CORPORATE SECRETARYSHIP JUNE 2009 SUGGESTED ANSWERS AND EXAMINERS 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.

EXAMINERS GENERAL COMMENTS There was further increased exposure to the Companies Act 2006 (CA 2006) in this examination. For example, the requirement for private companies to have a Company Secretary was explored for the first time. In view of the many different changes brought about by the CA 2006, candidates are urged to ensure they have the most recent study text and that they keep up to date by appropriate further reading. Im disappointed to say that the presentation of candidates responses has not improved since the last exam. The handwriting in too many papers was very poor and in a few places illegible. Candidates are of course reminded that marks cannot be awarded for portions of the answer script which are illegible. There was a lack of attention to basic exam technique in too many instances, for example, not starting each question on a separate page. In addition, some candidates repeated the text of the question unnecessarily this makes the examiners task more difficult and wastes the candidates time. Candidates are also reminded of the importance of presenting their answers in the requested format. As can be seen in the following pages, this is a practical exam and hence marks may be available for the format as well as the content of each answer.

Page 1 of 22
ICSA, 2009

SECTION A (Compulsory answer all parts of this question) 1. (a) Explain the provisions within the Articles of Association in respect of a shareholders proposal for the appointment of a director of a company.

(4 marks)

SUGGESTED ANSWER Table A reg. 76 states that shareholders may requisition a proposal at a general meeting to appoint or re-appoint their proposed director. Certain conditions must be met: notice must be given to the company by shareholders not less than fourteen nor more than thirty-five clear days before the date appointed for the meeting; the notice must be accompanied by the particulars of the proposed director (i.e. the details which would be required to be included in the companys register of directors); and the notice must be executed by the proposed director to indicate his / her willingness to be appointed or reappointed.

EXAMINERS COMMENTS This was a poorly answered question. Many candidates simply quoted statutory provisions on the requisition of a shareholder resolution. Candidates are reminded of the importance of knowing all of the provisions of the Articles of Association.
(b) What criteria must a company meet in order for it to be admitted to the Alternative Investment Market (AIM)? How does this generally differ from the admission requirements to the Official List? (4 marks)

SUGGESTED ANSWER The AIM is the London Stock Exchanges market for smaller public limited companies. The requirements for admission to AIM are less demanding than those for the Ofcial List. The company does not have to be a particular size or have a lengthy trading history and it is not required to have a certain percentage of its shares in public hands. However, where the companys main activity is a business which has not been independent and revenue earning for at least two years, it must agree that any director or employee owning more that 0.5 per cent of the shares must not dispose of them for at least one year from the date of admission. To be admitted, a company must appoint and maintain a nominated broker and a nominated adviser to help the directors meet their obligations and to bring together buyers and sellers of the companys shares in the market.

Page 2 of 22
ICSA, 2009

EXAMINERS COMMENTS Most candidates were aware that the AIM was the market for smaller companies and generally had less stringent requirements than the Official List. However, many candidates failed to mention the role of the nominated broker and nominated adviser, which is very important for AIM companies.
(c) Describe the main categories of information contained in an annual return for a limited company. (4 marks)

SUGGESTED ANSWER There are some fifteen categories of information in the annual return. The main categories are the following: the company number; the company name in full; the date of the current return, i.e. the date at which it is made up, not more than one year since the previous one; the date of the next return; the registered office address; principal business activities (based on the UK Standard Industrial Classification Codes); the location of the register of members, together with the address where the register is kept if this is not the registered office; the location of the register of debenture holders (if there are such holders); the company type, e.g. private company limited by shares; the company secretarys name and address (if any); the directors and their notifiable details; the issued share capital; list of past and present shareholders (a full list of shareholders for a private or non-traded public company / a list of shareholders holding at least 5% of the issued shares of any share class for a traded public company. Shareholders addresses must not be given for non-traded public companies); whether the company is or is not a traded company; signature of a director or the company secretary and the date it is signed; contact details of a person who can be contacted should there be any queries.

EXAMINERS COMMENTS Candidates were not expected to be able to name all of the above categories. Most candidates were able to provide adequate responses but a worrying amount of candidates confused the contents annual return with that of the annual report & accounts. Candidates should be aware that for UK company law, the annual return and annual report & accounts are two very different documents which serve very different purposes.

