment in the retention of profits after considering the company s business operations. Furthermore, dividends can be paid in the form of shares in the company by capitalising the company s reserves or profits, i.e. a capitalisation issue. A capitalisation issue includes a scrip dividend scheme under which profits are capitalised. A capitalisation issue must be supported by a listing document in the form of a circular to shareholders. The procedures for a capitalisation issue are as follows: 1. Hold a board meeting to resolve the capitalisation of reserves or profits for issuing the bonus shares to shareholders and the basis for the bonus issue. 2. Dispatch notices of meeting, circulars containing relevant details of the bonus shares and annual reports to shareholders (and enough copies to the Stock Exchange) not less than 21 clear days before the annual general meeting. 3. Hold the annual general meeting to approve the financial statements and reports, the capitalisation issue, etc. 4. Close the register of members to ascertain members entitlement to the dividend/bonus issue of shares. 5. Notify the Stock Exchange of the basis of distribution of bonus shares and submit a certified copy of each of the mandates and resolutions approving special business, if any. 6. Convene and hold a board meeting to approve the allotment of new shares to the shareholders, pro-rata to their holdings, on the recorded date. 7. Submit an application for the listing of and permission to deal in the new shares. 8. Issue bonus shares certificates. 9. Post bonus share certificates to the members who are entitled to the distribution.

7 10. Update the register of members. 11. File a return of allotments (Form SC1) with the Companies Registry within one month from the date of allotment. Please consider the above requirements for recommending a distribution to shareholders and obtain a legal opinion concerning the restrictions and regulatory requirements on participation by overseas shareholders in the bonus issue arrangements in the forthcoming results announcement. Alternatively, the dividend can be declared as a special or second interim dividend by the board of directors and no shareholders approval at general meeting is required.

8 4. In order to determine what kind(s) of transaction it is, apply the following percentage ratios: consideration ratio (the consideration divided by CIL s total market capitalisation): $24m / (200m x $16) x100 % = 0.75% profits ratio (the profit attributable to the assets being acquired divided by the profits of CIL): $1.8m / $150m x 100% = 1.2% [Not for connected transactions] revenue ratio (the revenue attributable to the assets being acquired divided by the revenue of CIL): $300m / $10,000m x 100% = 3% assets ratio (the total assets of HSL divided by the total assets of CIL): $20m / $2,8m x 100% = 714% equity capital ratio (the nominal value of CIL s equity capital issued as consideration divided by the nominal value of the CIL s issued equity capital immediately before the transaction): $1.5m/$200m x 100% = 0.75% Since the assets ratio is more than 100% and the transaction involves the issue of shares by listed company CIL, it is a very substantial acquisition and share transaction under Chapter 14 of the Main Board Listing Rules. It is subject to disclosure by way of public announcement and despatch of circular together with an accountants report on HSL for the past 3 financial years to shareholders and must be made conditional on approval by independent shareholders in general meeting. It is also a connected transaction under Chapter 14A of the Main Board Listing Rules as (1) Mr. Charles Lee, being a director of CIL, is a connected person of CIL and Mr. Lee s wife is an associate of Mr Lee and therefore is also a connected person; and (2) the transaction is between a listed company (CIL) and a connected person (i.e. Mr. Lee s wife, who holds a controlling interest in HCL). As not all percentage ratios (excluding the profits ratio) are less than 2.5%, the transaction is subject to both disclosure and independent shareholders approval. Hence, CIL shall notify the Stock Exchange as soon as possible after the terms of the transaction have been agreed and send a draft announcement to the Stock Exchange. Once the announcement has been amended taking into account of the Stock Exchange s comments, CIL must cause the announcement to be published on the respective websites of CIL and The Hong Kong Exchanges and Clearing Limited (the HKEx ) before 9:00 am on the next business day; deliver to the Stock Exchange for comments and approval a draft circular which must contain an accountants report on HSL for the past 3 years; then revise and/or dispatch the circular to members within 21 days after the publication of the announcement; publish the circular on the respective websites of CIL and the HKEx one day before circulation to members and obtain independent shareholders prior approval at a general meeting at which Mr. Charles Lee and his wife must abstain from voting if they hold shares in CIL. Further, the votes taken at the said general meeting must be taken by poll and the poll results must be announced.

