Board of Directors of ABC Limited on the Proposed Acquisition - Essay Example

Assignment 2 Question a) to Mr. P Chairman PQR Limited To pay a final dividend in script by an issue of bonus share for every share held by each shareholder: In this connection Clause 129 of Table A and Part IIA of Companies Ordinance read with S 79B dealing with the distribution of dividends and issue of bonus shares has to be taken account: The related provisions are reproduced below: Clause 129 of Table A: The company in general meeting may upon the recommendation of the directors resolve that it is desirable to capitalize any part of the amount for the time being standing to the credit of any of the company's reserve accounts or to the credit of the profit and loss account or otherwise available for distribution, and accordingly that such sum be set free for distribution amongst the members who would have been entitled thereto if distributed by way of dividend and in the same proportions on condition that the same be not paid in cash but be applied either in or towards paying up any amounts for the time being unpaid on any shares held by such members respectively or paying up in full un-issued shares or debentures of the company to be allotted and distributed credited as fully paid up to and amongst such members in the proportion aforesaid, or partly in the one way and partly in the other, and the directors shall give effect to such resolution: Provided that a share premium account and a capital redemption reserve fund may, for the purposes of this regulation, only be applied in the paying up of un-issued shares to be allotted to members of the company as fully paid bonus shares. Part IIA of Companies Ordinance: Part IIA of CO regulates the payment of dividend it used the word "distribution" in the content instead of "dividend": Distribution means every description of distribution of a co's assets to its members, whether in cash or on-cash items, except: Bonus shares Redemption / Repurchase of shares Reductions of share capital Distribution of assets upon dissolution Hence declaration of dividend and issue of Bonus shares are to be treated differently. However while issuing the bonus shares in lieu of dividend the following provisions governing the declaration of dividend are to be considered. S 79B of CO sets out basic principles in relation to the distribution of dividends Shall not make a distribution EXCEPT out of profits AVIABLE FOR THE PURPOSE Distributable profits are Accumulated Realized Profits Less Realized Losses Accountants usually regard a profit as realized if the company concerned has obtained cash. Thus, a book profit is an unrealized profit. _______________________________________________________________________ 2. Change in the composition of the Board: The following provisions of Table A which govern the appointment and term of office of the Board of Directors are worth noting: Clause 91 of Table A 91. At the first annual general meeting of the company all the directors shall retire from office, and at the annual general meeting in every subsequent year one-third of the directors for the time being, or, if their number is not 3 or a multiple of 3, then the number nearest one-third, shall retire from office. Clause 92 of Table A The directors to retire in every year shall be those who have been longest in office since their last election, but as between persons who became directors on the same day those to retire shall (unless they otherwise agree among themselves) be determined by lot. Clause 93 of Table A A retiring director shall be eligible for re-election. Clause 109 of Table A 109. The directors may from time to time appoint one or more of their body to the office of managing director for such period and on such terms as they think fit, and, subject to the terms of any agreement entered into in any particular case, may revoke such appointment. A director so appointed shall not, whilst holding that office, be subject to retirement by rotation or be taken into account in determining the rotation of retirement of directors, but his appointment shall be automatically determined if he cease from any cause to be a director. Hence the following position emerges: Mr. Q being the Managing Director is not subject to Retirement by Rotation as per Clause 109 of Table A, subject however to the terms of his appointment as Managing Director. Out of the balance Directors 1 (one) being one third of the remaining number of directors is subject to retirement by rotation. Mr. P being the longest in the office is to retire by rotation and is eligible for reappointment. (Clauses 91,92 and 93 of Table A) ________________________________________________________________________ 3. To keep XYZ& co as Auditors of the company: This issue does not pose any problem so long as the appointment of the auditors is done strictly in accordance with the regular provisions of Clause 131 of Table A which states that "Auditors shall be appointed and their duties regulated in accordance with Sections 131, 132, 133, 140, 140A, 140B and 141 of the Ordinance." XYZ & Co being the auditors to be re-appointed their appointment is to be mentioned in the Notice calling the Annual General Meeting of the Company. Detailed procedure is to be followed as per the different sections of the Companies Ordinance only when there is a change in the Auditors of the company. ________________________________________________________________________ 4. To issue 1 million new shares of HK$1 each at par to Mr. T: Clause 2 of Table A Provides "Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, any share in the company may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise as the company may from time to time by ordinary resolution determine." Hence there is no problem in issuing the new shares to the extent of HK$ 1 million. However the memorandum of a company limited by shares must state the amount of share capital with which it proposes to be registered and its division into shares of a fixed amount. This is known as the 'registered capital', 'authorized share capital' or the 'nominal capital'. It is the total amount of capital a company is allowed to issue. However, a company