CORPORATE LAWS AND GOVERNANCE
MODEL QUESTION PAPER
SECTION A
CORPORATE LAWS
Instructions:
1. Answer both Questions 1 and 2 and either Question 3 or 4 in Section A. Only 3
solutions will be marked.
2. When the examination is over, place your solutions to this section of the Corporate
Laws and Governance examination in a separate envelope to your solutions to
Section B.
Q. 1.
The Board of XYZ Ltd. is considering a major diversification of the Company’s activities into
a new product/market area. The Board of Directors are aware of the risks of diversification
away from the Company’s existing core business and are anxious to limit the resulting risks
of such a move. Accordingly, they have decided that a new company, which will be a
subsidiary of XYZ Ltd. Should be set up for the purpose of carrying on the new business.
The Finance Director of XYZ has been asked by the Board to advise on the funding options
for the subsidiary. You are have been asked by the Finance Director to assist in this task.
Specifically, you are required to draft a memorandum dealing with the following issues:
a) The different types of real non-possessory security interests that are recognised in
Irish law.
(5 marks)
b) The likely terms that a bank will seek to incorporate into any debenture creating a
charge over the subsidiary’s undertaking and assets.
(5 marks)
c) The types of charges that must be registered under Section 99 of the Companies
Act 1963.
(4 marks)
d) The powers that a Receiver appointed out of Court on foot of a debenture might be
expected to possess.
(5 marks)
e) The likelihood of a bank being willing to accept a letter of comfort from XYZ Ltd. in
respect of the borrowings of its subsidiary.
(5 marks)
(1 mark for presentation)
Total [25 marks]
Q. 2.
The Board of DEF Ltd. is considering an expansion of the Company’s activities but is not
willing to take on significant additional debt owing to its concerns about possible future
economic conditions. The existing shareholders are not in a position to provide additional
equity funding at this point, nor are they willing to countenance their existing interest in the
Company being diluted by way of sale of shares to outside investors. Accordingly, the Board
has decided to give effect to its expansion plans by appointing a network of agents. You are
required to prepare a report to the Board dealing with the following issues:
a) The different ways in which an agent’s authority can be classified under Irish law.
(5 marks)
b) The requirements that must be fulfilled before a principal can be bound by an
agent’s apparent authority.
(5 marks)
c) The conditions that must be met before a principal can ratify an agent’s actions.
(5 marks)
d) The distinction between a disclosed and an undisclosed agency.
(4 marks)
e) The ways in which an agency relationship may be terminated.
(5 marks)
(1 mark for presentation)
Total [25 marks]
Q.3.
Discuss the circumstances in which the veil of incorporation may be lifted at common law.
Total [20 marks]
Q.4.
Discuss the requirements that must be met under company legislation before a company
may pay a dividend.
Total [20 marks]
Section B
CORPORATE GOVERNANCE
Instructions:
1. Answer Two Questions Only from Questions 5, 6 and 7. Only two solutions will be
marked.
2. When the examination is over, place your solutions to this section of the Corporate
Laws and Governance examination in a separate envelope to your solutions to
Section A.
Q. 5.
Oenomaus Ltd is a recently established company where two shareholders/directors
have set up a biotechnology business. The company forecasts high growth prospects
and is managed by an experienced and ambitious team who are capable of turning
their business plan into reality. M/s Suzie Wong an employee of ET capital, provider
of venture capital funds to this biotechnology start-up has been invited to sit on the
Board of Directors of Oenomaus Ltd. Susie is now seeking your advice on the
following issues:
a) Susie is concerned that the company’s affairs are being handled in a relatively
informal manner. She has asked for advice on her position as a non-executive
director (NED) given that Joe Soap and Joe Bloggs are the executive directors of
Oenomaus Ltd?
(6 marks)
b) Susie asks you to list and summarise the Common Law fiduciary duties of
directors?
(6 Marks)
c) Susie has heard that company directors occasionally use company assets for
personal purposes unrelated to the company’s business. Briefly explain why some of
these transactions are legally prohibited and for the benefit of whom?
(3 Marks)
[Total 15 Marks]
6.
Táin Energy Resources Ltd - an energy business with interests in both Northern
Ireland and the Republic of Ireland is currently seeking a listing on the Irish Stock
Exchange (ISE). The directors of the company are aware that certain listed
companies have attracted considerable criticism in recent years over directors’ pay
and conditions. Research findings published in the Economist in January ’07 found
that 80% of survey respondents believed executives were overpaid and that their pay
and conditions were far too generous. The lack of transparency in the remuneration
policies of some companies has also been subject to censure in recent years. The
directors of Táin Energy Resources Ltd. are anxious to ensure that, if their bid for a
listing is successful, all aspects relating to their pay and conditions should be in line
with best practice.
Required:
You are asked prepare a briefing report to the Board of Directors of Táin Energy
Resources Ltd in which will address the following issues:
(a) The role and function of the remuneration committee.
(4 Marks)
(b) Five key duties of the remuneration committee having regard to the provisions of
the Combined Code and
(5 Marks)
(c) Details of how listed companies are required report on compensation paid to the
members of the Board of Directors.
(5 Marks)
(1 mark for presentation)
[Total 15 Marks]
7.
Dr.Czeslaw Gulnaz – an industrial chemist has recently been appointed to the post of
Chief Executive Officer (CEO) with Crixus Plc an Irish Stock Exchange (ISE) quoted
company with a secondary quotation on the NYSE. He has previously been
employed in the company’s European HQ in Warsaw as Research Director. In
preparation for his new assignment at the company’s HQ in Lexlip he has been trying
to get to grips with the concept of corporate governance and all that it entails. As the
recently appointed compliance officer at Crixus Plc he is seeking your assistance to
clarify some issues of concern.
Required:
You have been asked to prepare a brief report in which you:
(a) Provide Dr. Czeslaw Gulnaz with a robust definition of corporate governance and
a brief explanation of what you understand corporate governance to be.
(5 marks)
(b) Explain the rationale for the introduction of the Sarbanes Oxley (Sarbox) Act 2002
and briefly explain how it may affect Crixus Plc.
(5 marks)
(c,) Sarbanes Oxley Section 404 requires companies listed in the US to report on the
efficacy of their internal controls on financial reporting. Recommend a suitable
framework to Crixus Plc for evaluating the effectiveness of internal controls and
justify your choice of framework accordingly.
(4 Marks)
(1 mark for presentation)
[Total 15 Marks]
SAMPLE EXAM PAPER
MODEL SOLUTIONS
CORPORATE LAW AND GOVERNANCE
SECTION A
S.1
TO: Miriam Kelly, F.D. XYZ Ltd.
FROM: Connor P. Ahern, Finance Manager.
CC:
Date: 28 September 2007.
RE: New Subsidiary – Funding Options.
