SUBJECT NO 19M Corporate Secretaryship (June 2005 Examination) Suggested Answers QUESTION 1 (a) In Hong Kong a company is a private company if its articles of association contain all the following three restrictions specified in S 29 of the Companies Ordinance: (1) The right of its members to transfer shares in the company is restricted. (2) The number of its members is restricted to 50, not counting present or former employees of the company. (3) No invitation should be made to members of the public to subscribe for its shares or debentures. A private company need not file financial statements with the Companies Registry. (b) The following types of names will not be accepted for registration as names of companies: (1) Same or similar to another name on the index of company names maintained by the Registrar of Companies. (2) Same or similar to that of a corporation under another ordinance. (3) Offensive or contrary to public interests in the opinion of the Chief Executive. (4) Its use would constitute a criminal offence in the opinion of the Chief Executive. (5) Likely to be connected with the government of the PRC or of the Hong Kong SAR 1
(c) He/she can appoint a proxy to vote at the general meeting by filling a proxy form and send it to reach the company or the place specified in the notice of the meeting before the expiration of the time limit specified in the footnote of the notice of the meeting. (d) The memorandum of association of a company contains the following clauses: (1) Name clause stating the name of the company. (2) Domicile clause stating that the registered office of the company is in Hong Kong. (3) Objects clause specifying the intended activities and powers of the company. (4) Liability clause stating that the liability of its members is limited. (5) Capital clause stating the authorized share capital, if any, of the company. (6) Subscription clause the subscribers declare that they subscribe to the memorandum of association of the company. (e) Unless otherwise provided in the company s articles, a director can appoint his alternate director in writing which is to be approved by the board of directors. After the board approval the company should file Form D1 or D2A and Form D3 consent to act as director within 14 days and update its register of directors. (f) A dormant company is exempt from the following obligations: (1) Hold annual general meetings (2) File annual returns. (3) Appoint auditors. A dormant company, while being dormant, must not enter into a relevant accounting transaction. 2
(g) The purpose of a statement of compliance is to make the person who executed the statement responsible for the compliance of all legal requirements in connection with the incorporation and to relieve the onerous duty of the Companies Registry to go through in detail all incorporation documents to make sure that all legal requirements are complied with. The statement must be signed by a subscriber to the memorandum of association or by a person named in the articles to be a director or the company secretary of the proposed company (h) A substantial shareholder for the purpose of disclosure of interests in securities is a person who holds or is interested in at least 5% of the voting shares in a listed company. When a person, who is not a substantial shareholder of a listed company, acquires or becomes interested in up to 5% of the voting shares in that listed company, he has a duty to notify the company and the Stock Exchange of his becoming a substantial shareholder of the company. When a person, who is already a substantial shareholder, acquires or disposes of interests resulting in a change of a whole number percentage of his interests, he also has a duty to disclose the change to the listed company and to the Stock Exchange. After he ceases to have 5% interest of the voting shares of the listed company, he must notify that listed company and the stock exchange. (i) A listed company may pay a dividend under the following conditions: Dividends must be paid out of profits and should not exceed its realized profit. (1) When its net assets are in total not less than the aggregate of its called up share capital and its undistributable reserves (such as share premiums, capital redemption reserves and revaluation reserves) and to the extent that the dividend would not reduce the net assets to less than the said aggregate. (2) The proposed dividend must be justified by the company s last audited accounts. 3
(j) A place of business is defined under the Companies Ordinance to include a share transfer or share registration office, a place used for manufacturing or warehousing of goods and to exclude any place not used to transact any business which creates legal obligations. 4