may choose not to issue all the capital at the time of its formation. This nominal or authorized capital can be increased or reduced. The nominal or authorized capital is merely the amount of share capital which the company is authorized to issue, not what it has actually got. There is no minimum requirement as to the amount of the authorized share capital. The issued capital and paid-up capital are more important because they represent the fund to which creditors of the company look for payment of their debts. However, according to the CO, the memorandum of association of every company limited by shares is required to contain a capital clause. This states the amount of the company's authorized capital and the division of that capital into shares of a certain fixed amount, that is, the nominal value of the shares. Since the Company's entire authorized capital is fully paid up, the Memorandum of Association of the company is to be altered with respect to the increase in the Nominal or Authorised Capital. The Capital Clause in the Memorandum of Association can be altered by passing a suitable resolution in the Annual General Meeting of the company ________________________________________________________________________ Question: 1 (b) NOTICE NOTICE is hereby given that the .Annual General Meeting of the Company will be held at the Registered Office of the Company on 1st November 2006 at 10.00 am to transact the following business: AS ORDINAY BUSINESS: 1. To receive, consider, approve and adopt the accounts of the company for the Year ended 31st December 2005. 2. To appoint Auditors and fix their remuneration: M/s XYZ & Co present auditors of the company are eligible for re-appointment. 3. To appoint a director in the place of Mr. P who retires by rotation. Mr. P is eligible for re-appointment as a director AS SPECIAL BUSINESS: 4. To receive, consider, approve and adopt the following resolution with or without modification as an ordinary resolution: "Resolved that subject to the applicable provisions of the Companies Ordinance and other applicable laws if any, the authorized capital of the company be increased from 10,000,000 equity shares HK $ 1 each to 11.000.000 equity shares of HK $ 1 each". Further resolved that the clause V of the Memorandum Association of the Company be and is hereby amended by substitution of the following clause: "V. The Authorised Capital of the company is HK$ 11,000,000 divided into 11,000,000 equity shares of HK$ 1 each." (BY ORDER OF THE BOARD) For PQR Limited Hongkong 25th October 2006 Company Secretary ________________________________________________________________________ Question 2 Report to the Board of Directors of ABC Limited on the proposed acquisition of additional shares in the company XYZ Limited: The provision of the Securities and Futures Ordinance (Cap571) (SFO) Part XV came into effect from 1st April 2003 contains certain disclosure requirements which enables the corporation concerned to find out who is in the process of buying shares in the corporation or who is secretly trying to acquire control of a sizeable holding of shares on which to base a bid for control. They are: A person must notify the listed corporation and the Stock Exchange if he or she knowingly acquires or becomes aware that he or she has acquired an interest of 5% or more in shares comprised in a listed corporation's relevant share capital, or ceases to be interested in shares so comprised. The duty to notify must be performed within the period of three business days following the day on which that duty arises. Chapters 14 and 14A of the Main Board Listing Rules set out the circumstances in which listed companies are required: (a) To disclose details of notifiable transactions, namely, major transactions, very substantial disposals, very substantial acquisitions, share transactions, discloseable transactions, reverse takeovers, and connected transactions. (b) To send a circular to shareholders giving information about such transactions. As ABC Limited is a listed company it is subject to the Listing Rules regarding the notifiable transactions. The acquisition of 10% of the interest in XYZ Limited in addition to the 29% already being held by the company is an acquisition of assets and therefore is subject to the disclosure if percentage ratios of any of the five tests equal to or exceeds 5% Assets Ratio: HK$ 1000 m x 10% / 3000 m = 3.33% Profits Ratio: HK$ 200 m x 10%/ 500 m = 4.00 % Revenue Ratio: HK $ 5000 m x 10%/7000 m = 7.14% Consideration Ratio HK $ 150 m/3000 m = 5% Equity Capital Ratio: Not applicable as ABC Limited doesn't issue equity capital as consideration. As the percentage for Revenue Ratio is 7.14% the transaction is a Discloseable Transaction. Hence the following disclosure procedure is to be followed: Company ABC Limited has to A) Notify the Exchange B) Adopt the publication of an announcement and C) Send a circular to the shareholders. There is no need for the approval of the shareholders or to publish an accountants report. The details are to be published in at least one English Newspaper and one Chinese Newspaper on the next business day following the entering into the transaction. Whenever there is a material variation of terms of the transaction, or material delay in the completion of the transaction or termination of the transaction, the listed company is required to make a further announcement. The draft announcement together with appropriate checklists must be submitted to the Stock Exchange for comments and approval before it is published. The Stock Exchange has specified the information to be included in an announcement (you are not expected to know details of the requirements, so they are not covered in this unit) and prepared a checklist of this to ensure the listed company complies with disclosure requirements. A soft copy of the announcement incorporating amendments suggested by the Stock Exchange, if any, should be submitted to the Stock Exchange on the date of the publication for its release on the Stock Exchange's website. For notifiable transactions, a circular to shareholders is required. The circular should be sent to shareholders within 21 days after the publication of the