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Corporate Secretarial Practice June 2012

Suggested answers and examiner’s comments Important notice When reading these answers, please note that they are not intended to be viewed as a definitive ‘model’ answer, as in many instances there are several possible answers/approaches to a question. These answers indicate a range of appropriate content that could have been provided in answer to the questions. They may be a different length or format to the answers expected from candidates in the examination. Examiner’s general comments This was the third examination session under the new format which included a pre-release case study. The case study format does seem to be settling in with most candidates, but challenges still continue for some candidates in applying good technique to the examination. Study support is available from various ICSA resources to help candidates with good examination technique and I would encourage these to be used before attempting an examination. There are still too many candidates not performing as well as they should:

the level of poor presentation still persists in many answers, which must be well presented and readable; and

some answers were excessively long, lacked focus or repeated previously given responses. In particular, too many candidates still “write all they know” about a topic instead of providing the focussed response requested.

There were a few candidates making some basic administrative errors by not following examination instructions properly. For example, not fully completing the front cover sheet of the examination scripts. Also, many candidates did not start a new question on a new page. Candidates should ensure they follow the examination instructions as requested. There were, however, good answers in some cases, with many candidates picking up on the salient points of the each question and providing acceptable answers. There appeared to be an even spread of questions attempted by candidates. It was clear from the answers that nearly all candidates had read the pre-released case study and had used this to help them in their examination preparations. However, too many candidates did not adequately link the case study to their answers. For example, it was clear from the case study that ‘Power Cars’ had no non-executive directors and candidates should have picked this up as a deficiency in the answer to Question 1(b) for a company seeking a full listing.

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Up-to-date study text support materials are available for candidates and should always be used. A small number of candidates appeared to be using out-of-date materials, which may harm the chances of successfully achieving a pass standard in the examination.

Case Study

Puma Cars plc You are the company secretary of Puma Cars plc (‘Puma’), a large car manufacturing company listed on the London Stock Exchange. Puma has performed well because it has a wide and innovative range of cars, from environmentally-friendly low-emission vehicles to luxury sports cars. The luxury sports cars are produced under the brand ‘Power Cars’ by Puma’s wholly owned subsidiary Power Cars Limited (‘Power’). Environmentally friendly cars are produced by Puma under the brand ‘Eco Cars’. Business is thriving for both brands as Power Cars has recently won several prestigious car races and Eco Cars has set new records for fuel economy. Puma has operations worldwide, including a main production facility in England. The parent company is incorporated in England and Wales and there are many subsidiary companies, some of which are incorporated in England and Wales and some in other jurisdictions. The production and sale of cars worldwide is a complex operation and Puma has several international relationships with businesses outside of the group. One of the key relationships is with Gripping Tyres, a business based in China, which provides tyres for all of Puma’s cars. Gripping Tyres ships all of its tyres from its main production facility in Beijing to Puma’s production facilities. You have built up a strong working relationship with Mrs Lee, the corporate secretary of Gripping Tyres. Mrs Lee has called you asking for some advice on a proposal in respect of a matter of UK statutory compliance and you have agreed to help her. Puma is very aware of its corporate social responsibility and, in particular, its environmental responsibilities. A lot of work is being planned in this regard with the brand Eco Cars and there are several initiatives which are being considered by Puma, including research on new equipment which will substantially reduce air pollution. This research is being undertaken under the project name ‘Project Clean’ (‘the Project’). Mr Shaw, the Chief Executive of Puma, will need your input on the Project and, in particular, on the best way to formalise arrangements. He tells you that the Project will require substantial financial investment up-front by way of share capital and that the Project may make a profit, although it has not been decided what to do with such profits. If the Project proves to be successful, Mr Shaw tells you that the scope and objectives may change over the longer term to cover other non-environmental and purely commercial matters. Power Cars has been in operation for two years and the cars are manufactured in Scotland. However, due to increasing demand, it is likely that additional production facilities will be added shortly. Puma is considering a number of options to ensure the continued growth of Power Cars and your help will be needed on a number of statutory compliance and corporate governance issues in this regard. In particular, Bing Investments Limited, which is not a shareholder of Puma, has shown considerable interest in Power Cars and wishes to discuss a proposition with Mr Shaw. Despite the strong interest from Bing Investments Limited, the board of Puma wishes to keep an open mind as to the next steps for Power Cars and is also actively considering alternative plans. Although competition in the luxury car market is intense, Puma is convinced that it has the right product and that Power Cars has a great future. The day-to-day operations of Power Cars are managed by the board of Power. The board of Power is quite active and focused on this specialised market. It has four executive directors and no non-executive directors. The success of Puma has made its shares very popular with the public. Puma now has approximately 50,000 shareholders, which include both large institutional holders and smaller individual shareholders. The company secretarial department is responsible for providing services to Puma’s shareholders and ensures services to shareholders are reviewed regularly so that they remain cost effective. In addition to the parent company, Puma has about 50