Page 3 of 22
ICSA, 2009

(d)

In respect of employee share schemes, explain what is meant by the terms all employee schemes and discretionary schemes. (4 marks)

SUGGESTED ANSWER An all-employee scheme is a scheme which the company intends all, or substantially all, of its employees to participate in. For example, the savings-related scheme or the share incentive plan. The opposite of an all-employee scheme is a discretionary scheme. This is where the company intends that only a selected group of employees, usually defined by their seniority, business function, or duration of service to the company, will participate. An example of such a scheme is a company share option scheme.

EXAMINERS COMMENTS Most candidates were able to describe both types of share schemes and the better answers provided examples of each scheme to demonstrate their understanding of the question.
(e) What are the provisions in Table A in respect of the convening of board meetings? (4 marks)

SUGGESTED ANSWER The following provisions are contained in Table A in respect of the convening of board meetings: Article 88 provides that the directors may regulate the proceedings of board meetings as they think fit. Article 88 also provides that a director may, and the secretary at the request of a director shall, call a meeting of the directors. Article 88 states that it shall not be necessary to give notice of a meeting to a director who is absent from the United Kingdom. Article 66 provides that an alternate director shall be entitled to receive notice of all meetings. However, he or she is not entitled to notice of such a meeting if he or she is absent from the United Kingdom.

EXAMINERS COMMENTS The quality of responses to this question was generally disappointing. Many candidates simply wrote about procedures during board meetings, instead of the procedures for convening them. Again, this showed a lack of understanding in respect of the Articles of Association.

Page 4 of 22
ICSA, 2009

(f)

What information is required by statute to be maintained in the register of members of a company with a share capital? (4 marks)

SUGGESTED ANSWER Pursuant to CA 2006 s. 113 the information to be maintained on the register of member is: name and address of member; date that person became a member and the date on which that person ceased to be a member if applicable; number, and class of share held and cash amount or non-cash consideration paid; details where shares have been converted to stock; share warrants; a company with more than 50 members must keep a separate index in the same place as the register to enable easy access to the data; an entry relating to a former member of the company may be removed from the register 20 years after the date on which he ceased to be a member (CA 2006 s. 352). From October 2009, this period will reduce to 10 years (CA 2006 s. 121).

EXAMINERS COMMENTS Most candidates provided adequate responses to this question. The majority of candidates did not, however, mention the requirement to keep an index where there are 50 or more members. This is an important feature which is usually the responsibility of the Company Secretary or their agent.
(g) What are the statutory provisions in respect of shareholders rights to raise concerns about the audit of a quoted company? (4 marks)

SUGGESTED ANSWER S. 527 CA 2006 introduces a new provision which gives shareholders of a quoted company the right to have a statement placed on the companys website ahead of a general meeting at which the accounts are to be considered. The statement shall be in relation to the audit of the accounts or any issue surrounding an auditor who has ceased to hold office. In order for the statement to be placed on the companys website, it must be requisitioned by members representing at least 5% of the total voting rights or by 100 members holding paid up shares on average sum per member of not less than 100.

EXAMINERS COMMENTS This is a new feature introduced by the CA 2006 and it was disappointing to see that many candidates had not kept up to date with this provision. Many candidates confused this with processes to remove or not appoint an existing auditor, which is a different matter.
Page 5 of 22
ICSA, 2009

(h)

What are the provisions in the Articles of Association in respect of partly paid shares held by a shareholder? (4 marks)

SUGGESTED ANSWER The provisions in the Articles of Association in respect of partly paid shares held by a shareholder are: partly paid shareholders are liable to pay any unpaid share capital at the request of the directors (known as a call); failure to pay a call may lead to interest penalties or forfeiture of shares (by resolution of the board); Article 8 gives the company a first lien on every share which is partly paid; Article 24 allows directors to refuse to register a transfer of shares if it is to a person whom they do not approve; Article 104 permits directors that dividends may be paid pro-rata to the amount paid up on the respective shares.

