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ACCA F4 (GLO) Corporate and Business Law December 2011

Final Assessment – Answers

To gain maximum benefit, do not refer to these answers until you have completed the final assessment questions and submitted them for marking.


PAPER F4 (GLO): CORPORATE AND BUSINESS LAW

Š Kaplan Financial Limited, 2011 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

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FINAL ASSESSMENT ANSWERS

ANSWER 1 Incorporation under the Companies Act 2006 requires companies to register certain documents with the Registrar of Companies and pay the registration fee. The necessary documents are as follows: Memorandum of Association This document must be signed by all the subscribers. It states that one or more persons wish to form a company, that they agree to become members of that company and to take at least one share in the company each. Application The application form must include the proposed name of the company; whether, and if so how, the liability of the members is to be limited; a statement as to whether the company is private or public; the details and address of the registered office. Articles of Association The articles of association form part of the company’s internal constitution, along with other agreements or special resolutions (s.17). They set out the manner in which the company is to be governed and regulate the relationship between the company and its shareholders. If no articles are submitted, the company will be governed by the model articles prescribed by the Secretary of State. Statement of capital and initial shareholdings This must state the number of shares, their aggregate nominal value and how much has been paid up on each share. Statement of proposed officers This gives details of the first directors and company secretary and their consent to act. Statement of compliance This provides confirmation that the provisions of Companies Act 2006 have been complied with. Trading certificate A private company can commence trading immediately. However, a public limited company cannot commence trading until the registrar has issued a trading certificate (s.761 CA 2006). To obtain a trading certificate, there must be at least £50,000 of allotted share capital with at least one quarter of the nominal value and all of the premium being paid up. It is a criminal offence for a plc to carry on a business without a certificate. If it does so, the company and any officers are liable to a fine.

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PAPER F4 (GLO): CORPORATE AND BUSINESS LAW

Marking Guidance No half marks should be awarded. Generally 1 mark per point made. More than 1 mark per paragraph should be awarded where the paragraph contains more than 1 valid point. Memorandum of association – up to 2 marks. Application – up to 3 marks. Articles – up to 3 marks. Statement – 1 mark each. Trading certificate – up to 2 marks.

ANSWER 2 The nominal value of a company’s shares is set out in the statement of capital delivered to the Registrar when the company is first incorporated. Once shares have been issued, their market value may diverge from that nominal value, but their nominal value remains fixed. (a)

It is a long established rule that companies are not permitted to issue shares for a consideration that is less than the nominal value of the shares together with any premium due. In other words, shares cannot be issued at a discount to their nominal value. The strictness of this rule may be seen in Ooregum Gold Mining Co of India v Roper (1892). In that case the shares in the company, although nominally £1, were trading at l2.5p. In an honest attempt to refinance the company, new £1 preference shares were issued and credited with 75p already paid. When, however, the company subsequently went into insolvent liquidation the holders of the new shares were required to pay a further 75p. This common law rule is now given statutory effect in s.580 CA06 and is supported by s.582 which states that shares are only treated as paid up to the extent that the company has received money or money's worth. Anyone who takes shares without paying the full value, plus any premium due, is liable to pay the amount of the discount as unpaid share capital, together with interest (s.580(2) CA06). Also any subsequent holder of such a share who was aware of the original underpayment will be liable to make good the shortfall (s.588 CA06). The reason for such rigour in relation to preventing the issue of shares at a discount is the protection of the company's creditors. Shareholders enjoy the benefit of limited liability but that privilege is only extended to them on the basis that they have fully subscribed to the company's capital for the shares they hold. Shareholder capital can be seen as a fund against which creditors could claim in the event of dispute. These rules apply only to shares. Debentures may be issued at a discount. This is the case even where the debentures are convertible into shares, as long as they do not carry an immediate right to conversion (Mosely v Koffyfontein Mines (1904)).

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FINAL ASSESSMENT ANSWERS

(b)

It is common for a company to require prospective subscribers to pay more than the nominal value of the shares they subscribe for. This is especially the case when the market value of the existing shares is above the nominal value. In such circumstances the shares are said to be issued at a premium, the premium being the value received over and above the nominal value of the shares. Section 610 CA06 provides that any such premium received must be placed into a share premium account. The premium obtained is regarded as equivalent to shareholder capital and, as such, there are limitations on how the fund can be used. Section 610 provides that the share premium account can be used for the following purposes: (i)

to pay up bonus shares to be allotted as fully paid to members;

(ii)

to write off the expenses or commission incurred on the issue of those shares.