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subsidiary companies. Some of the subsidiary companies are public limited companies (but not listed on any stock exchange) and some are private limited companies. Some of the subsidiaries are material operating subsidiaries with many employees while others are less active or dormant. You are responsible for co-ordinating company secretarial support for all of the companies in the group and, in particular, now is the time for you to consider planning issues in respect of the annual accounts for all of the companies in the group. Mr Morley, the Finance Director, has several matters he would like to raise with you in respect of the accounts. You note that Mr Morley has spent a considerable amount of time building on the relationship with Bean LLP (‘Bean’), Puma’s external auditors. Bean has a reputation for being very thorough with its audit and reviews. You are responsible for a small company secretarial department which takes an active role in all of the companies which form part of the Puma group. Your responsibilities include Companies Act and listing regime compliance and good corporate governance practice. You are about to go on holiday and have been making arrangements for the work which needs to be done while you are away. John Silva (‘John’) is the Assistant Secretary and will help to ensure the department continues to function well in your absence. In particular, you are aware that John has several compliance matters to manage in respect of the various subsidiary companies. You have agreed to have a meeting with John on your return from holiday to deal with any unresolved queries.

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Questions Questions 1 – 4, below, are connected to the pre-released case study. 1. The following alternative options are being considered to ensure the growth of Power

Cars:

(a) Mr Shaw suggests that Puma should allot shares for cash to Bing Investments Limited. Mr Shaw asks whether Puma requires any authorities or is subject to any limitation on this matter. He would also like you to explain the required process to allot the shares and any other regulatory requirements.

(15 marks) (b) Mr Shaw suggests that Power, which is valued at about £5 million, could be partially

“spun off” to form a separate company listed on the London Stock Exchange. Puma would retain 80% of the issued shares. Mr Shaw would like to know the relevant criteria for companies to be eligible for listing and whether any changes would need to be made for Power to meet such criteria and follow best practice.

(10 marks) Required Advise Mr Shaw on (a) and (b) above. (Total: 25 marks)

Suggested answer (a) Proposed allotment of shares to Bing Investment Limited Advice note for Mr Shaw Prior to any allotment of shares, it will be necessary to ascertain whether the directors are authorised to allot the shares. The proposed allotment to Bing Investments Limited will require the disapplication of shareholder pre-emption rights. This can be achieved if the company passes a special resolution. Puma is a listed company and it is standard practice for listed companies to pass such a special resolution at each AGM (with authority which lasts until the next AGM) so that the company retains the flexibility to make decisions such as these without the need to convene a further general meeting. A check will therefore need to be made that this resolution was proposed and passed at the last AGM. If it was not, a general meeting will need to be convened and a resolution passed and a copy of the resolutions must be filed with the Registrar (s. 30 Companies Act 2006). Listed companies usually recognise the pre-emption guidelines of institutional shareholders such as those published by the Association of British Insurers and National Association of Pension Funds, these limit the amount of shares which may be allotted on a non pre-emptive basis. These guidelines recommend that:

a resolution be passed for annual disapplication of pre-emption rights, not exceeding 5% of issued share capital; and

no more than 7.5% of issued share capital may be subject to disapplication of pre-emption rights within any rolling three year period.

It will therefore be necessary to calculate how much of the authority has been used during the year and over the last three years as this may further limit the number of shares available without seeking further shareholder authority. Consideration should also be given as to whether it would be advisable to consult with our major shareholders about the proposed allotment.

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If all of the above is in order, the directors will need to approve the allotment of the shares and that Bing Investments Limited will need to apply for the shares. A formal letter of application will be required from Bing Investments Limited (which is usually drafted by the company secretary or the company’s legal advisors) together with the required payment. The board authority shall include instructions for the company secretary to make the relevant entry in the register of members and to issue a share certificates (or for the relevant CREST account to be credited). A return of allotments (on form SH01) must be filed with the Registrar within one month of the date of allotment. As Puma is a listed company, it must arrange for the newly issued securities to be admitted to the Official List and to trading on the London Stock Exchange. The allotment of a relatively small amount of securities does not require the publication of a prospectus. However, formal applications must be submitted to both the UK Listing Authority and the London Stock Exchange at least two business days ahead of the date the company wishes the securities to be eligible and to commence trading. The formal applications must be accompanied by a copy of the relevant board resolution confirming the allotment of shares. It will also be necessary to issue an announcement through a Regulatory Information Service in respect of the admission of securities to the official list and for trading on the London Stock Exchange. Fees will be payable for listing the shares and admitting them to trading. I trust this information is helpful. Company Secretary (b) Criteria for a company to be admitted to the Official List Advice note for Mr Shaw Please note the following for explaining the relevant criteria for a company to be admitted to the Official List:

The company must be duly incorporated and acting in accordance with its Articles of Association.

Companies wanting a full listing must, in most circumstances, have filed audited accounts for the last three years.

The business must be revenue-earning.

The current key executives must have played a significant role in the company’s activities.

The company must be capable of making decisions independently of any controlling shareholder.

The shares must be freely transferable. This is necessary to encourage the liquidity of the shares.

The first shares to be listed must have an aggregated market value of at least £700,000 capital.

At least 25% of the company’s share capital must be in public hands. This will assist in the creation of an open market for the shares.

The shares must be eligible for electronic settlement (i.e. CREST).

The company must be a public limited company. Applying this to the arrangements in place at Power Cars, please note the following points:

Power Cars has been in operation for two years, hence it would not be in a position to have three years’ audited accounts. A special exemption would therefore need to be sought.