EXAMINERS COMMENTS Most candidates were aware that the directors could make a call to pay and that if a shareholder fails to pay this could lead to forfeiture of the shares. On the whole, this question was well answered by candidates.
(i) What information is legally required to be shown on the letterhead of a company? (4 marks)

SUGGESTED ANSWER The following information is required to be shown on the letterhead of a company: the registered office address; a list of the names of all the directors, or none of them; the company name, as registered at the Registrar of Companies. If the trading name of the company is different, this may be shown in addition to the registered name; the companys registered number; the country of registration (i.e. the jurisdiction under which the company is incorporated); if the company has an exemption from using the word `limited, a statement that the companys liability is limited; if the company is required to be authorised and regulated by a statutory body, for example, the Financial Services Authority, a statement that the company is so authorised and regulated.

EXAMINERS COMMENTS Candidates performed well on this question and were able to provide, on the whole, good answers.
Page 6 of 22
ICSA, 2009

(j)

Explain what is meant by a dormant company. Are dormant companies required to file accounts with the Registrar of Companies, and are there any applicable statutory provisions? (4 marks)

SUGGESTED ANSWER A dormant company is one which has no significant accounting activities during its financial year. Dormant companies must file annual accounts with the Registrar of Companies. Companies are able to use Form DCA to make this process simpler. Dormant accounts automatically qualify for audit exemption. Directors only need to prepare abbreviated accounts which must include a declaration that they acknowledge their responsibility for preparing accounts which give a true and fair view and that the company qualified as dormant for the accounting period.

EXAMINERS COMMENTS Most candidates could provide an adequate definition of a dormant company and it was pleasing to see some candidates refer to Form DCA to demonstrate their understanding of the question. A few candidates incorrectly thought that a dormant company was not required to file accounts with the Registrar of Companies.

Page 7 of 22
ICSA, 2009

SECTION B (Answer THREE questions from this section) 2. You are the Assistant Secretary of Computer Chips plc, a company listed on the London Stock Exchange. The company will be holding its Annual General Meeting (AGM) in a few months. To ensure it is well planned, the Company Secretary has asked you to produce a note setting out what actions he should take before the AGM, and what documents need to be prepared and/or issued. REQUIRED Prepare a suitable note for the Company Secretary. SUGGESTED ANSWER Computer Chips plc 2009 ANNUAL GENERAL MEETING NOTE TO THE COMPANY SECRETARY Introduction As requested, I have prepared the below note which sets out what actions should be taken before the AGM and what documents need to be prepared and/or issued. AGM Venue You should advise the chairman of the estimated attendance at the meeting so that a room can be booked that will be suitable in terms of size, availability, cost and quality. As you know, the Secretary is usually responsible for finding, evaluating and hiring an appropriate venue in plenty of time before the AGM. It is essential for the Secretary to check practical details, for example, catering, room layout, security, access and facilities for the disabled, health and safety arrangements and audio-visual arrangements. These practical details are usually dealt with during a pre-meeting with those responsible for managing the meeting venue. Annual Report, Notice of AGM and Proxy Card The audited accounts, notice of AGM and proxy form must be submitted to and approved by the board. Three proof copies of the report and accounts should be signed off. A director must sign the balance sheet, either the secretary or a director must sign the directors report and the signature of the auditor is needed on the auditors report. As the company is listed, the signature of a director or secretary should also appear at the end of the remuneration report within the report and accounts. For the notice, the chairman may sign his statement (if applicable) and the secretary usually signs the notice of the meeting by order of the board. Keep one of the three signed copies of the report and accounts with the companys records, send one to the Registrar of Companies and the other to the auditors. Page 8 of 22
ICSA, 2009

(20 marks)