Applying the rules relating to capital maintenance it follows that the share premium account cannot be used to pay dividends to the shareholders.

Marking Guidance No half marks should be awarded. Generally 1 mark per point made. Each case should be awarded 1 mark. More than 1 mark per paragraph should be awarded where the paragraph contains more than 1 valid point. Part (a) Nominal value – 1 mark Cannot be issued at less than nominal value – 1 mark Common law rule – 1 mark Ooregum Gold Mining Co – 1 mark Unpaid amount will need payment with interest – 1 mark Capital maintenance principle – up to 2 marks. Debentures can be issued at discount – 1 mark. Part (b) Issued at premium when market value greater than nominal value – 1 mark Share premium account – 1 mark. Uses of share premium account – up to 2 marks. Cannot be used to pay dividends – 1 mark.

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PAPER F4 (GLO): CORPORATE AND BUSINESS LAW

ANSWER 3 (a)

Under CA06 there is no statutory requirement for a private company to hold annual general meetings. S.336 CA06 provides that every public company must hold a general meeting as its annual general meeting in each period of 6 months beginning with the day following its accounting reference date (in addition to any other meetings held during that period). If a company fails to hold an AGM then every officer in default may be fined. S.307 CA06 states that 21 days’ notice is normally required unless 95% of those members entitled to attend and vote agree to a shorter period. The usual business of an AGM includes consideration of the accounts, appointment of the auditors, election of the directors and the declaration of dividends.

(b)

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General meetings may be convened in a number of ways by various people as follows. (i)

Meetings are usually called by the board of directors. Directors may call a general meeting whenever they consider it necessary.

(ii)

The directors of public limited companies are required, under s.656 CA 2006, to call a general meeting where there has been a serious loss of capital. This is defined as the assets falling to half or less than the nominal value of the called up share capital.

(iii)

The members (shareholders) of the company may call a general meeting. A meeting may be called by those members who hold at least 10% of the paid up voting capital or, in the case of a private company, 5% of the paid up voting capital, if more than 12 months has elapsed since the last general meeting (s.303 CA 2006). If the directors then fail to convene a meeting as required within 21 days of the deposit of the requisition, (and to hold it within 28 days of the notice calling the meeting) then the requisitionists may themselves convene a meeting and recover any expenses from the company: s.305 CA 2006.

(iv)

The resigning auditor of a company may require the directors to convene a general meeting of the members. This power is provided so that, where there is cause for concern, the auditor can explain the reason for his resignation to the members generally and put them on notice: s.518 CA 2006.

(v)

The court may order a meeting under s.306 CA 2006 where it is impracticable otherwise to call a meeting, for example to break deadlock. The court's power under s.306 is extremely wide and any such meeting is to be called, held and conducted in any manner the court thinks fit. In Re El Sombrero Ltd. (1958) the applicant held 900 of the company's 1,000 shares although he was not a director of the company. The only two directors held 50 shares each. When the majority shareholder sought to exercise his power to remove the two existing directors under s.168 CA 2006, they refused to call a general meeting and made it clear that they would not attend any meeting called. As the articles of association set the quorum for a general meeting at two, their refusal to attend prevented the applicant from taking any action. Under such circumstances, the court used its power under s.306 to order the holding of a general meeting at which the quorum was set at one person only. Thus the applicant could remove the other two members from the board of directors.

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FINAL ASSESSMENT ANSWERS

Marking Guidance No half marks should be awarded. Generally 1 mark per point made. Each case should be awarded 1 mark More than 1 mark per paragraph should be awarded where the paragraph contains more than 1 valid point.