The company’s plans to retain 80% of the share capital may compromise Power Cars’ ability to make decisions independently of any controlling shareholder. It would also not meet the minimum float requirement of 25% of the company’s shares to be in public hands.

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Power Cars would need to re-register as a public limited company before applying to be listed.

The board of Power Cars consists of four executive directors. In order to meet the requirements of the UK Corporate Governance Code on a comply or explain basis, independent non-executive directors and a non-executive chairman would need to be appointed so that at least half of the board, excluding the chairman, comprise independent directors.

As Power Cars is valued at £5m, this should meet the minimal market valuation requirements.

I trust this answers your questions. Company Secretary Examiner’s comments Although there was generally a good response to this question, there were some common areas of the question which many candidates did not address. For part (a), most candidates provided adequate answers on the basic points in respect of authority to allot shares, disapplication of pre-emption rights and the formalities of issuing the shares (for example, Form SH01, issuing a share certificate / allotting into CREST). However, too many answers did not consider governance and regulatory issues such as the ABI pre-emption limits and the process for formal admission of shares to the Official List and to trading on the London Stock Exchange. In part (b), too many candidates provided long explanations of the re-registration of a private limited company to a plc, instead of focussing on all the relevant criteria which was required for a company to be listed. Too many candidates also did not link the case study to the question, for example, the case study made it clear that the company had no non-executive directors and hence candidates should have stated the company would need to appoint non-executive directors. In general, though, most candidates did explain the core requirements necessary for a company to be eligible for listing.

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2. Mr Morley has the following questions for you in respect of the preparations for the annual accounts:

(a) Mr Morley has received a terse email from a new non-executive director of Puma,

Geoffrey Carling, who has been recruited for his entrepreneurial flair and who knows little about company administration. It reads: “Why has this group got so many dormant companies? Surely it is a complete waste of time and money! Presumably they all have to have accounts done, which means big audit fees, not to mention salaries for company secretaries for them all.”

Mr Morley asks you to draft a full reply to this. Include in your reply what duties

directors have in relation to these companies. (13 marks) (b) Mr Morley has been given a draft audit limitation agreement prepared by Bean. Mr

Morley asks you why the auditors would seek such an agreement, if he can sign it and if there are any other statutory processes or disclosures which need to be considered.

(6 marks) (c) Mr Morley wants to know if, in future, Puma will be able to send electronic copies of

annual reports to shareholders instead of printed copies, as this would save costs. He has also seen a small supply of printed annual reports for last year in your office and he would like you to explain why you have kept these.

(6 marks) Required Advise Mr Morley on (a), (b) and (c) above. (Total: 25 marks)

Suggested answer (a) Dormant companies Advice note for Mr Morley I refer to the recent email sent by Geoffrey Carling. For the purposes of the Companies Act 2006 (s. 1169), a company is dormant during any period in which it has no significant accounting transaction. Dormant companies may be required for a variety of reasons, for example, to protect a trading name because the company is no longer active but has not been wound-up or struck off, or because the company is maintained as a ‘spare’ company in case it is needed for future use. In respect of statutory requirements, please note that the responsibilities of directors for a dormant company are no different to that of any other company. In particular, the directors must ensure that the filing requirements for a dormant company are observed. Annual accounts for a public limited company must be filed within six months after the end of the relevant accounting reference period and annual accounts for a private limited company must be filed within nine months after the end of the relevant accounting reference period. If the accounts are the first accounts of the company and cover a period of more than 12 months, the time limit is nine or six months from the first anniversary of the incorporation of the company or three months from the end of the financial year, whichever expires last. Annual returns must also be filed as must any changes in directors or the company secretary (if appointed). Under s. 480 Companies Act 2006, dormant companies automatically qualify for audit exemption, with a few limited exceptions (for example, if the company is involved in financial services). As there are no accounting transactions to report, a dormant company needs only

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prepare and deliver an abbreviated balance sheet and notes to the Registrar. Dormant company accounts must be accompanied by a special declaration by the directors which confirms the directors’ responsibility for preparing accounts and that the company qualified as dormant for the period. Directors’ responsibilities should therefore include sufficient due diligence to confirm that the company has remained dormant during the relevant accounting period. To further assist companies in reducing their administrative burden, Companies House produces a special form (AA02) which provides a pro forma for dormant accounts and which includes the special declaration required to be made by the directors. Under the Companies Act 2006, all public companies are required to appoint a company secretary. Private companies are not required to appoint or retain a company secretary, but they may do so, in which case the company secretary has the same duties and responsibilities as he would in a public company. Under the Companies Act 2006, there is nothing to prevent a public limited company from being defined as dormant hence a check would need to be made as to the registration of the company before determining if the appointment is necessary. In respect of whether the appointment of a company secretary is desirable, it should be noted that the tasks of the company secretary will still need to be done, even if there is no one with that title. As in this instance company secretaries are already employed, it would be a cost neutral option to retain an appointed company secretary. As good corporate governance and knowledge of statutory compliance may be important for the organisation, it will need to carefully consider whether the appointment of a company secretary for private companies should be considered good practice. I trust this answers your questions. Company Secretary (b) External auditor – Proposed audit liability limitation agreement Advice note for Mr Morley I understand that the external auditors have given you a proposed audit limitation agreement for signature. I should explain that as an auditor’s liability is unlimited, this has led to concerns that an audit firm could go out of business were it to be found liable in a court in respect of the audit of a large company. This has lead to concerns that competition has been reduced in the marketplace, particularly among the larger audit firms (the so called ‘big four’ audit firms). Sections 534 – 538 Companies Act 2006 therefore provides that the liability of auditors may be limited by way of a liability limitation agreement. The agreement will be in relation to the acts or omissions of the auditor for the relevant financial year. Any such limitation would need the approval of the company and its shareholders by way of ordinary resolution. Hence you may only sign the agreement if it has been agreed by the directors and proposed to and authorised by shareholders. If a limitation agreement is approved and signed it must be disclosed. The liability limitation agreement must be disclosed in the annual report and accounts of the company. I trust this answers your questions. Company Secretary (c) Annual reports – Electronic and printed copies Advice note for Mr Morley I refer to our recent discussions about the annual report. The Companies Act 2006 requires companies to send their annual report and accounts to each shareholder. However, these provisions allow companies to use electronic communications as a default method to communicate with shareholders. This may be accomplished by circulating copies electronically