QUESTION 2 The part of Mr So s plan to convert his business into a private limited company with himself as the sole shareholder and the sole director is feasible as the Companies Ordinance has been amended to allow a private company to have only one shareholder and one director. However, although the new law allows a private company to have only one director, but it requires the sole director to nominate a person not under the age of 18 to be the reserve director to act as director in the event of the death of the sole director. Mr So s plan that he will not be required to keep minutes of board meetings cannot be achieved as the newly amended Ordinance requires the decisions of the sole director, which should normally be passed at a board meeting, to be written down and the written records must be given within 7 days to the company. The company shall enter such records into a book to be kept like minute books for board meetings. When there is only one director, the director cannot act as the Company Secretary as the law does not allow a person to act in a dual capacity as a director and as the company secretary at the same time, and some documents need to be signed by a director as well as by the company secretary. The proposed limited company cannot be converted into a listed company as planned by Mr So for the following reasons: (1) The Co is only suitable for listing on the Main Board and the Main Board requires at least 3 years trading record under the same management. Mr So, therefore, cannot convert it into a listed company after operating for only 2 years. (2) The expected net profit of $5 million per annum is far below the Main Board requirement of $20 million for the most recent year and a total net profits of at least $30 million for the 2 years preceding the most recent year. (3) Mr So s plan to have a board for the listed company to consist of only himself, his wife and his three brothers is not feasible because the Listing Rules require a listed company to have at least 3 independent non-executive directors. To be independent and non-executive, they must not be connected to a director of the company, must not hold more than 1% shares 5
in the company, must not have, other than not exceeding 1% holding of shares and directors fees, any financial interests in the company and must not be a present or past employee of the company. One of the Independent Non-Executive Directors must also hold relevant professional qualifications or have accounting or financial management expertise.. 6
QUESTION 3 (a) For an unlisted company, the normal procedures for replacement of lost share certificate should be: (1) Written application with a letter of indemnity or bank guarantee; (2) The required fee for a new certificate, if any. (3) Board meeting to approve the application. (4) Sample board resolution: It was resolved that Mr Lo s lost share certificate No. 100 for 10,000 shares be cancelled and a new share certificate bearing an appropriate number for 10,000 shares be issued to Mr Lo. It was further resolved that the common seal of the company be affixed to the mentioned new certificate and two directors of the company be authorized to sign the new certificate. (5) Record the cancellation and issue the new share certificate and update the Register of Members. (b) If the company is a listed company, then, the procedures would be different as follows: (1) The applicant should submit a statutory declaration in the prescribed form made at a district court, the high court, before a Justice of Peace or a notary public. (2) The company should then notify the Stock Exchange by a prescribed form of its intention to cancel the share certificate and to issue a new certificate. (3) Publish a notice in one English and one Chinese newspapers in the prescribed form. (a) If the latest value of shares is $20,000. (b) If the latest value of shares is > $20,000, publish the notice in the gazette once in each of three consecutive months. (4) (a) If no objection is received within one month after (3) (a) above, obtain a board resolution to approve the cancellation and issue of a new certificate. (b) If no objection is received within 3 months from the first date of 7
publication as mentioned in 3(b) above. (5) Record the cancellation issue the new certificate to the applicant and update the Register of members. (6) Within 14 days of (5) Gazette a notice in the prescribed form with a copy to the Stock Exchange. QUESTION 4 (a) As the transaction involves the acquisition of assets of consideration value by a listed 8
company G, it is governed by the Listing Rules under Notifiable Transactions. Applying the tests: Assets Ratio = Value of the subject asset / Total assets of the listed co = 100 m / 2000 m = 5% Consideration Ratio = Value of consideration / Market capitalization = 120 m/ (120 m / 4%) = 4% Equity Capital Ratio = Nominal value of equity shares to be issued / Nominal value of equity shares issued = 4% As the biggest ratio reaches 5%, it is a Discloseable Transaction As it involves a new issue of equity shares, it is a Share Transaction (all tests < 5% and consideration includes issue of securities.) As it is a transaction between the listed company G and K who is to be the Chief Executive of G, K would become a connected person of G, and so it is also a Connected Transaction. (b) As it is a discloseable transaction, G will need to make the following disclosures: (1) Notify the Stock Exchange. (2) Announcement in one English and one Chinese newspapers. (3) Circular, after approved in draft by the Stock Exchange, in both English and Chinese, with a valuation report, to all members within 21 days of the public announcement. As it is also a connected transaction and a share transaction [the consideration exceeds the deminimis thresholds ( 25% but < 25% and consideration < $HK 10m)], it needs the prior approval of independent shareholders at a general meeting, or in writing by one or more independent shareholders holding more than 50% voting rights. QUESTION 5 One method of merger is for M to takeover N. This can be done by (1) Private agreements with one or more shareholders of N, together holding 9