announcement. The draft circular together with appropriate checklists must be submitted to the Stock Exchange for comments and approval before it is published. The Stock Exchange has specified the information to be included in a circular and prepared a checklist to ensure the listed company complies with disclosure requirements in this circular. If there is new information on the transaction after the issue of the circular, a revised or supplementary circular should be sent to the shareholders at least 14 days before the date of the general meeting which considers the transaction. The meeting must be adjourned if the 14-day requirement cannot be fulfilled. For the information of the Board the relevant provisions are appended below: Circumstances requiring disclosure Chapters 14 and 14A of the Exchange Listing Rules set out the circumstances in which listed companies are required: 1. To disclose details of the following transactions (known as 'notifiable transactions' under rule 14.06): (a) share transactions; (b) discloseable transactions; (c) major transactions; (d) very substantial disposals; (e) very substantial acquisitions; (f) reverse takeovers; 2. To disclose details of connected transactions as defined in rule 14A.13; 3. To send a circular to shareholders giving information about such transactions; and 4. In the case of certain material transactions or transactions with connected persons, to obtain shareholders' prior consent to them. They must publish details of such transactions in at least one English and one Chinese newspaper Notifiable transaction classification According to the Main Board Rule 14.06, transactions are classified by using the percentage ratios set out in rule 14.07 The classifications are as follows: 1. Share transaction - An acquisition of assets (excluding cash) by a listed issuer where the consideration includes securities for which listing will be sought and where all percentage ratios are less than 5%. 2. Discloseable transaction - A transaction or a series of transactions (aggregated under rules 14.22 and 14.23)1 by a listed issuer where any percentage ratio is 5% or more, but less than 25%. In practice, each notifiable transaction may have more than one percentage ratio and the percentage for each ratio may be different (e.g. the assets ratio is 10% but the consideration ratio is 30%; that is, a discloseable transaction using assets ratio and a major transaction using consideration ratio). If this is the case, then the highest percentage ratio should be used to determine the type of transaction. ________________________________________________________________________ Question 3 Note on the Listing requirements for the stock exchange: The following are the major basic qualifications for getting the securities listed in the Hongkong Stock Exchange: Issues which may get the company qualified for listing: 1. The company should be within the jurisdiction of Hongkong. 2. Expected Market Capitalisation at the time of listing of the securities which are the public should be at least HK $ 50 m and All shares market capitalization at the time of listing of the total securities issued by the issuer must be HK$ 200 m (with the existing sharecapital and the proposal to issue additional 50 m shares of HK$2 each this can be satisfied) 3. Suitable Accounting Standards: The Company's accounts must be prepared with either HK Financial Reporting System or International Financial Standards or other accounting standards acceptable by the Stock Exchange. (We assume that the company can follow any of these accounting standards) 4. Satisfied disclosures in listing documents; satisfied financial records and working capital statement, Satisfied management experience - presumably these can be accomplished. 5. All securities for which listing is required must be freely transferable. 6. Must have an approved share registrar or employ an approved share registrar to maintain in Hongkong is register of members. 7. Must have a Qualified Company Secretary, a qualified accountant who shall meet the stock exchanges requirements and 2 authorised representatives to act as communication channels with the stock exchange. (Mr. Chan's son who has got the requisite qualification to act as the company secretary can be appointed as such and other executives can be appointed to satisfy this requirement) 8. Must also have a Sponsor, Underwriter, Solicitor, Reporting Accountants, Financial Adviser or Banker during the listing application process ( all these being routine issues connected with the listing may not pose a big problem) Issues which doesn't qualify the company for listing: 1. First and foremost requirement is that the company should be a public company within the meaning of S 29 of the Companies Ordinance. Hence the present status of the company should be changed from private to public. 2. The Company should have at least 2 resident directors in Hongkong and 3 independent non executive directors. 3. Spread of shareholders at least 300 shareholders if the company qualifies in the profit test or 1000 shareholders if in the case of other tests. 4. Financial requirement: A new applicant must satisfy the profit test or market capitalization/revenue/cash flow test or the marketcapitalization/revenue test. Details of the tests are given below: Profit test: A trading record of not less than three financial years during which the profit attributable to shareholders must, in respect of the most recent year, be not less than HK$20,000,000 and, in respect of the two preceding years, be in aggregate not less than HK$30,000,000. The profit mentioned above should exclude any income or loss of the issuer, or its group, generated by activities outside the ordinary and usual course of its business. Although the Company is likely to get qualified on the basis of market capitalization (of course subject to fulfilling the other requirements as listed here), the Company doesn't qualify in the profit test as the conditions in this respect is not satisfied by the Company's current profit figures. Hence the company should have 1000 shareholders at the time of listing. _____________________________________________________________________ Read More