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(for example, by email) or by making it available on the company’s website, provided members are notified that the accounts are available to view online. The Companies Act 2006 allows companies to make electronic copies of accounts available to shareholders as a first choice (unless a shareholder objects). Shareholders must be consulted on their choice and if they fail to respond to the consultation they are deemed to have consented to electronic communications. Hence, please be advised that Puma cannot make a unilateral decision to substitute electronic copies for hard copies without the required consultation. In addition to the required statutory circulation of the annual report, additional copies are usually kept, in particular, by the company secretary. This is because companies often maintain a mailing list of other persons who may wish to receive the annual accounts (for example, a bank or a major supplier). The company secretary should also retain a small stock of spare annual reports throughout the year to deal with any requests for additional copies from shareholders or other interested parties, such as prospective customers or suppliers. If we were to follow your recommendation and adopt electronic accounts, there will still need to be a small stock of printed copies as shareholders are able to request a printed version of the annual accounts at any time. I trust this answers your questions. Company Secretary Examiner’s comments Most candidates provided adequate answers to part (a). However, too many candidates used the question to provide long answers on all of the statutory duties of directors, which was not relevant to the question asked. What was needed in this regard was a focussed response dealing with a director’s responsibility as it relates to a dormant company. In part (b), although most candidates described an audit limitation agreement, many candidates did not provide an adequate level of detail. For example, many candidates did not mention that prior shareholder approval was needed. In addition, too many candidates appeared unaware that the existence of an audit limitation agreement needed to be disclosed in the annual report. Most candidates provided acceptable answers to part (c), but too many answers did not adequately describe the “opting in” statutory requirement that shareholders need to make to continue to be sent hard copy annual reports.

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3. (a) In respect of Project Clean, it has been decided that the best way to formalise Puma’s objectives is to incorporate a new company. Mr Shaw would like your comments on the possible use of a company limited by guarantee and a community interest company.

(14 marks)

(b) Mrs Lee tells you that Gripping Tyres wishes to establish a formal place of business in the UK so that it can provide a better service to Puma. If possible, this business would be called ‘Best Tyres’, as this name would have greater impact in the UK. However, Gripping Tyres’ policy does not allow it to establish overseas subsidiaries. Mrs Lee is unclear as to whether this can be accomplished and if there are any UK statutory compliance requirements for establishing or maintaining a place of business which need to be observed.

(11 marks) Required Advise Mr Shaw and Mrs Lee in respect of (a) and (b) respectively above. (Total: 25 marks)

Suggested answer (a) Companies limited by guarantee and community interest companies Advice note for Mr Shaw Companies limited by guarantee Companies limited by guarantee are usually charitable or not-for-profit organisations, which typically have a low commercial risk. Given the initiatives being commenced by the company, it is not clear that this will have low commercial risk so its suitability as a company limited by guarantee is questionable. In addition, since 1980, companies limited by guarantee may only be formed without share capital and hence your request for a newly incorporated company with upfront share capital investment (see case study) cannot be accommodated. Companies limited by guarantee which meet the conditions of s. 60 Companies Act 2006 may omit the word “limited” from their name provided their Articles of Association require any profits made to be applied to promoting their objects (in this case, the relevant matters would be the promotion of commerce and science etc). Other than this, companies limited by guarantee are not restricted in the application of their profits, thus providing some flexibility as it is not clear what will be done with any profits. As you will see, a newly incorporated company limited by guarantee will not therefore meet all of the objectives you require. Community interest company (CIC) The purpose of a CIC is to encourage the provision of products and services which benefit the social and environmental regeneration of wide sections of local communities. Companies wishing to qualify for CIC status are required to satisfy the community interest test that ‘a reasonable person might consider that its activities are being carried on for the benefit of the community’. Given the activities envisaged, the proposed company may well meet such a test. Any profits generated from CICs must be used for the public good but, in order to encourage flexibility in financing, CICs have access to financial markets and investors are entitled to dividends, which are set by reference to prevailing published rates. A CIC may be incorporated as a company limited by shares or limited by guarantee. Hence your request for the business to be funded by share capital can be met but (with the exception of the fixed returns) the profits of