more than 50% shares in N, for purchase by M of their shares in N. The agreements will have to be first approved by a board resolution of M. The Stock Exchange and Securities And Futures Commission have to be informed. After execution by both parties of the agreements, the shares will be transferred to M by the shareholders of N concerned in the normal way. Appropriate announcements have to be made in newspapers. If all the transactions together amount to a Notifiable Transaction, the relevant disclosure procedures need to be followed. In case the whole or part of the considerations to be paid by M consist of new shares to be issued by M, procedures for issue of new shares have to be followed. Then, M will probably want to re-structure the board composition of N.Acquisition of shares which carry 30% or more of the voting rights of a company will trigger a general mandatory offer to other remaining shareholders. (2) Another method is by way of a general offer by M to all shareholders of N to purchase their shares at a stated price, conditional upon acceptances, together with the 10% already held by M, up to a percentage of not less than 51% of the issued share capital of N (3) Still another method is by a scheme of arrangement under S 166 of the Companies Ordinance. The scheme has to be approved by a court order whereby M and N may be merged under a new name This method is not favoured unless the two companies are very large and other methods are difficult to carry out. (4) One more method is by voluntary winding up (technically and not really) of both companies whereby the undertakings of both companies are transferred to a new company to be created. This method is not favoured for listed companies as it may damage their goodwill and cause too much disturbance to both companies. QUESTION 6 As the company is insolvent, the mode of winding up should be Creditors Voluntary Winding Up 10
One way of commencing a Creditors Voluntary Winding Up is to: (1) Hold a board meeting to authorize the convening of an extraordinary general meeting of shareholder to pass a special resolution to wind up the company voluntarily as a Creditors Voluntary Winding Up and the convening of a creditors meeting to consider the company s affairs and to consider the appointment of liquidator/s. A statement of affairs of the company will need to be made with authority of the board. (2) Despatch notices of the general meeting, giving at least 21 clear days notice and the creditors meeting to be held on the same, or the next, day as the shareholders meeting. (3) Publish the notice of creditors meeting in the Gazette and in one English and one Chinese newspapers. (4) Hold the general meeting of shareholders to pass the special resolution for voluntary winding up as a Creditors Voluntary Winding Up and to appoint liquidator/s. (5) Hold the creditors meeting to consider the Statement of Affairs of the company and to consider the appointment of liquidator/s. In a Creditors Voluntary Winding Up, the choice for liquidator/s of the creditors should override that of the shareholders. It is therefore advisable to hold the two meetings one after the other immediately. The other way of commencing a Creditors Voluntary Winding Up is to: (1) Hold a board meeting to pass a resolution that the company cannot, by reason of its liabilities, continue its business, and it is necessary that the company be wound up and the winding up should be commenced under S 228A and that meetings of shareholders and creditors will be held within 28 days after delivery of the winding up statement.. (2) Execute and deliver within 7 days to the Companies Registry a Winding Up Statement (who must be a solicitor or professional accountant) in the prescribed form the board resolution and within 14 days of notice of appointment of a Provisional Liquidator. (3) Publish notice in Gazette of the winding up and appointment of provisional liquidator. (4) Convene separate meetings of shareholders and creditors with at least seven days notice and publish the notice of creditors meeting in Gazette and in one English and one Chinese newspapers. 11
(5) Hold the meetings of shareholders and creditors at which a statement of the Company s affairs and a list of creditors and their estimated claims must be laid to consider the appointment of liquidator/s as in method 1. Because of the rather large number of shareholders and creditors, and because of the urgency nature of the matter, it would be preferable to use the second method in this case. 12