ANSWER 4 Every company must appoint an auditor or auditors in accordance with Companies Act 2006, unless it is a small company which is exempt from the auditing requirements or it is a dormant private company which has adopted a special resolution to exempt the company from these requirements. Auditors are appointed to ensure that the interests of the shareholders in a company are being met. Their key function is to produce reports confirming, or otherwise, that the accountancy information provided to shareholders is reliable. Company auditors have certain duties and liabilities. Duties Under s.495 CA 2006, the auditors are specifically required to report on: (i)

whether the accounts have been properly prepared in accordance with the Act and the relevant financial reporting framework;

(ii)

whether the individual company accounts and the group accounts show a true and fair view of the profit or loss and state of affairs of the company and of the group, so far as it concerns the members of the company.

The auditor is also required to report on whether the information in the directors’ report is consistent with the accounts presented: s.496. Under s.498 CA 2006 the auditors are required to investigate: (i)

whether the company has kept adequate accounting records and obtained adequate accounting returns from branches; and

(ii)

whether the accounts are in agreement with the records; and

(iii)

whether they have obtained all the information and explanations that they considered necessary.

The Companies Act places further duties on auditors, relating to such issues as: (i)

the valuation of any non-cash consideration for shares allotted by a public company or a company converting to a public company (s.93 CA 2006); and

(ii)

the purchase of its own shares by a company by payment out of capital (s.714 CA 2006).

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PAPER F4 (GLO): CORPORATE AND BUSINESS LAW

Liability of an auditor It is the duty of an auditor to bring to bear on the work he has to perform that skill, care and caution which a reasonably competent, careful and cautious auditor would use. What is reasonable skill and care must depend on the particular circumstances of each case. If there is anything calculated to excite suspicion he should probe to the bottom of it, but in the absence of anything of that kind he is only bound to be reasonably cautious and careful. If an auditor fails to exercise reasonable skill, care and caution he may be liable to the company for breach of contract or in tort for negligence. He may owe a duty of care to members as a body in the general meeting Caparo Industries v Dickman (1990). A wider duty of care may also be owed to persons who rely on statements of auditors for a known purpose. This does not include investors. In Caparo Industries v Dickman, an investor relied upon accounts audited by the defendants when purchasing shares in Fidelity plc. The investor alleged that the accounts had been inaccurate and misleading. One of the issues for the House of Lords was whether the defendant owed the investor a duty of care. It was held that advice to individual shareholders in relation to present or future investment in the company is not part of the statutory purpose of the preparation and distribution of accounts. It was considered whether an auditor, despite the limited purpose of the accounts, owes an additional common law duty to individual shareholders who choose to use them for another purpose without the knowledge of the auditor. It was held that an auditor owed no such duty in those circumstances.

Marking Guidance No half marks should be awarded. Generally 1 mark per point made. More than 1 mark per paragraph should be awarded where the paragraph contains more than 1 valid point. Up to 2 marks for discussing Caparo Industries.

ANSWER 5 Under s84 Insolvency Act 1986 a company may be wound-up voluntarily either when it passes a special resolution that that effect, or when it resolves by extraordinary resolution that it cannot by reason of its liabilities continue its business and that it is advisable to windup. The passing of such a resolution must be advertised in the Gazette within 14 days. It is necessary to distinguish between a members' voluntary winding-up and a creditors' voluntary winding-up. The directors of a company may make a statutory declaration to the effect that after full enquiries they have formed the opinion that the company will be able to pay its debts in full within 12 months of the commencement of the winding-up. If such a declaration of solvency is made the liquidation will be a members' voluntary winding-up, and its conduct will be largely in the hands of the members. If so such declaration is made it will be a creditors’ voluntary winding-up and creditors will be more in control.

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FINAL ASSESSMENT ANSWERS

In a members’ voluntary winding-up the company in general meeting appoints the liquidator(s). On such appointment all the powers of the directors cease, unless otherwise specified by the general meeting or the liquidator. In a creditors’ voluntary winding-up the company must send out notices calling a meeting of creditors for the day on which the resolution for voluntary winding-up is to be proposed, or the day following. Both the creditors and the shareholders at their respective meetings may nominate a liquidator. If different persons are nominated then the choice of the creditors prevails.

Marking Guidance No half marks should be awarded. Generally 1 mark per point made. More than 1 mark per paragraph should be awarded where the paragraph contains more than 1 valid point.

ANSWER 6 (a)

Corporate governance is the system by which companies are directed and controlled. It deals which such matters as how power is divided between the board and the members, the accountability of the board to its members and the rules and procedures for making decisions.