9 5. A rights issue is an offer made by a company to its shareholders on a fixed record date to subscribe for a certain number of new shares on a pro-rata basis at a specific price. The price of the rights shares is usually lower than the current market price of the issued shares. As the price is attractive, shareholders are likely to take up the rights shares. If all the shareholders take up the rights shares, the ratios of their shareholdings in the company remain the same. Since Oliver Bakery Limited is a listed company, it needs to hold a general meeting to approve the issue. The Listing Rules also require the following: The company must issue a prospectus stating, amongst other matters, the basis of allotment, the reason for the issue, and the use to which the proceeds will be put. It must also state whether the board of directors has received any information from any substantial shareholder of his intention to take up the rights shares provisionally allotted to him or to be provisionally allotted to him and particulars thereof. The company must have the issue fully underwritten unless the prior consent of the Stock Exchange to do otherwise has been obtained. The company will need to dispose of the rights shares not taken up by shareholders on the fixed record date by issuing application for excess shares forms to shareholders along with the provisional allotment letter to enable shareholders to subscribe for additional shares in the company or to sell the excess shares in the market, if possible, for the benefit of the persons to whom the rights shares were offered. In the case of a private placing, Oliver Bakery Limited may issue shares to investors (who can also include present shareholders) or to stockbrokers who then place the shares with their clients or to persons selected by them. A prospectus is not required in this case as Oliver Bakery Limited is already a listed issuer and the shares to be issued belong to an existing class of securities already listed. As a private placing is not a pro-rata issue, prior shareholders approval must be obtained, for example, if a general and unconditional mandate to issue shares by the directors not exceeding 20% of the aggregate nominal amount of the shares in issue at the date of passing the relevant ordinary resolution has been given by shareholders at the latest general meeting). The company should also publish an announcement concerning details of the issue, including, amongst other matters, the number of shares issued and the issue price, the total funds to be raised and the proposed use of the proceeds. Comparing the above methods of fund raising, a rights issue may target a larger pool of investors (who are the existing shareholders) than a private placing and therefore a larger amount of capital can be raised. However, the procedures are more complicated and a rights issue is more costly than a private placing because of the requirements for a prospectus and underwriting. On the other hand, a private placing can broaden the shareholder s base and the issue price may be higher that the rights issue per share. As the amount of funds to be raised by Oliver Bakery Limited is relatively small, a private placing will be more appropriate in this case.

10 6. (a) The methods available for winding up the company include: Members voluntary winding up Members voluntary winding up can be used if the company s assets (office premises and stocks) can be realised and are sufficient to discharge its liabilities in full within a period of 12 months from the commencement of winding up. This method is cost efficient as a creditors meeting is not required and hence time and expenses can be saved. However, a majority of the board of directors must issue a statement of solvency, saying that they have made full enquiry into the company s affairs and have formed the opinion that the company will be able to pay its debts in full within a period of 12 months. In addition, a special resolution for to wind up the company by way of a members voluntary winding up must be passed by at least 75% of the members present in the general meeting. ABC Accessories Limited, as a member with a 30% shareholding and also a major creditor, may exercise its right to demand a poll and vote against the resolution. Creditors voluntary winding up The board of directors may proceed with a creditors voluntary winding up if the board considers that the company is unable to settle all its debts in full. This is more expensive and requires more complicated procedures than a members voluntary winding up as it involves creditors meetings and the appointment of a committee of inspection. The board can apply for a creditors voluntary winding up under section 228A or section 241 of the Companies Ordinance. Under section 228A, the directors can start the winding up when they deliver a winding up statement to the Companies Registry instead of at the date when the special resolution for winding up the company in a general meeting under section 241 is passed. This procedure has the advantage of safeguarding the company s assets at an earlier stage these assets may be seized by fraudulent persons before the winding up process commences. Based on the above, a creditors voluntary winding up under section 228A is the most appropriate method for winding up the company. (b) ABC Accessories Limited can acquire Delphi Trading Limited by way of agreement with the other four shareholders of Delphi Trading Limited, as follows: 1. Draft an agreement to cover the number of shares to be acquired, the consideration, waivers of pre-emption rights and arrangements for the appointment and resignation of the directors and secretary. 2. Convene board meetings of Delphi Trading Limited and ABC Accessories Limited to approve and execute the agreement, to appoint the new directors and, if required, new secretary and approve the resignation of the current directors and secretary. 3. Deliver a return of particulars of directors and secretary (Form D2A) of Delphi Trading Limited. 4. Update the register of directors and secretaries, the register of members and the register of transfers. 5. Arrange for letters to be sent to customers, suppliers, bankers, etc.