Other Preparatory Actions In addition, the following matters need to be dealt with ahead of the AGM: advise the external registrar of the recommended dividend so that they can prepare the dividend warrants for dispatch to shareholders following approval at the AGM; arrange with the bankers for a dividend account to be opened so that the money required to pay the dividend can be deposited; instruct printers to print the notice of AGM, annual report and proxy form and for it to be dispatched observing applicable notice requirements (and Combined Code recommendations); in accordance with the Disclosure and Transparency Rules, place the Annual Report and notice of AGM on the companys website; invite the companys solicitors or other appropriate advisors to attend the meeting. Auditors are entitled to attend anyway. Instruct the companys registrars to attend; prepare ballot papers for the event of a poll being demanded; prepare an agenda for use by the board. In some circumstances it may be useful to prepare a more detailed agenda / script for the chairman, together with prepared answers to awkward questions; prepare attendance sheets to register attending shareholders, the press, proxies and representatives; make the register of members available for inspection in case it is necessary to identify the people attending the meeting, to ensure that only those entitled to be there are present; make copies of the non-executive directors letters of appointment (Combined Code recommendation) available for inspection. Although no longer a listing rule requirement, many listed companies make their executive directors service contracts also available for inspection at the AGM; prepare name cards and/or name badges for the directors and organise proposers, seconders and scrutineers if required.

Recent Trading Performance In listed companies, the directors sometimes take the opportunity to update shareholders on the companys recent trading performance, its trading outlook, or perhaps on changes in the composition of the board. The Secretary should be briefed if such an update will be made because such a statement will have to be released to the Page 9 of 22
ICSA, 2009

market through a regulatory information service. The release of such announcements must be timed to coincide with the directors address to the meeting. Returned Proxy Forms The Secretary should check returned proxy forms against the register of members and report the result of the proxy count to the board after the expiry of the deadline for receipt (usually 48 hours before the meeting). For listed companies, a short report of the proxy votes lodged should be prepared for putting on the companys website (and / or for release through a Regulatory Information Service) and for handing out to interested shareholders following the meeting. I trust the above information is helpful. Regards Assistant Secretary, Computer Chips plc

EXAMINERS COMMENTS This was a popular question with candidates and most candidates did well as it represents some of the most familiar core learnings of the syllabus. Some candidates missed out on obvious matters, such as booking the AGM venue, preparing dividend arrangements and preparing the annual report for dispatch these represent some of the most important duties of a Company Secretary and must be adequately addressed in a question such as this.

Page 10 of 22
ICSA, 2009

3.

You are the Company Secretary of Hugo plc, a company which is not listed on any stock exchange. At a board meeting, the following issues arise with respect to dividends: (a) Mr Spin, the Marketing Director, has asked you if the Companies Act contains any restrictions on a companys ability to pay dividends. He is also concerned that the financial position of the company has changed considerably since the last accounts were prepared, and asks you if there are any statutory requirements which need to be observed in relation to the companys ability to pay dividends. The company has ordinary shares, preference shares, and debentures, and he asks you whether the company is obliged to pay on each of these, and whether there is any particular priority. (11 marks) The Sales Director asks you to explain the difference between interim dividends and final dividends, and the authorities required prior to payment of either. (4 marks) The Chairman asks you to draft an appropriate minute in respect of the consideration and approval of an interim dividend on ordinary shares. (5 marks)

(b)

(c)

REQUIRED Provide the advice requested in (a) and (b) above, and draft an appropriate minute in respect of (c). (Total: 20 marks) SUGGESTED ANSWER HUGO PLC ADVICE REGARDING DIVIDENDS I refer to the recent discussion at the Board meeting regarding dividends. As promised, I have provided further advice regarding the queries: (a) Ability to pay dividends

A company may not make a dividend distribution except out of distributable profits available for the purpose (Companies Act 2006 s. 830). These are defined as a companys accumulated realised profits less its accumulated realised losses. Dividend payments may not be made out of capital, which must be maintained so that the company can meet its liabilities due to creditors. Public companies must ensure that the proposed distribution does not reduce the net assets of the company to less than the aggregate of the companys called-up share capital and its undistributable reserves. If the last annual accounts show that there are insufficient distributable profits to make a distribution, or if the companys financial situation has changed considerably since the annual accounts were prepared, the directors must prepare and refer to more recent Page 11 of 22
ICSA, 2009

