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THE HONG KONG INSTITUTE OF CHARTERED SECRETARIES THE INSTITUTE OF CHARTERED SECRETARIES AND

ADMINISTRATORS

International Qualifying Scheme Examination

CORPORATE SECRETARYSHIP DECEMBER 2011

Time allowed – 3 hours

Section A – Compulsory Case study

Section B – 5 long questions (attempt any 3)

DO NOT OPEN THIS PAPER UNTIL INSTRUCTED TO DO SO BY THE INVIGILATOR

Important Note: Candidates are allowed 15 minutes reading time to read through the question paper before the commencement of the examination between 1:45pm-2:00pm. During the reading time, all candidates must be silent and must not write or mark anything on their question papers or answer books. Candidates must close all their reference books, notes or other unauthorised materials and put these under their chairs. If any candidates write or make any marks during the reading time, or if they speak or in any other way communicate with anyone either in or outside the examination hall during this period or read any unauthorised materials, they will be disqualified from continuing this examination paper. Once candidates have opened the question paper, they are not allowed to leave the examination hall until 2:30pm.

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SUBJECT NO 19M

CORPORATE SECRETARYSHIP

DECEMBER 2011 The examination paper is divided into TWO Sections. Section A is a case study which is compulsory and carries 40 marks. Candidates shou ld attempt THREE questions from Section B, all of which carry 20 marks each. You should allow yourself approximately 70 minutes in total to answer the questions in Section A, and 35 minutes for each of the questi ons attempted in Section B. Unless otherwise stated, $ denotes Hong Kong dollars. Friday afternoon 2 December 2011 Time allowed: 3 hours

SECTION A (Compulsory – answer ALL questions for this case study)

1 Home Electronics Holdings Limited is a company incorporated in Hong

Kong (the company), and whose shares are quoted on the main board of the Hong Kong Stock Exchange.

With China entering the World Trade Organisation in 2001, the company, with its operating subsidiaries (the group), grew quickly from a small electronics factory into a sizable manufacturing group. Turnover for the year ended 31 December 2008 reached $2,600 million with a good net profit of $24 million.

However, the 2008 global financial crisis, technology change and rapid rise of costs quickly reversed the situation. By 31 December 2010, the group’s annual revenue was down to only $500 million while it showed a massive loss of $767 million.

The figures below indicate how deep the group’s financial trouble was at the 2010 year-end:

� Net liabilities at 31 December 2010: $300 million

� Net current liabilities at 31 December 2010: $705 million

Unable to pay its employees and its suppliers or to honour commitments to the banks, the group also faces numerous lawsuits.

After many efforts to raise funds, all in vain, an independent investor, Mr. Knight, proposed a rescue plan consisting of three courses of actions, which were inter-dependent and conditional upon each other. The rescue plan is as follows:

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(i) Capital re-organisation

Share capital before capital reorganisation:

Authorised $300 million divided into 3,000 million shares of $0.10 each

Issued $200 million divided into 2,000 million shares of $0.10 each

Shareholders: (a) Mr. Lam, Chairman and CEO:

560 million shares (28%)

(b) Public: 1,440 million shares (72%)

(a) Capital reduction: the par value of each existing issued share be reduced by 99% from $0.10 per share to $0.001 per share,

(b) Share sub-division: the par value of each authorised but unissued existing share be sub-divided into 100 shares of $0.001 each,

(c) Share consolidation: each of the 10 authorised but un-issued existing shares after sub-division in (b) above be consolidated into one (1) new share of $0.01 each.

Share capital after capital re-organisation:

Authorised $300 million divided into 30,000 million new shares of $0.01 each

Issued $2 million divided into 200 million new shares of $0.01 each

Shareholders: (a) Mr. Lam, Chairman and CEO:

56 million new shares (28%)

(b) Public: 144 million new shares (72%)

(ii) Group reorganisation and creditors’ scheme

The group would be split up into: -

(a) The scheme group, consisting of those subsidiaries which were in trouble and which would be put in the hands of the administrator to be appointed under the creditors’ scheme in accordance with Section 166 of the Companies Ordinance, and finally be dissolved.

(b) The continuing group, consisting of the holding company and a few operating subsidiaries, which would continue with the business under the new management and free from old litigation.

(iii) New investor with fresh capital and financial support (Mr. Knight)

(a) Mr. Knight would invest $80 million in the company by subscribing for 1,000 million new shares of $0.01 each, representing 83.33% of the company’s new issued share capital as in (i) above.

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(b) After the capital re-organisation and allotment to Mr. Knight, the total number of issued new shares of the company would be: -

Mr. Knight: 1,000 million new shares (83.33%) Mr. Lam : 56 million new shares (4.67%) Public : 144 million new shares (12.00%).