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the company will be used for a public good and thus may not provide all the flexibility the proposed company requires. In addition, if the business is wound up any surplus assets can only be applied to similar organisations or for charitable purposes. Hence, if the nature of the business may change over the longer term both of these points need to be drawn to your attention. As you will see, a CIC will not meet all of the requirements, particularly if the longer term plans for the proposed company are unclear. I would be happy to discuss other options if that would be helpful. Company Secretary (b) Overseas Companies Advice note for Mrs Lee I refer to our recent conversation. I can confirm that it is possible for an oversea company (i.e. a company incorporated outside the UK) to establish a place of business within the UK, without the need to establish a registered subsidiary company in the UK. In order to establish a place of business in the UK, the following documents must be filed with the Registrar of Companies (Companies House) within one month of establishing an oversea company:

a statutory form OS IN01 and registration fee;

a copy of the company’s constitutional documents. This is usually the company’s certificate of incorporation, Memorandum and Articles of Association (or equivalent). If these documents are in Chinese, duly certified translations into English must be provided; and

a copy of the latest audited accounts, again which must be in English. A key part of the compliance regime for an oversea company is that they will be required at all times to have a person authorised to accept the serving of formal documents. Details of the authorised person must be given to Companies House when the place of business is established and any changes in particulars must also be notified to Companies House. An oversea company can be registered in its existing corporate name under the laws of the country in which it is incorporated or under an alternative name in the UK. The controls and restrictions which apply to the selection of company name also generally apply to an oversea company so it will be necessary to assess first whether there is an existing company in the UK with the same name or one which is too like ‘Best Tyres’ as to potentially be challenged. I would be able to provide you with further help on this. The other key statutory compliance issues for maintaining the oversea company include the following:

Any subsequent changes to the original information delivered at formation must be notified to Companies House within 21 days of such change.

An oversea company is also subject to broadly equivalent regulations to UK companies in respect of the display of the company name at business premises and on formal correspondence. Again, I can provide further help to you on these regulations.

If an oversea company is required to prepare and disclose accounting documents under its parent law, it must also send accounts to Companies House within three months from the date on which the document is required to be disclosed under the company’s parent law. If the oversea company is not required to disclose accounts under its parent law, it must still file accounts with the Registrar of Companies within 13 months of the end of the relevant accounting reference period.

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I trust this answers your questions. Company Secretary Examiner’s comments In part (a), most candidates explained the basics of a company limited by guarantee and a community interest company (CIC). For example, most candidates described that companies limited by guarantee usually were not for profit or low commercial risk entities. However, many answers did not link the case study to the question. For example, the case study made it clear that the company would require an upfront share capital injection but this would not have been possible, as a company limited by guarantee cannot be formed with a share capital. Also, some answers did not address issues with the CIC such as the application of profit and whether dividends could be paid. For part (b), most candidates provided a good response. Good answers included that ongoing filing requirements would be needed.

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4. You have returned from holiday. During your meeting with John, he asks for your help on the following:

(a) John is unclear as to what a charge or debenture is and he was unable to find either

a register of debentures or a register of charges for one of the subsidiary companies. He does not know if this is a problem or if any information relating to either register needs to be maintained.

(7 marks) (b) Bean has asked to review the minute books for all of the subsidiary companies.

John asks why Bean needs to do this, whether Bean can access the confidential records and if Bean has other rights which he needs to consider. John also notes there are no recent minutes of general meetings for the private limited company subsidiaries re-appointing Bean. He therefore considers that Bean may not be validly re-appointed.

(10 marks) (c) John is considering the arrangements for allowing the company books, in respect of

Puma’s subsidiary companies, to be inspected by members and the public. He is unsure whether different arrangements need to be made for the private limited companies and for the public limited companies. He would also like to know if access to any registers should be prevented.

(8 marks)

Required Advise John on (a), (b) and (c) above. (Total: 25 marks) Suggested answer (a) Register of debentures and register of charges Advice note for John John, further to our conversation, you should find the following helpful. Firstly, a charge is usually a mortgage or a secured loan on property of the company. A debenture is a written acknowledgement of a debt evidencing a loan to a company. Section 876 Companies Act 2006 requires every company to keep a register of charges, even if there are no charges to be entered. The absence of a register of charges is therefore a problem. The register should include:

A short description of the property charged, or class of property in respect of floating charges.

The amount of the charge (this may often be expressed as ‘all moneys’ owed to the chargee from time to time).

The names of the persons entitled to the charge, unless a security to bearer. In addition, a company must keep copies of instruments creating charges (s. 875 Companies Act 2006). There is no statutory requirement for a company to have a register of debenture holders. However, as a company must register an allotment of a debenture stock (Companies Act 2006 s.741) it would be wise to keep a register with all the necessary details.

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We can discuss this further when we meet next. Company Secretary (b) External auditors – Access to confidential documents Advice note for John John, about your concerns for allowing the external auditor access to confidential records, I thought the following might help clarify the situation. The role of an auditor is to prepare an independent report to the company’s members as to whether its financial statements have been properly prepared in accordance with the Companies Act 2006 and other applicable legislation. Their report must also state if a company’s accounts give a true and fair view of its affairs. In order for the auditor to perform these duties, it will require extensive access to Puma’s records. Auditors therefore have a general right of access to company information (s. 499 Companies Act 2006). It is an offence under the Companies Act 2006 to fail to comply with a requirement under s.499 or to provide an auditor with misleading information. You should provide full co-operation with the auditors as soon as reasonably practicable. There are some other key rights of the auditor which you’ll need to consider:

An auditor is entitled to attend any general meetings and to receive all notices and other communications relating to general meetings, at which he may also speak if there are any matters concerning him as auditor. For private limited companies, the auditor is also entitled to receive copies of any proposed shareholder written resolutions together with applicable supporting documentation (Companies Act 2006, s. 502).