interim accounts. These must be prepared to such a standard that they would enable a reasonable judgement to be made as to whether there are sufficient distributable profits. The interim accounts prepared by a public company must comply with the rules for preparing annual accounts. The interim accounts do not need to be audited, but they must be filed with the Registrar of Companies. Directors are not obliged to pay dividends on ordinary shares or preference shares (unless the preference shares carry a fixed dividend entitlement) and may not pay such dividends if there are insufficient distributable reserves. Ordinary shares rank after preference shares for the purposes of dividends. For preference shares, there is usually a fixed rate of dividend often expressed as a percentage and it is deemed to be cumulative, unless stated otherwise. This means that, should a company fail to pay the dividend due, it will accrue to the shareholder and become payable, together with the next dividend due, at the next payment date. If profits were available (and if they were cumulative preference shares), any amount unpaid would need to be carried forward to future year(s) when profits become available. Debentures are effectively loans to the company by investors and are not a class of share. Interest on debentures ranks ahead of the payment of dividends on either preference shares or ordinary shares. Interest on debentures must be paid, even if the company does not have sufficient distributable reserves, and failure to pay may lead to an event of default. (b) Interim and final dividends

A final dividend is paid after the end of the financial year, based on the final audited accounts for the immediately preceding year. An interim dividend is any dividend which is paid before the end of the current financial year in respect of distributable profits for the current financial period. Article 102 of our Articles of Association requires shareholders to approve the final dividend by ordinary resolution. However, Article 103 permits interim dividends to be paid between general meetings and do not need the approval of shareholders. The power to pay interim dividends is usually delegated to the directors who must be satisfied that the payment is justified by sufficient distributable profits. (c) Draft minute for an interim dividend

X proposed that an interim dividend of [x] pence per ordinary share be paid. The board reviewed a set of interim accounts for the purposes of considering the payment of an interim dividend. Following a review of the interim accounts, the directors were satisfied that there were sufficient distributable profits to pay the interim dividend. Following further deliberation, IT WAS RESOLVED THAT an interim dividend of [x] pence per ordinary share be paid on x 2009 to shareholders on the register of members at x 2009. The Company Secretary was instructed to make the necessary arrangements in respect of the payment of the interim dividend.

Page 12 of 22
ICSA, 2009

Regards Company Secretary, Hugo plc

EXAMINERS COMMENTS Most candidates were able to provide adequate explanations of the CA 2006 provisions on a companys ability to pay dividends and the prioritisation of debentures, preference shares and ordinary shares. However, a worrying amount of responses did not state that if the companys financial position had changed considerably, that interim accounts needed to be prepared before a decision on dividends could be made. This is a key governance and statutory compliance issue on which directors should be able to look to the Company Secretary to provide guidance. Most candidates could provide adequate explanations of both final dividends and interim dividends. In respect of part (c), this was on the whole weaker. Many candidates missed out key points for inclusion in the minute, such as confirmation that there were sufficient distributable reserves, the record date and the payment date. Again, the directors will be looking to the Company Secretary to ensure that these details have been considered and have been appropriately authorised by the board.

Page 13 of 22
ICSA, 2009

4.

You are the Company Secretary of Sharp Ends plc, a company listed on the London Stock Exchange. Sharp Ends plc has an issued share capital of 100 million shares. Mrs Chief, the CEO, advises you that she suspects Predator plc has recently acquired five million shares in Sharp Ends plc, but that the shares are not registered in Predator plcs name. Mrs Chief asks you the following: (a) How to discover the identity of the owner of the five million shares in question. She is concerned about how the stock market would react if Predator plc is the owner of the shares, and has asked you whether there is any requirement to disclose any information under statute or under listing regime obligations. She also asks you what statutory registers would need to be updated if Predator plc were the owner of the shares. (10 marks) To explain when the City Code on Takeovers and Mergers (the Code) would apply, and the key general principles of the Code. (10 marks)

(b)

REQUIRED Provide the advice requested in parts (a) and (b) above. SUGGESTED ANSWER SHARP ENDS PLC SHAREHOLDING IN THE COMPANY I am writing to you further to the queries about shareholdings in the Company. (a) Predator plc

(Total: 20 marks)

Under Companies Act 2006 s. 793, a public company can investigate the true ownership of its shares by sending a written notice to any person whom it knows, or has reason to believe, is interested in the voting shares of the company, asking for information about the identity of the persons interested, the number of shares held and the dates when the interest was acquired. A company can investigate both current shareholdings and shareholdings over the last three years. The recipient is required to inform the company making the enquiry whether they have or had an interest, and if so, what the nature of the interest is or was. If the recipient fails or refuses to respond, the company is entitled to seek permission of the court to impose restrictions in respect of the shares under investigation. Public companies are required to maintain a register of interests in respect of information held on a companys shares. The register must include all responses from a shareholder under s. 793 CA 2006 investigation. As the register must be made available for inspection, it is not possible to keep the identity of the true holder of the shares undisclosed. Page 14 of 22
ICSA, 2009

In addition, as the company is listed on the London Stock Exchange, it is subject to the Disclosure and Transparency Rules. This requires anyone with an interest of 3% or more of the listed company to notify the United Kingdom Listing Authority of such an interest and also to notify the listed company concerned. The listing company will be required to release a stock exchange announcement through a Regulatory Information Service regarding the interest. The Companies Act provides that share registers for companies registered in England and Wales can only show the registered name of the shareholder, not any trust or underlying beneficial shareholding. Hence, any nominee company which is holding the shares on Predators behalf will be shown on the share register, and not Predator itself. (b) City Code on Takeovers and Mergers

The Code sets out regulations for the takeover of shares in listed companies. It is published and administrated by the Panel on Takeovers and Mergers (the Panel) and has members from influential bodies within the investment and business community. Its provisions apply when a bidder increases their shareholding to 30 per cent or more. Professional nancial advisers will need to be retained to advise on the merits of a takeover bid. These professional advisers will take the Code into consideration and are aware that breach of the Code could result in sanctions. The prime objective of the Code is intended to ensure fair and equal treatment of all shareholders during a takeover. It does not set out to deal with the nancial implications of a bid. There are six principles of the Code: all shareholders of the offeree must be given equivalent treatment; the shareholders of the offeree must have enough information to make an informed decision on the bid and enough time to consider it; the board of the offeree must act in the interests of the company as a whole and must not deny shareholders the chance to decide on the merits of the bid; false markets must not be created in the shares of the offeree, the offeror or any other company concerned by the bid; an offeror must ensure that they can meet any cash consideration in full before announcing a bid; an offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities.

I trust the above information is helpful. Company Secretary, Sharp Ends plc Page 15 of 22
ICSA, 2009

EXAMINERS COMMENTS This was the least popular question with candidates. This is probably because the subjects have not been tested for some time and have never been tested in the particular combination as presented. It is possible that many candidates were not prepared for the question. Candidates are reminded that the whole of the syllabus is examinable and that they should be fully prepared ahead of their exams. There was a wide variance in the quality of answers to this question. Most candidates were aware of the provisions of S.793 CA2006 but many candidates were not aware of the requirement to maintain a register of interests. Most candidates could provide some of the key principles of the Code but many candidates seemed to be unaware that the provisions come into effect when the bidders holding in the target company reaches 30%.

Page 16 of 22
ICSA, 2009

5.

You are the Secretary of Nice Shoes plc, a company which is not listed on any stock exchange. The Board is considering the following transactions with its directors: (a) Making two loans to its directors: firstly, a loan of 30,000 to Mr Man, the Human Resources Director; and secondly a loan of 9,000 to Mrs Money, the Finance Director. (11 marks) Entering into two property transactions: firstly, a transaction with Mr Mans wife to sell to her a company car for 3,000; and secondly, a transaction to purchase Mrs Moneys former holiday home for 150,000. Both transactions are at the appropriate market value.

(b)

(9 marks)

Mr Boss, the Chief Executive, has asked you to prepare a paper for the next board meeting which sets out: Whether the proposed transactions can be entered into and, if so, the statutory requirements which need to be considered, and any approvals to be obtained. Any disclosures which should be made by the directors concerned. What would be the position of the company if it had already entered into the transactions referred to in (b) above without the requisite approvals.

REQUIRED Prepare a paper suitable for the next board meeting. SUGGESTED ANSWER NICE SHOES PLC DIRECTORS TRANSACTIONS As requested, I am providing further guidance in respect of the proposed transactions by the directors. (a) Loans to directors

(Total: 20 marks)

Under s. 197 s. 214 Companies Act 2006, companies may make loans to directors. This is provided there has been prior approval by ordinary resolution of the members. In order for approval to be given in general meeting, there needs to be full disclosure in advance by including the following information in a memorandum: the purpose of the loan or transaction; the amount of the loan or value of the transaction; and the liability to which the company may be exposed under the loan or transaction. Page 17 of 22
ICSA, 2009

The memorandum must, at least, be available for inspection at the registered office for at least 15 days ending with the date of the meeting and must also be available for inspection at the place of the general meeting. Shareholder approval is not required where loans are in respect of 10,000 or less, or if the company is in the business of lending money. The loan to Mrs Money does not, therefore, require shareholder approval and may be approved by the board. (b) Substantial property transactions

Companies Act 2006 s. 190 s.196 sets out the provisions in respect of substantial property transactions between a company and a director involving non-cash assets. A company may not transfer to a director, or a director to a company, a substantial noncash asset unless approved by the company in general meeting. A substantial property transaction is one which involves assets which exceed 10% of the companys assets and is more than 5,000 or exceeds 100,000. The provision includes connected persons to the director and hence Mr Man is included by virtue of his spousal connection to Mrs Man. However, CA 2006 provides that no shareholder approval is required as the value is less than 5,000. The transaction in respect of Mrs Money will require shareholder approval. Sufficient details of the arrangement will need to be provided to shareholders in order for them to consider the proposal. It is also important to consider the relevant provisions of the Companies Act 2006 in respect of directors duties. The board will need to approve both loans (the larger loan being approved for consideration by the companys shareholders). S. 177 CA 2006 provides that a director must declare a direct or indirect interest in a proposed transaction or arrangement. Hence, both Mr Man and Mrs Money need to declare such an interest prior to consideration by the board. S.175 CA 2006 requires that directors must avoid situations where they may have a direct or indirect interest which is, or could, potentially be in conflict with the interests of the company. Following declaration of the potential conflict of interest, it will be up to the board to determine whether it shall authorise such a conflict. When the directors make the determination for such an authorisation, the director who is the subject of the conflict of interest may not be counted in the quorum of the meeting and must not vote on the matter. A substantial property transaction which has not received the appropriate shareholder approval, where required, is generally voidable. This could have serious implications for the director concerned should the company subsequently become insolvent. It is possible under s.196 CA 2006 for subsequent shareholder approval to be obtained to approve the transaction in which case it will no longer be voidable. Please do not hesitate to ask any questions if you require further guidance. Company Secretary, Nice Shoes plc Page 18 of 22
ICSA, 2009

EXAMINERS COMMENTS Most candidates were aware of the statutory provisions regarding loans and in particular that shareholder approval would be required in certain circumstances. A few candidates incorrectly applied the old provisions of Companies Act 1985 in respect of the proposed loans to the directors. Candidates are reminded of the importance of applying the most recent statutory provisions where required. There was also a generally weaker performance in the disclosure aspects of the question as many candidates did not state that the purpose, amount and liability of the loan had to be disclosed. Many candidates did not know the full statutory provisions regarding substantial property transactions, in particular the applicable definition (i.e. an asset which exceeds 10% of the companys assets and is more than 5,000 or exceeds 100,000). Nevertheless, most candidates were aware that shareholder approval would be required in certain circumstances. It was disappointing that many candidates missed an obvious point that a disclosure of interest would arise for the directors who were the subject to the loan or the substantial property transaction.

Page 19 of 22
ICSA, 2009

6.

You are the Assistant Secretary of Tasty Pasta plc, a company which is not listed on any stock exchange. John Smith has recently resigned as the Company Secretary of Tasty Pasta, and Jane Cash, the Finance Director, has raised the following issues with you: (a) Who is responsible for appointing and removing a new Company Secretary, and for approving his/her appointment terms? Jane has also asked if there are any statutory registers which would need to be updated, or any documents to be filed in this regard. (4 marks) John also resigned as Company Secretary of Cheesy Pizzas Ltd, a subsidiary of Tasty Pasta. Jane asks you whether there is a need to appoint a replacement for John for either company, and whether the person replacing John needs to have any particular qualifications.

(b)

(8 marks)

(c)

Jane would like to know the typical reporting lines in a company for a Company Secretary, and also his/her powers and authority. (8 marks)

REQUIRED Prepare the advice requested in (a), (b) and (c) above, including any relevant statutory and Table A provisions. (Total: 20 marks) SUGGESTED ANSWER TASTY PASTA PLC POSITION OF THE COMPANY SECRETARY As requested, I am providing further guidance in respect of the position of the Company Secretary. (a) Appointment and removal of Company Secretary

The importance of the role of the Company Secretary is reflected through the appointment and removal process. Article 99 states that the Company Secretary shall be appointed by the directors for such term, at such remuneration and upon such conditions as they may think fit and the Company Secretary may be removed by the directors. The appointment or removal of a Company Secretary must be entered on the register of directors and secretaries and notified to Companies House by filing form 288a or 288b respectively. (b) Requirement for a Company Secretary

Under the Companies Act 2006, all public companies are required to appoint and maintain a Company Secretary. However, private limited companies are not required to Page 20 of 22
ICSA, 2009

appoint and maintain a Company Secretary. Where such an appointment is made the Company Secretary has the same duties and responsibilities as he / she would hold in a public company. Hence, only Tasty Pasta plc must appoint a replacement for John. In practical terms, where a private limited company does not have a Company Secretary, the directors will need to be vigilant that the duties normally associated with the Company Secretary are carried out. There is no legal requirement for a company secretary of a private limited company to have professional qualifications or any previous experience. This would apply to Cheesy Pizzas if it chose to appoint a Company Secretary. However, in the case of Tasty Pasta, which is a public company, the Companies Act provides that the directors must take all reasonable steps to secure that the Company Secretary is a person who appears to have the requisite knowledge and experience to discharge the relevant functions. S273 Companies Act 2006 provides that the Company Secretary of a public company must be a person who: is a barrister, advocate or solicitor, called or admitted in any part of the UK; for at least three of the five years immediately preceding his appointment held the office of company secretary of another company other than a private company; is a member of any of the following professional bodies: Institute of Chartered Secretaries and Administrators; the Institutes of Chartered Accountants in England and Wales, Scotland or Ireland; Chartered Institute of Management Accountants; Association of Chartered Certified Accountants; Chartered Institute of Public Finance and Accountancy is a person who, by virtue of his holding or having held any other position, or his being a member of any other body, appears to the directors to be capable of discharging those functions. Typical reporting lines, powers and authority

(c)

The Company Secretary is an officer of the company. This recognises the importance on which directors rely upon the Company Secretary and also brings with it the additional responsibility that the Company Secretary may be liable to breaches under the CA 2006, along with the directors. The Companys Secretarys signature is sometimes accepted as an alternative to a directors, particularly where deeds can be executed by either two directors or one director and the company secretary. Common law has proved that the Company Secretary has ostensible authority for binding the company with contracts of an administrative nature. The Company Secretarys signature is, therefore, accepted in a variety of administrative transactions. The Company Secretary is responsible to the board and should be accountable to it through the chairman on all matters relating to his core duties as an officer of the company. In connection with other non-core duties, the Company Secretary should report to the chief executive or to any other director as chosen by the board. The Company Secretarys remuneration and benefits should be decided by the board, or the remuneration committee of the board. This will prevent the Secretary from being Page 21 of 22
ICSA, 2009

exposed to the influence of a single director. In some larger organisations, the Company Secretary has a functional reporting line to the companys General Counsel, the most senior in-house lawyer. I trust the above information is helpful. Please do not hesitate to contact me if you have any questions. Assistant Secretary, Tasty Pasta plc

EXAMINERS COMMENTS This was a popular question with candidates and was, on the whole, answered well. Most candidates were aware of the Companies Act 2006 provisions in respect of the optional requirement for private companies to appoint and retain a Company Secretary. However, there was a tendency in part (c) for candidates to write all they know about the duties of a Secretary. This was not requested in the question and candidates would have lost considerable marks using this approach.

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.

Page 22 of 22
ICSA, 2009