(c) The company would pay all the $80 million received from Mr. Knight to the administrator of the scheme group.

(d) Mr. Knight would need to place down or dispose of a certain amount of his shareholding in the company to make sure the minimum 25% public float as required by the Listing Rules is maintained.

(e) Mr. Knight would make available to the continuing group the necessary working capital by way of interest-free loans of up to $40 million.

(f) Conditions attached to Mr. Knight’s subscription to the new shares include, on completion:

(i) The “whitewash waiver” be obtained.

(ii) Mr. Lam would resign from the board, as would the company’s other current executive directors. But Mr. Lam would remain as an employee of the continuing group at his pre-agreed terms of employment for a period of up to two years at the discretion of Mr. Knight.

(iii) Mr. Knight and three other executive directors would be appointed to the board with Mr. Knight appointed group chairman.

REQUIRED:

(a) Justify and assess the rescue plan, focusing o n how the various stakeholders should act and what they would get out of the plan.

(15 marks)

(b) Present the comprehensive procedures the compa ny should take to put the rescue plan into action.

(12 marks)

(c) Outline critically the requirements for the resignation and appointment of directors as in this situation.

(8 marks) (d) Explain what you understand by the term “white wash waiver”. What

would follow if the proposed “whitewash waiver” wer e voted down by the independent shareholders at the EGM?

(5 marks)

(Total: 40 marks)

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SECTION B

(Answer THREE questions from this section) 2. ABC Company Limited is a company incorporated in Hong Kong with its financial

year end at 31 December. Its shares are listed on the main board of the Stock Exchange of Hong Kong Limited. It is now end of December 2011 and you are making preparations leading up to the annual results announcement, publication of the annual report and holding of the annual general meeting. REQUIRED:

(a) As the company secretary, draw up a check list, including deadline implications, to be shared with the various concern ed parties, for the preliminary annual results announcement, annual rep ort and corporate governance report publication, and the holding of t he annual general meeting.

(15 marks)

(b) Present the disclosure requirements for the prelimi nary annual results announcement, in terms of both timing and contents, as required by the listing rules for a main board company in Hong Kong .

(5 marks)

(Total: 20 marks)

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3. Rainbow Fashions Limited is a Hong Kong registered company whose shares are

listed on the main board of the Hong Kong Stock Exchange. The company adopted an employee share option scheme at its annual general meeting held on 28 March 2008 and has decided to make certain grants at its board meeting to be held this afternoon, 2 December 2011.

REQUIRED:

(a) Describe:

(i) the main purposes of employee share option sche mes; (3 marks)

(ii) the approval and clearances required for their establishment;

(3 marks)

(iii) the main features of a share option scheme; a nd (5 marks)

(iv) how option exercise prices are determined.

(2 marks)

(b) Draft precisely a template grant letter for share o ptions, making any

necessary assumptions.

(7 marks)

(Total: 20 marks)

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4. Board committees are useful organisation tools for the delegation of power and

duties, and provide a mechanism of checks and balances for the protection of minority shareholders and for better corporate governance purposes.

REQUIRED:

(a) Identify THREE common board committees required or recommend ed for listed companies in Hong Kong, and give the major f unctions of each of them . (Note: no need to state the full terms of reference for each committee.)

(12 marks) (b) Formulate the procedures for the establishment of a board committee and

list the headings of the terms of reference of ONE of the committees you have given in your answer to part (a).

(8 marks)

(Total: 20 marks)

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5. Loan capital is a common alternative to the issue of new shares for raising

financing for a company. ABC Limited, a private company incorporated in Hong Kong, wishes to borrow $80 million through the issue of interest bearing debentures to finance its expansion plan. The company plans to provide its factory located in Chai Wan, Hong Kong as security for the borrowing. REQUIRED:

(a) As the company secretary, write a memorandum to the directors advising

them of the feasibility of the proposal and the pro cedures involved. You may make assumptions to certain facts in your presentat ion.

(8 marks)

(b) List the requirements and procedures for both the regist ration of charges and their discharge in Hong Kong.

(12 marks)

(Total: 20 marks)

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6 Kinsman Brothers Company Limited is a company incorporated in Hong Kong with

a financial year end of 31 March. Its shares are listed on the main board of the Stock Exchange of Hong Kong Limited. By middle of May the audit of the accounts to 31 March 2011 has been completed and the company is planning its announcement of annual results and 2011 annual general meeting.

REQUIRED:

(a) Prepare a notice of the board meeting of Kinsman Brothers Ltd with the

agenda catering for the approval of the accounts, t he publication of the annual report and convening of the AGM. Make any as sumptions you consider necessary.

(15 marks)

(b) State what you understand by the term “board writte n resolutions” of the

directors.

(5 marks)

(Total: 20 marks)

End of Examination Paper

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