Puma has operations and subsidiaries both in England & Wales and in other jurisdictions. The auditors’ rights extend to subsidiaries incorporated both in Great Britain and overseas. Hence, if there is any information on these subsidiaries to which you have access you should ensure full co-operation with the auditor.

The appointment of Bean to the private limited company subsidiaries is likely to be valid. The Companies Act 2006 abolishes the requirement for private companies to hold an AGM and thus provisions for the deemed reappointment of auditors have been included in s. 485 Companies Act 2006. Provided that the auditors have been validly appointed under the Companies Act 2006, they are deemed to be re-appointed and do not need to be appointed again. If private companies do not hold an AGM, the auditor’s period of office is deemed to run between the end of 28 days following the circulation of the annual accounts to the corresponding period in the following year. I trust these answer your questions. Company Secretary (c) Inspection of registers Advice note for John John, I can confirm that different arrangements are required for inspecting records for public limited companies and private limited companies. Below is an explanation of the differences: For private companies, the following applies:

a person who wishes to inspect registers must give advance notice to the company. The notice must include the time at which the inspection is to start and that time must be between 9am and 3pm. The company is then obliged to allow at least 2 hours for the inspection; and

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the required notice period is two working days where it is during the notice period of a general meeting or during the period of the circulation of a written members’ resolution. At other times the notice period is 10 working days.

For public companies, the following applies:

records must be available for inspection for at least 2 hours between 9am and 5pm on each working day; and

there is no need for a person to give advance notice to a public company. Members and the public have no right of access to board minutes or to the register showing the residential addresses of directors and access to these should be prevented. It is good practice to keep board minutes separately from minutes of general meetings as members have the rights of access to the latter but not the former. All companies also need to consider whether requests to inspect certain registers (register of members, debenture holders and interests disclosed) are for a ‘proper purpose’ under Companies Act 2006 and to deal with such requests accordingly. Let me know if the above was helpful. Company Secretary Examiner’s comments Part (a) was not well answered, as many answers did not fully describe a charge or a debenture and did not correctly address whether the registers were a statutory requirement. Responses to part (b) were better than in part (a). Most candidates correctly stated that full co-operation and access to records needed to be provided to the external auditor. Some candidates did not appear aware of the provisions in relation to the deemed re-appointment of auditors for private companies – many of those candidates suggested incorrectly that written member resolutions were needed to re-appoint the auditor. In part (c), most candidates provided good answers.

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Questions 5 and 6, below, are not connected to the pre-released case study. 5. You are the Manager at Company Secretarial Best Practice Limited, an independent

company providing advice to many clients. You receive the following calls from your clients:

(a) Ms Aston has just joined a company which has 80 subsidiaries. All of the statutory

registers are on paper only, and the company submits all Companies House forms to the Registrar of Companies on paper. She asks for your comments and you agree to send her a briefing note on why this is neither modern nor best practice, and summarising alternative methods.

(10 marks) (b) Mr Erikson is confused about capitalisation issues (also known as bonus issues)

and rights issues of shares. He needs you to explain clearly what each is, why companies make them, what choices shareholders have in relation to them and what impact they might have on the company’s share price.

(9 marks) (c) Mr Elliot tells you that a Ms Wade is about to join the board of his company. Ms

Wade was previously a director of a company which became insolvent and was wound-up. He wants to know if this would prevent Ms Wade from being appointed a director and how such matters are investigated.

(6 marks)

Required Advise your clients in respect of (a), (b) and (c) above. (Total: 25 marks)

Suggested answer (a) Company Secretarial Best Practice Limited Administration of subsidiary companies – advice note for Ms Aston I refer to our recent conversation regarding the administration of 80 subsidiary companies. The administration of the companies would be made easier by utilising various technologies which are widely available to help company secretaries to do their job more easily. Although Companies House accepts printed forms their preference is for such documents to be filed electronically and most Companies House forms can now be filed in this way. Using electronic filing will be attractive to companies who are high-volume users (for example, with many subsidiary companies) and has the added advantage that documents are automatically validated as well as acknowledged, which is not available automatically with the submission of printed forms. As a further encouragement, Companies House typically charge lower fees for filing certain documents if this is done electronically, hence, using electronic filing will save the company costs. Utilising electronic filing is also a more secure method of operation. There have been several instances of companies which have been “hijacked” by fraudsters changing details of the company’s directors and registered office and then using the victim company to obtain goods or services fraudulently on credit. In an attempt to deter such fraud, Companies House has introduced the PROOF service (PROtected Online Filing), which is only available when documents are filed electronically. If the company uses PROOF, the Registrar will accept specific forms electronically only if they meet the required authentication criteria and will reject any paper versions of those forms unless specifically authorised to do so by the company. In