Following our meeting of 26 September I have set out below the main issues to be
considered with respect to the funding options for the proposed new subsidiary. As
agreed I have dealt with these under five main headings:
a) Real non – possessory security interests,
b) The likely terms that a bank may seek to incorporate into any debenture
creating a charge over the subsidiaries assets,
c) The types of charges that must be registered under Section 99 of the
Companies Act 1963,
d) The powers that a receiver appointed on foot of a debenture might be
expected to possess, and
e) The likelihood of a bank being willing to accept a letter of comfort from XYZ
Ltd. in respect of the borrowings of its subsidiary.
(a) A real security creates a proprietary interest, which in the event of default of
payment allows a creditor to realise the property concerned to satisfy the debt
owing. Non-possessory securities are those, which the debtor continues to hold
possession of throughout the lending period. As such, most assets being the
subject of a non-possessory security would not on the face of things appear to be
a security unless such information was specifically ascertained from a register of
charges.
The main real non-possessory securities are as follows:
Fixed Charge: This is a charge which attaches to a specific, identifiable asset and
remains attached to that asset from the moment of creation of the charge until the
debt owing is fully paid up.
Floating Charge: Courtney defines a floating charge as “a charge over a company’s
present or future property, or classes of property, which hovers over that property
until the moment of crystallisation, when the charge fastens onto the charged
property or class of property, and becomes a quasi-fixed charge”. A floating charge
therefore does not require a specific asset; it may attach to movable equipment and
vehicles, shares or work in progress. The difficulty with floating charges however is
that in the event of a winding up, a fixed chargeholder will take priority for payment
over a floating chargeholder.
Legal Mortgage: In this case the mortgagor transfers legal ownership of the
mortgaged property to the mortgagee. In return, the mortgagee undertakes to return
legal title to the mortgagor on full repayment of the loan. The mortgagor remains the
equitable owner of the mortgaged property.
Equitable Mortgage: In this case, the mortgagor transfers equitable title of the
property or he may deposit the title deeds of the property with the creditor. Forde
states that the principal kind of equitable mortgage in the commercial world is the
agreement to grant a mortgage. As such, if a creditor agrees to grant a legal
mortgage, the courts will hold him to that and the property will be seen to be subject
to an equitable mortgage.
b) It is likely that a bank will insist that the debenture creating a charge over the
subsidiary’s undertaking and assets will be secured with a fixed charge. Lending
institutions prefer a fixed charge for two reasons. Firstly, it provides them with added
security as the charge attaches to a specific, identifiable item of property such as
land or machinery instead of assets over which a floating charge can be created.
Secondly, in the event of a winding up, legislation provides that a fixed chargeholder
has priority over a floating chargeholder. If a receiver is appointed under a floating
charge over property already the subject of a fixed charge, the receiver is required to
give priority to the fixed charge and may not take action without the prior consent of
the fixed charge holder. In this respect, a fixed charge ensures the bank is the
preferential creditor and subject to minimal risk in deciding to lend funds to the
subsidiary.
(c) It is paramount that a company and its investors, creditors etc are aware of the
status of the company’s assets at any given time or at the very least be in a position
to easily access this information. Section 99 of the Companies Act 1963 therefore
provides that the company registers certain charges with the Registrar of Companies
within 21 days of its creation. Failure to register a charge which should have been
registered has serious consequences in that the charge will be declared legally void
and the chargeholder will become an unsecured creditor and lose their priority in the
case of a winding up.
S.99 (3) sets out the charges, which must be registered in order to receive priority:
-
charges for securing any issue of debentures
charges on uncalled share capital of the company
charges created by instruments akin to a bill of sale
charges on lands wherever situate, or an interest therein, but not including
a charge for any rent or other periodical sum issuing out of land
charges on book debts
floating charges
charges on calls made but not paid
charges on ships or goodwill
S.99 (10) further stipulates that mortgages are included in charges, which must be
registered in order to gain priority.
d) There are two ways in which a receiver can be appointed, by contract/debenture
or by the Courts. Set out in a debenture document are the terms of appointment of a
receiver. A debenture holder can appoint a receiver when the principal monies which
were secured by the debenture become payable. The receiver’s role is to secure
and take control of those assets, which are the subject of the debenture holders
charge. He then has the power to dispose of those assets in order to pay the amount
owing plus interest to the debenture holder.
In appointing a receiver, the debenture holder owes no duty to the company but the
appointment must not be made in bad faith
A further provision of the debenture usually states that the receiver will be an agent
of the company and as such the company will be responsible for his acts or defaults
and his remuneration. This agency relationship however has certain special
characteristics in that:
♦ The receiver will be personally liable on any contracts entered into by him after
his appointment whether in his own name or that of the company
♦ The company is not able to dismiss him
When a receiver is appointed on foot of a debenture, he is given the power to
manage the company which allows him to realise the secured assets and pay off the
amount owing to the debenture holder. The debenture may also give the receiver the
power to realise the security using whatever method is necessary.
While a company is under receivership, any powers which the company holds over
the assets concerned are suspended and the company cannot make any decisions
regarding these assets without the consent of the receiver.
It is important to note that the Companies Acts impose some restrictions on the
powers of the receiver:
S.316A of the Companies Act 1963 inserted by by S.172 of the 1990 Act states the
receiver will be answerable to the company if he is negligent in the sale of the
company’s assets.
S.316A (3) of 1963 Act imposes a restriction on a receiver selling a non-cash asset of
the company to anyone who was an officer of the company within 3 years of the
receivers appointment. He must give 14 days notice to all creditors of the co of this
intention.
(e) A letter of comfort is usually provided to lending institutions as an alternative to a
guarantee of payment of a loan. It is most commonly used in the case of a parent
company reassuring creditors that it is aware of any financial support they may give
to its subsidiary. It will also normally state that the parent will not reduce any control
it holds over the subsidiary and that it will continue to support it. Lending institutions
however are unlikely to accept a letter of comfort from XYZ Ltd in respect of its
subsidiary as in general, courts will regard such letters as not intending to be binding.
It will usually come down to the courts interpretation of words and phrases used in
the letter to ascertain if it should have contractual effect. The seminal case in this
area is Kleinwort Benson Ltd-v-Malaysian Mining Corp. Berhad [1988] 1 WLR 799.
Here the defendant had refused to give a guarantee in respect of a loan but did give
a letter of comfort. In accepting the letter of comfort the plaintiff charged a higher
rate of interest to compensate for the lack of a guarantee. The UK Court of Appeal
considered the conduct of the parties and in refusing to give a guarantee, they ruled
the defendant as never having intended to create a contractual promise. The letter of
comfort therefore had no legal effect.
As demonstrated in the Kleinwort case, there is much risk involved in accepting a
letter of comfort and any alternative such as a personal security undertaking from the
parent would be much more persuasive.