(b)

The UK Code on corporate governance is a set of principles rather than rules. This means that directors can describe in their own words the way in which they have applied the principles of corporate governance to their company. Advantages •

As the directors report on the actual situation in their own company, the report should be more meaningful than one based on specific rules which may have no relevance to that company.

A code of practice can be changed more easily than legislation. This enables the combined code to be updated more easily to respond to changing conditions and changing expectations of members and others.

A principles-based approach encourages the directors to follow the spirit of the Code, whereas a rules-based approach may result in a tick box mentality. This means that the directors may follow the letter rather than the spirit of the rules.

Disadvantages •

A principles-based approach may result in general meaningless statements.

It may be difficult for directors to make sure that they have met the requirements of the Code.

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PAPER F4 (GLO): CORPORATE AND BUSINESS LAW

Marking Guide No half marks should be awarded. Generally 1 mark per point made. More than 1 mark per paragraph should be awarded where the paragraph contains more than 1 valid point. Part (a) Directed and controlled – 1 mark Division of power/accountability of board/making decisions – 1 mark each Part (b) Up to 2 marks for each advantage. 1 mark for each disadvantage.

ANSWER 7 (a)

Money laundering is the process by which the proceeds of crime, either money or other property, are converted into assets, which appear to have a legitimate rather than an illegal origin. The aim of the process is to disguise the source of the property, in order to allow the holder to enjoy it free from suspicion as to its source. The process usually involves three distinct phases: •

‘placement’ is the initial disposal of the proceeds of criminal activity into apparently legitimate business activity or property;

‘layering’ involves the transfer of money from business to business, or place to place in order to conceal its initial source; and

‘integration’ is the culmination of the previous procedures through which the money takes on the appearance of coming from a legitimate source.

Money laundering was first made a criminal offence in the United Kingdom under the Drug Trafficking Offences Act 1986 and is now regulated by the Proceeds of Crime Act 2002 together with the specifically anti-terrorist legislation, the Terrorism Act 2000 and the Anti-terrorism, Crime and Security Act 2001. (b)

The Proceeds of Crime Act 2002 seeks to control money laundering by creating three categories of criminal offences in relation to the activity. •

Laundering The first category of principal money laundering offences relates to laundering the proceeds of crime, or assisting in that process and is contained in ss.327 – 329. Under s.327, it is an offence to conceal, disguise, convert, transfer or remove criminal property from England and Wales, Scotland or Northern Ireland. Concealing or disguising criminal property is widely defined to include concealing or disguising its nature, source, location, disposition, movement or ownership or any rights connected with it. These offences are punishable on conviction by a maximum of 14 years’ imprisonment and/or a fine.

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FINAL ASSESSMENT ANSWERS

Failure to report The second category of offence relates to failing to report a knowledge or suspicion of money laundering and is contained in ss.330 – 332. Under s.330 it is an offence for a person who knows or suspects that another person is engaged in money laundering not to report the fact to the appropriate authority. However, the offence only relates to individuals, such as accountants who are acting in the course of business in the regulated sector. The offences set out in these sections are punishable on conviction by a maximum of five years’ imprisonment and/or a fine.

Tipping off The third category of offence relates to tipping off and is contained in s.333, which makes it an offence to make a disclosure, which is likely to prejudice any investigation under the Act. The offences set out in these sections are punishable on conviction by a maximum of five years’ imprisonment and/or a fine.

Marking Guide No half marks should be awarded. Generally 1 mark per point made. More than 1 mark per paragraph should be awarded where the paragraph contains more than 1 valid point. Part (a) Description of money laundering – 1 mark Purpose of money laundering – 1 mark Three phases – 1 mark for each phase Proceeds of Crime Act 2002 – 1 mark. Part (b) Laundering – up to 3 marks Failure to report – up to 3 marks Tipping off – up to 2 marks.

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PAPER F4 (GLO): CORPORATE AND BUSINESS LAW

ANSWER 8 (a)

Albert has contracted with Typo Ltd before Superspeed Ltd received its certificate of incorporation. This therefore is a pre-incorporation contract. s51 CA06 provides that a contract which purports to be made on behalf of a company not yet formed has effect as one made with the person purporting to act on behalf of the company and he is personally liable on it ‘subject to any agreement to the contrary’. In short, the person acting on behalf of the future company must contract out of personal liability. Albert has not done so, therefore he is personally liable on the contract. Superspeed Ltd is not liable and can contract with a cheaper source because it was not bound by the contract anyway.

(b)

The transfer of shares to Jennifer is dependent on whether there was a company in existence whose shares could be transferred to Jennifer. Although Albert and Edward had been led to believe the incorporation date was 1 June, the certificate states 10 June. There are two matters to be considered. First there is the legal status of the certificate of incorporation. S15 CA06 states the issue of a certificate is conclusive evidence that the requirements of the Act in respect of matters precedent and incidental to the registration have been complied with. Secondly, if there are errors in the formation procedure or an error on the certificate itself, Jubilee Cotton Mills Ltd v Lewis (1924) held the view that the date on the certificate was the significant date. Applying those principles to the transfer of shares to Jennifer it becomes clear that the company had not yet been incorporated and therefore the transfer, in law, could not occur. Any payment Jennifer gave was made under mistake and is recoverable. Should the company and Jennifer still wish her to be a member, the transfer should be authorised at a directors’ meeting according to Superspeed’s articles.

Marking Guide No half marks should be awarded. Generally 1 mark per point made. More than 1 mark per paragraph should be awarded where the paragraph contains more than 1 valid point. As this is a scenario question there are marks available for stating the law and applying it. Even if the explanation is incorrect a mark should still be given if the conclusion is correct.

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FINAL ASSESSMENT ANSWERS

ANSWER 9 The shareholders may use S168 CA06 to dismiss Barley. However, he will be entitled to compensation for breach of his contract. As his contract is not for a fixed term, the measure of damages will be his salary for the period of notice required by his contract or by law. In order to exercise the right in S168 they must: (a)

give 28 days’ notice of their intention to do so to the company – i.e. special notice, and

(b)

give Barley an opportunity to make representations at the meeting at which the resolution is to be put, or before the meeting, in writing.

If Barley is removed from his position as director, he ceases to be eligible to hold the position as managing director. Only those actions of the company’s authorised agents acting on behalf of the company within their authority will be binding on the company. Barley is managing director and would usually have all the management powers of the board vested in him. He can commit the company to contracts for the sale or lease of the company’s buildings. The articles purport to reduce Barley’s authority by requiring him to obtain the consent of the board in such circumstances; Barley therefore acts outside of his actual authority. Rent a Rack Ltd may be able to rely on S39 CA06, which provides that in favour of a person dealing with the company in good faith the power of the board to bind the company or authorise others to do so shall be deemed to be free of any limitations in the company’s constitution. A person is dealing in good faith whether or not he has actual knowledge of the contents of public documents. A person is still dealing in good faith even if he knows that directors are acting outside their authority. Rent a Rack Ltd is dealing in good faith for these purposes. Barley is a person authorised to act by the board of directors. Therefore, under S39, the contract is binding on Wheatear Ltd.

ANSWER 10 At a basic level, the value of shares may be seen as a reflection of the underlying profitability of the company; the more profitable the company, the greater its potential to pay dividends and the higher the value of its shares. Once the actual performance of a company is revealed in its accounts and statements, the market value of its share capital will be adjusted in the market to reflect its true worth, either upwards if it has done better than expected, or downwards if it has done worse than was expected. Share valuation depends upon accurate information as to a company’s performance or its prospects. To that extent knowledge is money, but such price sensitive/affected information is usually only available to the individual share purchaser after the company has issued its information to the public. If, however, the share buyer could gain prior access to such information, then they would be in the position to predict the way in which share prices would be likely to move and consequently to make substantial profits. Such dealing in shares, on the basis of access to unpublished price sensitive information, provides the basis for what is referred to as ‘insider dealing’ and is governed by part V of the Criminal Justice Act 1993 (CJA).

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PAPER F4 (GLO): CORPORATE AND BUSINESS LAW

Section 52 of the CJA sets out the three distinct offences of insider dealing: (i)

an individual is guilty of insider dealing if they have information as an insider and deal in price-affected securities on the basis of that information;

(ii)

an individual who has information as an insider will also be guilty of insider dealing if they encourage another person to deal in price-affected securities in relation to that information; and

(iii)

an individual who has information as an insider will also be guilty of insider dealing if they disclose it to anyone other than in the proper performance of their employment, office or profession.

The CJA goes on to explain the meaning of some of the above terms. Thus s.54 defines what securities are covered by the legislation and these are set out in the second Schedule to the Act and specifically include shares and debentures. Dealing is defined in s.55, amongst other things, as acquiring or disposing of securities, whether as a principal or agent, or agreeing to acquire securities. Section 56 defines ‘inside information’ as: (i)

relating to particular securities;

(ii)

being specific or precise;

(iii)

not having been made public; and

(iv)

being likely to have a significant effect on the price of the securities.

Section 57 states that a person has information as an insider only if they know it is inside information and they have it from an inside source. The section then goes on to consider what might be described as primary and secondary insiders. The first category of primary insiders covers those who get the inside information directly through either: (i)

being a director, employee or shareholder of an issuer of securities; or

(ii)

having access to the information by virtue of their employment, office or profession.

The term insider also extends to anyone who receives, either directly or indirectly, any inside information from anyone who is a primary insider. Thus anyone receiving information from an insider, even second or third-hand, is to be treated as an insider. It is important to note that if the primary insider merely recommends that the second party should buy shares, without passing on information, then although the tipper has committed an offence under s.52(2) in recommending the shares, the tipee does not commit any offence under the Act because they have not received any specific information as required by s.56. Section 53 provides defences for those accused of insider dealing and requires the individual concerned to show one of three things: (i)

that they did not expect the dealing to result in a profit attributable to the pricesensitive information; or

(ii)

that they reasonably believed that the information had been previously disclosed widely enough to ensure that those taking part in the dealing would be prejudiced by not having the information; or

(iii)

that they would have done what they did even if they did not have the information.

On summary conviction an individual found guilty of insider dealing is liable to a fine not exceeding the statutory maximum and/or maximum of six months’ imprisonment. On indictment the penalty is an unlimited fine and/or a maximum of seven years’ imprisonment. 14

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FINAL ASSESSMENT ANSWERS

Applying the general law to the problem scenario, one can conclude as follows: (i)

Nic is an ‘insider’ as he receives inside information as a result of his position as director of Large plc. The information fulfils the requirements for ‘inside information’ as it relates to: particular securities, the shares in Median plc; is specific, in that it relates to the takeover; has not been made public; and is likely to have a significant effect on the price of the securities. When Nic tells his friend Oz about the likelihood of the take-over he commits the offence of disclosing information he has as an insider. Oz then becomes an insider himself and is guilty of dealing when he buys shares in Median plc.

(ii)

When Oz advises his brother Quentin to buy shares in Large plc, he commits the offence under s.52 of encouraging another person to deal in price-affected securities in relation to inside information. Quentin on the other hand has committed no offence for the reason that, although he has bought shares in Large plc, he has not received any specific information and therefore cannot be guilty of dealing on the basis of such information.

(iii)

Minion gets inside information about the takeover bid from his employment. He appears to have engaged in insider dealing, but it is open to him to claim advantage of the defence under s.53 that he would have had to sell his shares to pay the tax bill in any case.

Marking Guidance No half marks should be awarded. Generally 1 mark per point made. More than 1 mark per paragraph should be awarded where the paragraph contains more than 1 valid point. As this is a scenario question there are marks available for stating the law and applying it. Even if the explanation is incorrect a mark should still be given if the conclusion is correct. Definition/purpose of insider dealing – up to 2 marks Criminal Justice Act 1993 – 1 mark Three offences – 1 mark for each offence Definition of inside information – up to 2 marks Explanation of insider – up to 3 marks Defences – 1 mark for each one Penalty – up to 2 marks Nic is an insider/discloses information– up to 2 marks Oz encourages another person to deal – 1 mark Quentin not committed an offence – 1 mark Minion maybe be able to claim defence – 1 mark.

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ACCA F4 GLO Final Assessment D11 Answers  

ACCA F4 GLO Final Assessment D11 Answers

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