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addition, the use of either online web filing or company secretarial software packages requires passwords or other personal identification information and hence provides additional security compared to the submission of paper filings. There are also several company secretarial software packages available which can be used to maintain the statutory registers. This would be a more effective method of maintaining such a large number of companies and would utilise not only electronic filing but also time saving features such as the ability to process batched changes and submissions as a single transaction. The software packages are approved by Companies House and are designed therefore to work seamlessly with the Registrar of Companies, for example, the software packages contain approved and up to date versions of forms which can be automatically populated with information from the software package’s database, further saving time and effort. I trust the above is helpful for you. Company Secretary (b) Company Secretarial Best Practice Limited Capitalisation issues and rights issues – advice note for Mr Erikson I should explain that a capitalisation issue involves the issuance of shares by a company allotted free of charge to existing shareholders in proportion to the existing size of their holdings. The shares are issued as credited fully paid and as the shares are allotted free of charge to shareholders the company will not therefore raise any capital and the value of the company will be unaffected. If the company is listed the market price of the shares is likely to fall roughly in proportion to the increase in the company’s issued share capital. A bonus issue is often recognised as a sign of confidence of the company and is sometimes used in lieu of making a cash dividend payment. In a capitalisation issue, shareholders are usually given the ability to renounce the allotment and hence provisional allotment letters will usually provide for the ability to renounce the allotment in favour of another person. A rights issue is also an issue of shares to the existing shareholders pro rata to their existing holdings. However, unlike a capitalisation issue, companies use a rights issue to seek additional funding from the company’s shareholders. As additional funding has been raised the value of the company will increase to reflect the injection of capital. Unlike a capitalisation issue, the price at which shares are offered is critical and in order to encourage the success of a rights issue, shares are usually offered at a discount to the prevailing market price. This results in the share price changing to reflect a combination of the previous shares in issue plus the impact of the shares issued in the rights issue at the rights issue price. As it will be important to ensure the rights issue is successful, many such issues are underwritten by brokers or banks in case shareholders do not take up all the shares under offer – this is unnecessary for a capitalisation issue. Similar to a capitalisation issue, shareholders may renounce the shares offered in a rights issue to another person. Please do not hesitate to contact me if you need further guidance. Company Secretary (c) Company Secretarial Best Practice Limited Proposed appointment of director – advice note for Mr Elliot Please note that the Registrar of Companies is required to maintain an index of directors who are disqualified, together with short details of the disqualification. This index is available to the public and can be accessed via the Companies House website. You should therefore access the index to find out if Ms Wade has been disqualified.

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A director may be disqualified by the court because during the directorship of a previous company now insolvent they were declared unfit to manage. However, it is not necessarily the case that a director will be disqualified just because a company became insolvent – what is relevant is the behaviour of that director and whether it fell below the standard expected or breach any statutory requirements. You should be aware that the Insolvency Service is an executive agency within the department for Business Innovations & Skills which is responsible for investigating the suspected misconduct of directors of insolvent companies. The service is authorised to deal with the disqualification of directors in all corporate failures. I trust this is helpful. Please let me know if you require any further information. Company Secretary Examiner’s comments For part (a), responses were generally satisfactory. Most candidates appeared aware of the electronic services provided by Companies House and other software providers. However, some candidates provided answers about the basic business benefits of an office environment which uses features of electronic document management, which were too general and not fully explained. In part (b), many of the responses adequately described a capitalisation issue and a rights issue. However, some responses were too general in respect of the impact such issues could have on the share price. In part (c), most candidates explained why a director may be disqualified, but not enough candidates explained that disqualification was not automatic and depended on the conduct of the director of an insolvent company. Most candidates appeared aware that Companies House maintains an index of disqualified directors. However, many candidates did not mention the Insolvency Service, which should have been an obvious part of the answer.

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6. You are the Company Secretary of Hands plc, a company which is not listed on any stock exchange. Mrs Shine has just been appointed chairman but, as this is her first appointment as a director, she has asked you to set out in a note:

(a) Advising on the role of the chairman before, during and after a board meeting. She

would also like to know who would act as chairman if she was absent. She would also like the note to include what to do if one or more of the directors did not agree with a proposal during a board meeting.

(14 marks) (b) Advising whether, and if so how, a board meeting can be convened tomorrow to

approve urgent business. She wants to know if there are any alternative solutions if the directors cannot make it to the office and she notes that one of the directors is on holiday and cannot be contacted for the next few days. She also asks you if the board may pass a written resolution instead of convening a meeting.

(11 marks)

Required Advise Mrs Shine in respect of (a) and (b) above. (Total: 25 marks)

Suggested answer (a) Duties of the chairman before, during and after a board meeting

Advice note for Mrs Shine

Further to our discussion, the following are key issues for the role of a chairman before a board meeting. The company secretary should draft the agenda and review it with the chairman (and other directors as necessary) prior to issuing it. The chairman should agree the agenda and any persons who will also attend the meeting. The chairman should also be made aware (through notification by the company secretary) in advance of any apologies for absence at the meeting. The chairman will normally instruct the company secretary to convene a meeting on a particular date and time to suit the chairman (usually after the company secretary has also checked the diaries of the other directors to ensure as full as attendance as possible), but any director can call a board meeting (Model Article 8). The chairman is responsible for ensuring, if necessary, that the other directors have all the information (for example, briefing papers) they need for a meeting in advance and this responsibility is usually discharged by the company secretary.