I hope that the above addresses the issues identified. If you require further
information or explanation(s) I’ll be pleased to assist.
____________________
Connor P. Ahern CPA
S2.
CBA Accountants
Main St.,
County Town,
14 September 2007.
The Board of Directors
DEF LTD.,
Units 55 – 60,
Business Pk.,
County Town.
Dear Sirs,
We are pleased to enclose the report that you commissioned on the issues arising
from your decision to appoint a network of agents as part of your expansion plans.
The full report is enclosed with this letter. It examines the issue under the following
five agreed headings as set out in the main body of the report.
We will be pleased to provide any clarification or explanation or additional assistance
that you may require.
Sincerely,
________________
Orlagh Murphy CPA
Report to the Board of Directors of DEF Ltd.
A Preliminary Consideration of Legal Issues arising out of a Principal Agent
Business Model.
Complied by Orla Murphy CPA, CBA Accountants
Date: 14 September 2007
Executive Summary:
The area of agency law is one of some complexity. Principal agent relationships can
arise in a variety of areas. It is essential that the Directors of DEF Ltd. are aware of
the possible pitfalls arising out of apparent authority and that there are well
established legal tests in relation to ratification. Exit strategies from a principal agent
relationship are discussed in point (e) inn the main body of the report.
This report considers the legal issues arising out of a principal agent business model
under the following five headings:
(a) The different ways in which an agent’s authority can be classified under Irish law.
(b) The requirements that must be fulfilled before a principal can be bound by an
agent’s apparent authority.
(c) The conditions that must be met before a principal can ratify an agent’s actions.
(d) The distinction between a disclosed and an undisclosed agency.
(e) The ways in which an agency relationship may be terminated.
(a) In Irish law, an agent’s authority can fall within the following categories;
1. Actual Authority: As per Freeman and Lockyer-v-Buckhurst Park Properties
(Manga) Ltd [1964] 2 QB 480, "An actual authority is a legal relationship between
principal and agent created by a consensual agreement to which they alone are
parties”.
There are two forms of actual authority. The first is express actual authority. This
arises in the case of power of attorney or by express words in a normal written
agreement or orally. The second is implied actual authority. This refers to any
incidental authority required to accomplish the act which has been expressly
authorised.
2. Apparent Authority: Under this doctrine, a principal will be bound by the acts of
an agent who appears to a third party to have authority, whether he actually has it or
not.
3. Usual and Customary Authority: Usual authority arises where an agent is in a
situation which normally entitles him to a certain authority and as such he
impliedly has that authority. For example in Rooney-v-Fielden 33 ILTR 100, an
agent given authority to sell a cow at a fair was found also to have authority to
give a warranty with it. Customary authority is the authority, which entitles an
agent to rely on the customs/usages common to his place of work.
4. Authority of Necessity: This authority arises where the following four conditions
have been met;
♦
♦
♦
♦
There must be some form of emergency
The agent could not get instructions from the principal
The agent must have acted bona fide and in the principal’s best interests.
The agent’s actions must be objectively reasonable.
5.
Authority by ratification: This arises where an agent acts on a principals behalf
without official authority to do so however this act is later ratified by the principal
and he is thus bound by it.
(b) The case of Freeman and Lockyer-v-Buckhurst Park Properties Ltd [1964] 2 QB
480 set out the three requirements which must be fulfilled before a principal can
be bound by an agents apparent authority. In this case, the defendant company
was formed by a Mr Kapoor for the purpose of buying and selling an estate of
land. Kapoor had never formally been appointed a managing director of the
company however his conduct was in every way regarded as that of a managing
director and the other directors of the company were at all times aware that he
was acting as such. Kapoor employed the plaintiff architects and a dispute
ensued as to whether the defendant company was liable to pay their fees. The
court found them to be liable due to the fact Kapoor had been acting with
apparent authority and the board had represented him as having actual authority.
In reaching this conclusion, the Court referred to the following three conditions
which must be present to bind a principal;
1. There must be a representation that the person, the agent, has authority:
This representation may be either express eg through words or implied eg by
conduct.
2. The representation must come from someone with authority to make that
representation: Generally, this authority comes from the principal. The authority
cannot be founded on a representation made by the agent that he has the
relevant authority. Therefore, if for some reason a third party suspects the
agents assertion that he has actual authority to act, he should confirm the
existence of this authority with the principal to ensure the transaction will be
binding.
3. The third party must rely on the representation: The third party must alter his
position in some way on account of the representation. It has been found that
merely entering into a contract with the agent based on the representation will
suffice. Further, the third party must have been aware of the representation itself
and cannot be shown to have relied on it if it is proved he knew the
representation to have been false.
(c) Agency arises by ratification when the principal adopts the acts of an agent done
on his behalf but without having the authority of the principal at the time of doing so.
Ratification thereby retrospectively creates a relationship of principal and agent and
the result is as if the agent has always been authorised. Strict conditions must be
complied with in order for the ratification to be effective:
1. The agent must disclose that he is acting on behalf of the principal
The reason for this condition was adduced in the case of Keighley, Maxted & Co-vDurant [1901] AC 240 where an agent exceeded his authority in agreeing to
purchase wheat at a higher price than previously instructed and while doing so, did
not disclose that the was acting on behalf of the principal. The principal later ratified
the contract however when he failed to pay the agreed price, the defendant sued for
breach of contract. In doing so, he sought to rely on the ratification however the
House of Lords rendered the ratification ineffective due to the non-disclosure and the
agent was held personally liable for the amount owing for the wheat.
2. The principal must have been in existence when the act was done
This applies to contracts entered into on behalf of companies prior to their
incorporation. Such contracts cannot subsequently be ratified as the company did
not exist at the time of making the contract and so was incapable of being party to a
contract. Put simply, the contract was void ab initio so there is no contract to ratify.
3. The principal must have been competent when the act was done
This requirement most commonly applies when dealing with minors. The principal
must have had the capacity to enter into the contract at the time the act was done. If
for example, an agent enters into a contract to purchase a crate of cigarettes on
behalf of a minor, this contract will be void against the minor but bind the other party
as the law states that you must be 18 years or over to purchase tobacco. On coming
of age however, the minor may ratify the contract in the normal way.
4. The principal must ratify the whole contract, and not merely parts of it
5. The principal must ratify the contract within the time period specified under the
purported contract or within a reasonable time after the agent has made the
contract for him and, at the latest before the time fixed for performance.
(d) A disclosed agency exists when there is a disclosed principal in that the third
party is aware that there is a principal involved in the relevant transaction and that he
is not dealing with the agent alone. It is not important that the principal be named or
identifiable, mere knowledge of his existence will suffice. In contrast, an undisclosed
agency refers to a situation where the third party intends to deal with the agent
personally and is totally unaware that a principal is party to the transaction at all. In
general in an undisclosed agency, the contract is between the agent and the third
party. If however, the third party later discovers the existence of the principal, the
third party has the option of either enforcing the contract against the principal or the
third party but not both. Once the third party elects a party to sue, he loses any right
of action he held over the other. Equally, the principal may enforce the contract
against the third party however this is subject to some conditions. The principal must
have had the capacity to enter into the relevant contract and he must have given the
agent actual authority to do so. This right of the principal is further subject to
limitations. He may not intervene where his intervention is expressly/impliedly
prohibited by the contract, if the third party chose to contract with the agent based on
purely personal reasons or in the same vein the third party has personal reasons for
not contracting with the principal. Further, in the event of a principal intervention, the
principal is bound by the same terms of the contract under which the agent would
have been bound.
(e) The ways in which an agency relationship may be terminated are as follows;
(1) By Operation of Law
Time: If authority is given for a specific time period, the relationship will terminate on
expiration of that time period.
By Performance: If authority is given for a specific transaction, the agency
relationship will terminate on performance of that transaction
Frustration/Illegality: Where an event occurs which renders the agency impossible
perhaps by the presence of an illegality, the agency is thereby frustrated and the
relationship terminates.
Bankruptcy: When a principal is declared bankrupt, his property etc. becomes
vested in a trustee. The agent no longer has authority to dispose or receive property
on the principal’s behalf and if he wishes to do so, he must get authority from the
trustee.
Insanity: Where a principal becomes mentally incapacitated to the point that he can
no longer understand the nature of the relevant transaction, the agent’s authority will
terminate.
By Death: The death of the agent will render the relationship terminated as the
authority was bestowed on him and him alone. Similarly, the death of the principal
results in the agent having no one to act for and so the agent’s authority is
terminated.
(2) By Acts of The Parties
By Mutual Agreement: The agent and principal can mutually decide to terminate the
relationship.
By Revocation: The agency relationship is revocable at the suit of either party. This
power however may be subject to limitations as set out in the relevant agency
contract.
S3. The veil of incorporation originated in the case of Salomon-v-Salomon &
Company [1897] AC 22. Here, Mr Salomon was a successful sole trader in the
leather business. He then set up a company and sold his business to the new
company for £38,782. The company was to have 20,007 shares and these were
divided between Mr Salomon and his wife and five children, he being the holder of
20,001 of these and his family holding the other 6. The company therefore paid Mr
Salomon 20,000 fully paid £1 shares and £8,782 in cash. The balance of £10,000
remained payable to Mr. Salomon and he secured this debt by creating a floating
charge over the assets of the company. The company later went into liquidation and
Mr Salomon as a secured creditor was first in line to be paid. The liquidator argued
however that the sole purpose of transferring the business to the company was so
that Mr Salomon could use it as an agent for himself and if the court did not accept
his view, the company’s unsecured creditors would remain unpaid. The Court of first
instance and the Court of Appeal agreed with the liquidator and found Mr Salomon to
have abused the privileges of incorporation. The House of Lords however took a
different view and held the company to be a separate legal entity. Priority therefore,
was to be given to Mr Salomons floating charge.
The Salomon principle is now a fundamental rule of company law and states that
upon incorporation, a company becomes a separate legal entity, distinct from its
members. The rule however is not without its exceptions. Under no circumstances
will the Courts allow the statutory privilege of incorporation to be used as an engine
for fraud. In these instances, the interests of justice require the veil to be pierced and
the controllers of the company to be made personally liable for the actions of the
company.
Lifting the veil can occur in one of the following contexts:
♦ Between the controllers and the company
♦ Between a group of companies eg. Between a parent company and its subsidiary
♦ Ignoring the company completely where it is shown to be a “sham” or a “device”.
There are four main circumstances in which the Courts will look behind the veil of
incorporation, and these are;
A) Fraud
The Courts have recognised fraud to amount to any impropriety, misconduct or any
injustice perpetrated by the company. This point was made clear in the case of
Creasy-v-Breachwood Motors Ltd [1993] BCLC 480 where a general manager was
dismissed and sued for wrongful dismissal. The company ceased trading and paid
off all its creditors apart from the plaintiff. It then transferred all its assets to a new
company, the defendant, in an effort to evade payment to the general manager
should his wrongful dismissal action be successful. The Courts held that the
separate legal personality of the second company could be disregarded and the
plaintiff was entitled to enforce judgment for wrongful dismissal against the first
company. In reality, the motive behind the transfer of assets and creation of a new
company had been purely to defraud the Plaintiff.
Another example of this point can be seen in the case of Re Bugle Press Ltd [1961]
Ch 270. Here, the majority shareholders, holding 90% of the shares in the company
wished to buy out the holder of the remaining 10%. When the minority shareholder
refused to sell, the majority set up a company and made a take over bid. Since they
owned 90% of the shares, under UK legislation they were entitled to compulsorily
acquire the minority shareholding. The Courts rightly recognised this endeavour as
nothing more than a way of expropriating the minority. In the words of the Court, it
was a “bare faced attempt to evade a fundamental rule of company law”.
As demonstrated by the above cases, the Courts will intervene and disregard the
separate legal personality of a company where incorporation has been employed in
pursuit of fraudulent, illegal or improper purposes.
B) Avoidance of Legal Duty
The Courts will not abide the use of the statutory privilege as a tool for avoiding
existing legal obligations.
This exception is demonstrated in Gilford Motor Company-v-Horne [1933] Ch 939.
The Defendant had signed an agreement stating that on termination of his
employment with the Plaintiff, he would not compete with him in the same business
for a period of six years. The Defendant however set up a company with his son,
which competed directly with the plaintiff’s business. He was not a shareholder of
this company or a Director however the Court disregarded its separate legal entity on
the basis that it was an effort to mask the Defendant’s breach of his agreement.
This point is also well illustrated in the case of Jones-v-Lipman [1962] 1 All ER 442.
Here, the Defendant entered into a contract to sell his house to the Plaintiff. Having
changed his mind however, he transferred the ownership of the house to a company
he had acquired in order to avoid the enforcement of the contract. The Court
deemed this company a mere “device” and “sham” created solely to avoid contractual
obligations. An order of specific performance was granted and the company was
bound by the Defendant’s previous contractual obligations.
This rule however, does not encompass the avoidance of any future obligations as
was held in the case of Adams-v-Cape Industries [1990] Ch 433. Slade LJ stated
that the use of the corporate structure as a tool “to ensure that the legal liability in
respect of particular future activities of the group will fall another member of the
group rather than the defendant company…the right to use a corporate structure in
this manner is inherent in our corporate law”.
C) Agency or Alter Ego Principle
If it appears that the company is acting as an agent of its member or a third party, the
Courts are likely to pierce the veil of incorporation. This most commonly occurs
where a subsidiary is found to be acting as an agent of their parent company.
In Smith,Stone and Knight-v-Birmingham Corporation [1939] 4 All ER 116. The
relationship between the Plaintiff Company and its subsidiary was such that the
Plaintiff Company was the beneficiary of the entire subsidiary’s profits without the
declaration of a dividend. Land on which the subsidiary was based was compulsorily
purchased by the defendant and the Plaintiff Company sought compensation for
disturbance. In its defence, the Defendant sought to rely on the Salamon principle
claiming the subsidiary to be a separate legal entity distinct from the Plaintiff
Company. The Court however disagreed and stated that where a company is found
to be an agent of its shareholders with the purpose of carrying on business of the
company, the veil of incorporation will be lifted.
In determining whether an agency relationship existed the Court listed the following
criteria which for agency to be found must be answered in the affirmative;
1. Are the profits of the subsidiary treated as the profits of the parent company?
2. Were the persons conducting the business of the subsidiary appointed by the
parent?
3. Was the parent company the “head and brains” of the trading venture?
4. Did the parent govern the operation of the subsidiary?
5. Were the profits of the subsidiary the result of the “skill and direction” of the
parent company?
6. Was the parent company in “effectual and constant control”?
It is important to note however that the mere existence of companies in the same
group will not automatically infer an agency.
D) Single Economic Entity
This is the final main circumstance in which the veil of incorporation will be lifted.
Sometimes, having reviewed the facts the Courts will regard a group of companies
as a single economic entity. There are two approaches taken by the Courts when
deciding if a single economic entity exists.
The first approach formulated in DHN Food Distributors Limited-v-Tower Hamlet LBC
[1976] 3 All ER 462 was adopted in Ireland in the case of Power Supermarkets Ltd-vCrumlin Investments Limited and Dunnes (Crumlin) Limited (22 June 1981) High
Court Unreported. Here the Plaintiff was leasing a unit in a shopping centre owned
by the first named defendant. Within the lease was a term which prevented the
lessor from leasing any other unit for the sale of food or groceries. Hard times
endued for the shopping centre and the first named defendant was acquired by
Cornelscourt Shopping Centre Limited, a company owned by the Dunnes Stores
group. The purchaser, now being in control caused the first named defendant to
convey the freehold of a large unit within the shopping centre for the purpose of
selling groceries. The plaintiff strongly objected to this and successfully sought relief.
It was held that the second named defendant was bound by the restrictive
convenants of the original contract even though it was not party to it. In reaching its
decision, the Court took a “if the justice of the case so requires” approach and stated
“the court may, if the justice of the case so requires, treat two or more related
companies as a single economic entity so that the business notionally carried on by
one will be regarded as the business of the group…”
Occasionally courts will lift the veil of incorporation in other circumstances. These
include;
E) Residency of a Company: Where tax liabilities are at issue, the courts will apply
the “head and brains” test to ascertain who in reality is the controller of the
company’s day to day operations.
F) Quasi-Partnerships: On evaluation of the facts, it sometimes appears that the
relationships within a company are more akin to a partnership and this is another
example of when the courts might lift the veil of incorporation.
S.4. Before a dividend becomes payable, it must be declared by the company. This
is a discretionary power enjoyed by the company and one which the Courts will not
interfere with. It is most commonly the case, that the declaration of a dividend is
mandatory however this must be expressly provided for in the Articles of Association.
In deciding whether or not to recommend a dividend, Directors must consider only
the relevant accounts as set out in section 49 of the Companies Act 1983. In
general, these are defined as the properly prepared last annual accounts of the
company however there are of course exceptions. As per S.193 of the Companies
Act 1990, an auditors report must accompany these accounts and a copy of that
report should be laid before a general meeting. Under S.49(6) (c) the report is not an
unqualified one, the auditor must also have stated in writing their opinion whether the
reason for the qualification was relevant to the legality of the distribution in question.
If for some reason, those accounts are shown to contravene the act, more recent
properly prepared accounts called "interim accounts” may be relied upon instead. If
this occurs however, a copy of the interim accounts must be forwarded to the
Registrar of Companies. If a company wishes to make a distribution during its first
financial year, reliance may be placed on the “initial accounts”. These must give a
“true and fair” view of the company’s financial position and a copy of them should
also be given to the Registrar of Companies.
Prior to the enactment of the Companies Act 1983, the definitions of profits available
for distributions were to be found in case law. For example in Verner-v-General and
Commercial Investment Trust [1984] 2 Ch 239 the Court stated “the word profits is by
no means free from ambiguity, the law is more accurately expressed by saying that
dividends cannot be paid out of capital, than by saying that they can only be paid out
of profits”. In view of such statements, it is clear there was a definite lacuna in
company legislation and a statutory definition was required. This came in the form of
Part IV of the Companies (Amendment) Act 1983.
In general the method for payment of dividends is usually well set out in the
company’s memorandum and articles of association however the legislation
governing this area must also be strictly adhered to. The fundamental rule in relation
to dividends is that they must always be paid out of the company’s distributable
profits and never out of the capital of the company. This ensures there will be no
reduction in the company’s capital to personally benefit its members.
Section 45(1) of the Companies Act 1983 states “A company shall not make a
distribution (as defined by section 51) except out of profits available for the purpose.”.
What then are distributable profits? Section 45(2) of the 1983 Act provides that “a
company's profits available for distribution are its accumulated, realised profits, so far
as not previously utilised by distribution or capitalisation, less its accumulated,
realised losses, so far as not previously written off in a reduction or reorganisation of
capital duly made”. This is quite a complex definition however it can be easily broken
down as follows; Accumulated refers to any surplus profit from previous years which
have been put in the reserves and has not been capitalised.
A useful definition of realised profits can be found in Part VII of the Companies
(Amendment) Act 1986 at 72 which deems them to be “such profits of the company
as fall to be treated as realised profits for the purposes of those accounts in
accordance with principles generally accepted with respect to the determination for
accounting purposes of realised profits at the time when those accounts are
prepared”.
Put simply realised profits refer to any profit which the company has actually earned
and appears in the profit and loss account of that current year. It is also important to
note that S.51(4) of the 1983 Act provides that the reference to “profits and losses” is
to be taken as meaning both revenue and capital profits and losses. To ascertain
what profits are available for distribution the company’s accountant must deduct from
the accumulated, realised profits any accumulated, realised losses. Realised losses
do not comprise any previously written off reduction in capital. These legal
safeguards are in place to protect at all times the company’s capital fund.
Section 45 further deals with accounting rules in relation to depreciation and how that
effects profits available for distribution. As stated in S.45(4), if a company makes
provision for depreciation, that provision must be treated as a realised loss. This is
with the exception however of “any diminution in value of a fixed asset appearing on
a revaluation of all the fixed assets or of all the fixed assets other than goodwill of the
company”. On the other hand, Section 45(6) makes provision for a fixed asset
revaluation resulting in a surplus. In this case, the surplus will be available for
distribution. For example, equipment originally costing €100,000 and depreciated at
€15,000 annually is, at the beginning of the third year, revalued at €75,000. It will
now be depreciated at €20,000 per year.
Depreciation provided to end of year 2 = €30,000.
Cost - asset at revalued amount (€100,000 – €75,000) = €25,000.
The difference between the depreciation charged to end of year 2 and the €25,000
i.e. €5,000 becomes part of the distributable profits fund.
Section 46(1) of the Companies (Amendment) Act 1983 deals specifically with public
limited companies. Under this section, a plc can only make a distribution where its
net assets are not less than the aggregate of its called up share capital and its
undistributable reserves. This ensures the net assets will never fall below this
aggregate. The undistributable reserves of a plc for the purpose of Section 46(1)
are;
(a) the share premium account
(b) the capital redemption reserve
(c) any reserve that the company is prohibited from distributing, either by law or by
the company’s memorandum and articles
(d) the amount by which the company’s accumulated unrealised profits, so far as
they have not been previously capitalised, exceed its accumulated unrealised
losses, in so far as they have not been previously written off in a reduction or
reorganisation of capital.
The Act also deals with the consequences a company will face should they make an
unlawful distribution. This is provided for in Section 50 of the 1983 Act namely that if
a company makes a distribution to one of its members in contravention of the Act and
he knows or has reasonable grounds for believing that it is in contravention, he must
repay to the company the value of the distribution made.
Notwithstanding that the rules on distributable profits appear to be quite tightly drawn,
when it comes to the revaluation of assets there may be possibilities for creative
accounting. This is of course an area where statutory auditors focus a lot of attention
in their audit procedures to ensure that best practice, all relevant accounting
standards and requirements under the act have been applied and that the financial
statements give a true and fair view.
Solution 5: Part a
• The positions of "Executive Director" and "Non-Executive Director" have no
statutory definition in Irish law. Legally there is no difference.
•
The recent decision in Re Tralee Beef & Lamb Limited (20 July 2004) has
brought the role of Non-Executive Directors (Ned’s) into sharper focus. Here,
the Court recognised the differing responsibilities and duties of Executive and
Non-Executive
Directors.
•
The Court noted that while the Directors collectively delegate the day-to-day
management of a company to the Executive Directors,
o this does not absolve the Non-Executive Directors from their
continuing duty to acquire and maintain a sufficient knowledge and
understanding of the company’s business to enable them properly to
discharge their duties as Directors and
o to supervise the discharge of those delegated functions (the exercise
of the power of delegation does not absolve a Director from the duty to
supervise
the
discharge
of
the
delegated
functions).
•
The Court also indicated that it would be difficult for a Director to establish
that he/she had acted responsibly if,
o during a significant period, he/she had failed to inform him/herself
about the affairs of the company and
o to join with his/her Co-Directors in supervising and controlling those
affairs.
•
Therefore, when advising M/s Wong it is necessary to make her aware of her
obligations under the acts and to advise her that although she is being invited
to act as a Non-Executive Director it does not discharge her from any
obligations
as
a
Director.
•
The effect of the judgement in Re: Tralee Beef & Lamb Limited (20 July 2004)
is to reinforce the onus on Non-Executive Directors to be pro-active and insist
that board meetings be held and financial information be made available on
an ongoing basis, even where there may be no reason to believe that there
are
financial
difficulties.
•
In conclusion M/s Wong needs to take cognisance of the judgement in Re:
Tralee Beef & Lamb Limited (20 July 2004) and as a consequence she may
decide not to become a Non-Executive Directors (NED). Otherwise if she
accepts the invitation she must ensure that Oenomaus Ltd. is compliant.
(6 Marks)
Solution 5: Part b
The list of Directors’ common law duties can be summarised into three principles:
Directors must;
1. Act in good faith and in company’s interest as a whole
• Must honestly believe in their decisions
• Interest must be the company’s and members’ interest, not the interest of
particular member(s)
• No abuse of powers
2. Be open and transparent
• May not make an undisclosed profit from acting as a director.
• Must account for any secret profit derived.
• Minimise potential conflicts- i.e. Executive directors with a contract of
employment or a service contract should not be involved with a competitor as
this may be in breach of their duties of fidelity and loyalty to the company.
3. Act with due care, skill and diligence
• Related to individual director’s knowledge and experience
• Director is liable for loss resulting from negligence
(6 Marks)
Solution 5: Part c
M/s Wong needs to be advised that some transactions are legally prohibited in order
to prevent unscrupulous directors from divesting the company of its assets for their
personal benefit.
The rules in the Companies Acts are a ‘creditor protection’ mechanism and are
designed to ensure that company assets remain within the business to meet its
ongoing commitments or are otherwise available for distribution to creditors in the
event of its liquidation.
(3 Marks)
(Total 15 Marks)
TUTORIAL NOTE:
1.
An article on the Restriction of Directors by Michael Quinn
which highlights recent judgements of the High Court in
relation to the duties and responsibilities of limited company
directors and officers was published by the CPA Institute in
Accountancy Plus in December 2004. This article is available
in PDF format on the CPA Website www.cpaireland.ie . It is
in the Corporate Laws and Governance section of the
Syllabus and Examinations area on the website.
2.
See: fiduciary duties of directors available on
www.odce.ie/en/company_companies_responsibilities.aspx
Solution 6:
Briefing Note
To:
The Board of Directors of Táin Energy Resources Ltd
From:
Comply Anz Accountant
Subject:
Remuneration Issues
Date:
10th December 2007
Introduction
The purpose of this briefing note is to address the remunerations issues raised in your
correspondence. Transparency in the matter of executive compensation has been one
of the most frequently – and most intensely – discussed topics in recent years. Hence,
listed companies should establish a remuneration committee to determine, within
agreed terms of reference, the company’s policy on executive remuneration.
Solution 6: Part a
The Remuneration Committee should be a committee of the board and responsible to
the board. The role of the Committee is to assist the Board to consider remuneration
issues fully and more efficiently and to provide recommendations to the Board for
approval.
The primary function of the Committee is to set the remuneration policy for executive
directors and other senior executives and to ensure that they are fairly rewarded for
their individual contribution to the company’s overall performance, having due regard to
the interests of shareholders, the financial and commercial health of the company and
pay and conditions throughout the company and among competitors. The Committee
should also ensure that the Company complies with the best practice provisions
regarding directors’ remuneration as set out in the Listing Rules of the Irish Stock
Exchange (the "Green Book"). To avoid potential conflicts of interest, the committee
should consist exclusively of independent non-executive directors.
(4 Marks)
Solution 6: Part b
The key duties of the Remuneration Committee are to;
1. Determine and agree with the Board the framework or broad policy for the
remuneration of the company’s Managing Director, Chairman, the executive
directors, the company secretary and such other members of the executive
management as it is designated to consider. The remuneration of nonexecutive directors will be a matter for the Chairman and the executive
members of the Board. No director or manager will be involved in any decisions
as
to
their
own
remuneration:
2. Review the ongoing appropriateness and relevance of the remuneration policy;
3. Review the design of all share incentive plans for approval by the Board and
shareholders. For any such plans, determine each year whether awards will be
made, and if so, the overall amount of such awards, the individual awards to
executive directors and other senior executives and the performance targets to
be
used;
4. Determine the policy for, and scope of, pension arrangements for each
executive
director
and
other
senior
executives;
5. Ensure that contractual terms on termination, and any payments made, are fair
to the individual, and the company, that failure is not rewarded and that the duty
to mitigate loss is fully recognised; within the terms of the agreed policy and in
consultation with the Chairman and/or Managing Director as appropriate;
(5 Marks)
Solution 6: Part c
Unlike the UK regime, a specific remuneration report is not required under general
company law, although the ISE Listing Rules LR 6.8.3(8) require that the Board
reports in the annual report and accounts, to shareholders on remuneration.
Companies must under general company law include basic remuneration information
in the annual accounts. It is, however, supplied on an aggregate basis only. This
information must be disclosed either in the accounts, or in a statement annexed to
them.
Under
section
191(1)
disclosure
is
required
of:
The aggregate amount of directors’ emoluments; the aggregate amount of directors’
and past directors’ pensions; and the aggregate amount of any compensation paid to
directors
or
past
directors
for
loss
of
office.
“Emoluments” are broadly defined in s191(2) as covering fees, salaries,
commissions, pension contributions made by the company in respect of the director,
an estimate of chargeable non-cash benefits, and chargeable expenses.
The annual report and accounts, including the Directors’ Report (which may contain
disclosure on directors’ interests) must be distributed to every member.
(5 Marks)
Conclusion
I trust that this information contributes to your success as a listed company on the
ISE
(1 mark for presentation)
TUTORIAL NOTE:
2. Question 2 requires the candidate to answer the question in the form of a briefing
report addressing the three issues in the order outlined in the question.
2. LR 6.8.3(8) is available on http://www.ise.ie/?locID=534&docID=483 Chapter 6
3. Details on Combined Code re; Remuneration Committee available for download
on www.frc.co.uk/corporate/combinedcode.cfm
4. The duties of the Remuneration Committee are available as listed below from
www.icas.org.uk under /Guidance, publications and policy/ 071014 Remuneration
Committee - Terms of Reference PDF
The committee shall
1. Determine and agree with the board the framework or broad policy for the
remuneration of the company’s chief executive, chairman, the executive
directors, the company secretary and such other members of the executive
management as it is designated to consider. The remuneration of non-executive
directors shall be a matter for the chairman and the executive members of the
board. No director or manager shall be involved in any decisions as to their own
remuneration.
2. In determining such policy, take into account all factors which it deems
necessary. The objective of such policy shall be to ensure that members of the
executive management of the company are provided with appropriate incentives
to encourage enhanced performance and are, in a fair and responsible manner,
rewarded for their individual contributions to the success of the company.
3. Review the ongoing appropriateness and relevance of the remuneration policy.
4. Approve the design of, and determine targets for, any performance related pay
schemes operated by the company and approve the total annual payments made
under such schemes.
5. Review the design of all share incentive plans for approval by the board and
shareholders. For any such plans, determine each year whether awards will be
made, and if so, the overall amount of such awards, the individual awards to
executive directors and other senior executives and the performance targets to
be used
6. Determine the policy for, and scope of, pension arrangements for each executive
director and other senior executives.
7. Ensure that contractual terms on termination, and any payments made, are fair to
the individual, and the company, that failure is not rewarded and that the duty to
mitigate loss is fully recognised within the terms of the agreed policy and in
consultation with the chairman and/or chief executive as appropriate, determine
the total individual remuneration package of each executive director and other
senior executives including bonuses, incentive payments and share options or
other share awards in determining such packages and arrangements,
8. Give due regard to any relevant legal requirements, the provisions and
recommendations in the Combined Code and the Listing Authority’s Listing Rules
and associated guidance
9. Review and note annually the remuneration trends across the company or group
10. Oversee any major changes in employee benefits structures throughout the
company or group agree the policy for authorising claims for expenses from the
chief executive and chairman.
11. Ensure that all provisions regarding disclosure of remuneration, including
pensions, are fulfilled
12. Be exclusively responsible for establishing the selection criteria, selecting,
appointing and setting the terms of reference for any remuneration consultants
who advise the committee
13. Obtain reliable, up-to-date information about remuneration in other companies.
The committee shall have full authority to commission any reports or surveys
which it as deems necessary to help it fulfil its obligations.
Briefing Note
To:
Dr.Czeslaw Gulnaz CEO Crixus plc
From:
Comply Anz Accountant
Subject:
Corporate Governance etc
Date:
10th December 2007
Introduction
The purpose of this report is to address issues raised in your correspondence re
corporate governance, the Sarbanes Oxley Act otherwise know an as SOX or Sarbox
and the implications of SOX 404 for Crixus plc.
Solution 7: Part a
There is no single, accepted definition of what the expression ‘corporate governance’
means consequently the concept of corporate governance is poorly defined because
it potentially covers a large number of distinct economic phenomena. The majority of
the definitions employed by corporate practitioners relate corporate governance to
“control”
of
the
company”.
“Corporate governance is the system by which businesses are directed and
controlled.”(Cadbury Report, UK) 1 .
Another related theme identified in the Cadbury Report 2 and common to definitions of
corporate governance focuses upon the “supervision” of the company or of
management.
Perhaps the most comprehensive definition of corporate governance is set out by the
Organisation for Economic Co-operation and Development (OECD):
“Corporate governance is one key element in improving economic efficiency and
growth as well as enhancing investor confidence. Corporate governance involves a
set of relationships between a company’s management, its board, its shareholders
and other stakeholders. Corporate governance also provides the structure through
which the objectives of the company are set, and the means of attaining those
objectives and monitoring performance are determined. Good corporate governance
should provide proper incentives for the board and management to pursue objectives
that are in the interests of the company and its shareholders and facilitate effective
monitoring” (OECD Principles, 2004, Preamble) 3
In simple terms, corporate governance means rigorous supervision of the
management of a company; it means ensuring that business is done competently,
with integrity and with due regard for the interests of all stakeholders. Good
governance is, therefore, a mixture of legislation, non-legislative codes and best
practice, structure, culture, and board competency. At the most basic level, it is about
complying with the law and applying structural requirements that are underpinned by
a business reason. According to (Charkham, 2005)
'The three principles underpinning corporate governance are enterprise,
transparency and accountability'.
(5 Marks)
1
http://www.ecgi.org/codes/documents/cadbury.pdf Section 2.5
http://www.ecgi.org/codes/documents/cadbury.pdf Section 2.5
3
www.oecd.org/dataoecd/32/18/31557724.pdf
2
Solution 7: Part b
A variety of complex factors created the conditions and culture in which a series of
large corporate frauds occurred in America between 2000 and 2002. The apparently
stable and successful US corporate world was rocked to its foundations by the news
of the collapse of not one, but a number off its largest corporations. The spectacular,
highly-publicised frauds at Enron, WorldCom, Tyco International, Adelphia
Communications and Global Crossing exposed significant problems with conflicts of
interest and revealed material weaknesses in the way the companies were operated
and regulated, as well as firm cultures that justified and legitimised the conduct.
These scandals cost investors billions of dollars when the share prices of the affected
companies collapsed and shook public confidence in the nation's securities markets.
In response to the corporate frauds the Sarbanes-Oxley (SOX or Sarbox) Act 2002
was enacted. Its aim was “to protect investors by improving the accuracy and
reliability of corporate disclosures made pursuant to the securities laws and for other
purposes.” Quite simply it was an act passed by U.S. Congress to protect investors
from the possibility of fraudulent accounting activities by corporations. The Act
effectively covers a whole range of governance issues, with an emphasis upon
keeping everything above board.
The Sarbanes-Oxley Act provides for far reaching reform which has caused much
anxiety outside of the US as the Act applies equally to US and non-US firms with a
US listing such as Crixus plc’s secondary listing on the NYSE. Companies and their
executives face criminal and civil liability for non-compliance with SOX. Penalties can
include fines of up to $5 million and imprisonment for up to 20 years
(5 marks)
Solution 7: Part c
Sarbanes Oxley Section 404 requires companies listed in the US to report on the
efficacy of their internal controls on financial reporting. The implementation of Section
404 is a classic example of “impractical” corporate governance. Section 404 requires
(among other things) that independent auditors attest to the internal controls of public
companies. This requirement imposed a huge cost burden on public companies
because it spawned an expensive “check-the-box” mentality among major auditing
firms. Notwithstanding, the US Securities and Exchange Commission (SEC) has
identified the Turnbull guidance 4 as a suitable framework for complying with US
requirements to report on internal controls over financial reporting, as set out in
Section 404 of the Sarbanes-Oxley Act 2002 and related SEC rules.
(4 marks)
Conclusion
I trust that this information contributes to the clarification of the issues raised by you
regarding corporate governance, the enactment of SOX and the dreaded Section 404
(1 mark for presentation)
TUTORIAL NOTE:
1. Question 3 requires the candidate to answer the question in the form of a
briefing report addressing the three issues in the order outlined in the
question.
4
"The Turnbull guidance as an evaluation framework for the purposes of s404(a) of the
Sarbanes-Oxley Act" issued by the FRC 16 December 2004
MARKING SCHEME
The ability to communicate effectively is one of the most essential interpersonal skills
for both seasoned professionals and new entrants to accounting, finance and
auditing. Technologies such as instant messaging and e-mail have actually
increased, rather than decreased, the need for strong communication skills.
As financial professionals assume more strategic roles, they will need to become
more analytical. They must be able to not only produce financial reports and perform
complex calculations, but also identify and explain what is meaningful in their data or
findings. Consequently, the examiner is emphasising the importance of
communication skills when answering examination questions in the Part B of the
Corporate Laws & Governance examination paper. Candidates are required to
demonstrate strong communication skills in addition to the technical knowledge and
competency required to answer the question asked.
Q.5
PART A
•
•
•
PART B
•
•
•
PART B
•
Legally no distinction between Executive & (1 mark)
Non Executive Directors
Demonstrable understanding of ruling and (3 marks)
application of Tralee Beef & Lamb Case.
Non-executive directors, even if they have
limited involvement in the company, are
unremunerated, and do not have special
business expertise are “under an obligation
to discharge the minimum obligations of
informing
[themselves]
about
the
company’s affairs and joining with [their]
co-directors in supervising and controlling
such affairs in the sense of being in a
position to offer guidance and to monitor
the management of the Company”
throughout their “entire tenure as a
director”.
Demonstrable evidence of advice to Susie (2 marks)
She must discharge obligations as set out
above even though she is unremunerated
and not an executive director, duty re
company compliance’
(Total 6 marks)
Act in good faith and in company’s interest (2 marks)
+ summary
(2 marks)
Be open and transparent + summary
Act with due care, skill and diligence + (2 marks)
summary
(Total 6 marks)
Demonstrable knowledge that rules in (3 marks)
Companies Act are ‘creditor protection’
mechanism and explanation as to the
reason for this
(Total 3 marks)
Question Total 15 marks
Q. 6
PART A
•
•
•
PART B
•
PART C
•
•
•
•
•
Role of remuneration committee- to assist (2 marks)
the board and to make recommendations
to the board
Function of remuneration committee is to (1.5 marks)
set the remuneration policy for executive
directors etc, having due regard to interests
of shareholders, etc
Function of remuneration committee in (1.5 marks)
context of this particular question is to
comply with best practice as set out in ISE
Listing Rules
(Total 5 marks)
Outline of any five duties of the (5 X 1 mark)
remuneration committee as set out in terms
of Reference for Remuneration Committee
(Total 5 marks
Disclosure requirements under S(191) 1 (3 marks)
aggregate amount of directors emoluments
aggregate amount of directors pensions
(past and present)
compensation paid for loss of office to
directors (past and present)
Listing
requirement
LR
6.8.3
(8) (1 mark)
compliance re disclosure of remuneration
Overall briefing report layout, structure and (1 mark)
presentation
(Total 5 marks)
Question Total 15 marks
Q. 7
PART A
•
•
PART B
•
•
•
PART C
•
•
•
•
Robust, creditable definition of corporate (2.5 marks)
governance.
Acceptable explanation of candidates (2.5 marks)
understanding of corporate governance
(Total 5 marks)
(3
marks)
Brief Background to and rationale for
introduction of SOX.
Demonstrable knowledge that a secondary (1 mark)
quotation on NYSE requires compliance
with SOX legislation.
Demonstrable knowledge of awareness (1 mark)
that civil and criminal liabilities arise from
non-compliance with SOX legislation.
(Total 5 marks
(2
mark)
Demonstrable knowledge of Sox 404 (brief
overview)
Identification of Turnbull as suitable (1 mark)
framework
Justification for acceptance of Turnbull (1 mark)
guidance
(Total 4 marks
Overall briefing report layout, structure and (1 mark)
presentation
Question total 15 marks