There are also some important roles of a chairman during a board meeting. The duty of the chairman is to manage the board and the board meeting. You should seek the views of the other directors on each agenda item and then facilitate discussion. Following the conclusion of a particular agenda item, the chairman should ensure there is a consensus or understanding on the particular matter. Following the discussion, the chairman should ascertain, if required, whether the board approves the agenda item concerned. If any matter has an equal number of votes for and against from the directors voting, public company Model Article 14 provides the chairman with a casting vote to resolve the matter. The minutes of the previous meeting are usually reviewed at the meeting and if the board approves the minutes, authority is usually given to the chairman to sign the minutes. The company secretary should work with the chairman to ensure that all agenda items have been covered and, once all business has been covered, the chairman should declare the meeting closed.

The role of a chairman also extends to after a board meeting. Minutes will be prepared promptly by the secretary and circulated in draft form to the directors, including the chairman for comment. The minutes should be in a form that the chairman is happy with so that, if approved at the next meeting, they can be signed by the chairman. To facilitate this process, it would be

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wise for the company secretary and the chairman to discuss, for example, whether the chairman prefers to have more detailed minutes capturing the discussions during a board meeting.

Two aspects need to be considered in the absence of chairman for a board meeting. Model Article 12 (public company) provides for the appointment of a deputy chairman or assistant chairman. Such a person would deputise for the chairman in her absence. Alternatively, if the chairman is absent for a short period, and there is no deputy chairman or assistant chairman, a chairman should be appointed to chair any board meeting where you would be absent. The selection of a deputy or assistant or the appointment of a chairman for a particular meeting is a matter for the board, who will need to resolve to make such an appointment amongst themselves.

You also asked what do if some of the directors do not agree with a proposal. As noted above, it

is the chairman’s role to ascertain whether the directors support a particular matter and, in the event of deadlock, you can use a casting vote (although you are not obliged to do so). At board meetings, decisions are normally reached by consensus rather than being put to a vote. If a resolution is put to a vote, each director has one vote and a majority decision is needed. If a director does not agree with a proposal, they should make their objection clear in the meeting and the chairman should instruct the company secretary to record in the minutes that the particular director was dissenting. Please let me know if you require any further information. Company Secretary (b) Convening a board meeting at short notice

Advice note for Mrs Shine

The chairman or any other director may instruct the company secretary to convene a board meeting (public company Model Article 8). There are no provisions in the Companies Act 2006 or the Model Articles of Association regarding adequate notice for directors’ meetings. However, under common law, directors must be given “reasonable” notice and public company Model Article 8 states that notice must be given to each director. It needs to be recognised that boards do from time to time need to make urgent decisions and every effort should be made to contact the missing director – notice need not be in writing and may, for example, be via email or telephone. Boards usually make decisions by majority vote and a meeting is usually valid if it is quorate. Therefore, it could be argued exceptionally that every effort should be made to contact the missing director to give notice of meeting but, if that is not successful, a meeting of the directors should proceed anyway if the majority can attend and decide on the urgent matter. There would of course be a risk that the absent director could subsequently object because he did not receive notice and assert that any decision made is invalid, however, if the majority of the board approve the transaction it could make the objection academic. A sensible practical suggestion would be to contact the absent director at the first available opportunity to determine their support and to confirm this at the next board meeting and record their support in the minutes. Model Articles permit board meetings to be held via teleconference or videoconference as an alternative to meeting in the office. If directors will not be participating in the same place, the notice must include how it is proposed that the directors should communicate with each other at the meeting.

With regards to the director who is absent, I shall also check whether the director has already nominated another director to act as an alternate. In this case, the alternate would automatically be able to act in the director’s absence.

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You also asked me whether we could pass a written resolution of the board rather than convene an urgent board meeting. Although the Model Articles do allow boards to pass a written resolution, unanimous consent is required. Hence this does not appear to be viable given the absence of one of the directors (unless there is an alternate appointment). Written resolutions of the board therefore override the usual requirement that a simple majority is required to approve a board resolution. I would therefore advice you that a board meeting (rather than written resolution) will be required. Please let me know if you require any further information. Company Secretary Examiner’s comments Some of the best answers for this examination appeared to be on question 6 (a). Most candidates provided good answers and appeared well aware of the chairman’s roles.

In part (b), weaker answers confused procedures for a members’ meeting with that of a directors’ meeting, for example, by stating notice periods are required for a general meeting. Also, some answers were not practical, for example, by not acknowledging that board meeting procedures are more flexible than general meeting procedures or that on occasion it may be necessary to convene an urgent board meeting event if one of the directors cannot attend. However, most candidates did apply some practical measures, for example, by confirming that it was acceptable to hold the meeting by teleconference or videoconference.

There was a wide range in the quality of the answers about whether a written resolution would be viable. Too many candidates did not apply the provisions relating to a written resolution to the question, which made it clear that urgent business needed to be approved the following day. It would not have been possible to pass a written resolution in the required timescale because of the absent director and candidates should have provided clear advice that a written resolution was not a viable option and that a meeting had to be convened instead.

The scenarios included here are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental.