Question 1

a) Corporate Governance

i) Concept of Corporate Governance (2 marks)

Corporate governance refers to the system of rules, practices, and processes by which a company is
directed and controlled. It involves balancing the interests of the many stakeholders in a company,
including shareholders, management, customers, suppliers, financiers, government, and the community.
Effective corporate governance ensures accountability, fairness, and transparency in a company's
relationship with all its stakeholders, leading to sustainable financial performance.

ii) Roles of the Board of Directors in Corporate Governance (4 marks)

1. Strategic Direction and Oversight:

o The board is responsible for setting the company’s strategic goals, ensuring that
management implements these strategies effectively. This involves regular review and
assessment of the company's progress towards its strategic objectives, ensuring
alignment with shareholder interests and long-term sustainability.

2. Risk Management and Internal Controls:

o The board must oversee the risk management processes to identify, assess, and mitigate
potential risks that could affect the company's performance. This includes ensuring
robust internal controls and compliance with legal and regulatory requirements, thus
safeguarding the company’s assets and reputation.

iii) Corporate Governance Best Practices (4 marks)

1. Board Diversity and Independence:

o Ensuring that the board comprises a diverse group of individuals with a range of skills,
experiences, and perspectives can lead to more balanced and effective decision-making.
Moreover, having independent non-executive directors who are not involved in the day-
to-day running of the company helps provide objective oversight and reduce conflicts of
interest.

2. Transparent Reporting and Accountability:

o Adopting transparent reporting practices, including regular and accurate disclosure of

financial performance and business operations, ensures accountability to shareholders
and other stakeholders. This builds trust and confidence in the company's management
and operations, fostering a positive corporate image and long-term investment.

b) Methods of Raising Capital by Issuing Shares

i) Placement Method

Explanation: The placement method involves issuing new shares directly to a select group of investors,
typically institutional investors, rather than offering them to the general public.
Advantage:

 Speed and Efficiency: Placements can be executed quickly and with fewer regulatory hurdles
compared to public offerings, allowing the company to raise capital more swiftly.

ii) Offer for Sale Method

Explanation: In the offer for sale method, existing shareholders sell their shares to the public through a
stock exchange. This does not involve issuing new shares but rather the redistribution of existing shares.

Advantage:

 Liquidity for Existing Shareholders: This method provides an opportunity for existing
shareholders to liquidate their holdings, increasing the liquidity of their investments.

iii) Offer for Sale by Tender

Explanation: In the offer for sale by tender method, shares are offered to the public with investors
invited to submit bids for the number of shares they want to purchase and the price they are willing to
pay. The final price is determined based on these bids.

Advantage:

 Market-driven Pricing: This method helps in discovering the true market price of the shares
based on demand, potentially leading to a better price realization for the company and the
selling shareholders.

Q2d

Defensive Tactics to Prevent Acquisition

Management of MUA Ltd can use several defensive tactics to thwart KIM Ltd's acquisition attempt. Here
are four effective strategies:

1. Poison Pill (Shareholder Rights Plan):

Explanation: This tactic involves issuing new shares to existing shareholders at a

discount, which dilutes the ownership interest of the potential acquirer. The plan is
typically triggered if a single shareholder buys a certain percentage of the company's
shares without board approval.

Advantage: Makes the acquisition prohibitively expensive and unattractive to the

potential acquirer.

2. White Knight:

Explanation: This involves finding a more friendly company (a "white knight") that is
willing to acquire MUA Ltd on more favorable terms than KIM Ltd.

Advantage: Ensures that the company remains in the hands of a more favorable and
possibly synergistic partner rather than a hostile one.

3. Golden Parachute:
 Explanation: Implementing lucrative compensation packages for key executives that are
triggered in the event of a takeover. This makes the acquisition more costly for the
acquirer.

Advantage: Discourages the acquirer by significantly increasing the financial burden

associated with the takeover.

4. Staggered Board:

Explanation: Structuring the board of directors so that only a fraction of the directors
are up for election in any given year. This prevents an acquirer from quickly gaining
control of the board.

Advantage: Slows down the process of taking over the company, giving the current
management more time to implement other defenses or negotiate better terms.

Q4

ii. Distinction between "Without Recourse" and "With Recourse" Factoring Agreement

Without Recourse Factoring Agreement:

 Explanation: In a "without recourse" factoring agreement, the factor (financial institution)

purchases the accounts receivable from the company and assumes the risk of non-payment by
the debtors. This means that if the debtors fail to pay the invoices, the factor cannot seek
reimbursement from the company.

 Implication: This type of agreement provides greater financial protection to the company selling
the receivables as the risk of bad debts is transferred to the factor.

With Recourse Factoring Agreement:

 Explanation: In a "with recourse" factoring agreement, the factor purchases the accounts
receivable but the company retains the risk of non-payment. If the debtors fail to pay the
invoices, the factor can claim reimbursement from the company.

 Implication: This type of agreement generally involves lower fees compared to without recourse
factoring, but the company retains the credit risk of its debtors.

b. Differences between a Forward Currency Contract and a Futures Currency Contract

1. Standardization and Trading Venue:

 Forward Currency Contract:

o Nature: Customized contracts between two parties.

o Trading Venue: Traded over-the-counter (OTC), not on formal exchanges.

 Futures Currency Contract:

o Nature: Standardized contracts with fixed terms (e.g., contract size, maturity date).

o Trading Venue: Traded on organized exchanges (e.g., Chicago Mercantile Exchange).

2. Flexibility and Customization:

 Forward Currency Contract:

o Flexibility: Highly flexible and can be tailored to meet the specific needs of the parties
involved (e.g., amount, delivery date).

o Customization: Terms are negotiated directly between the buyer and the seller.

 Futures Currency Contract:

o Flexibility: Less flexible due to standardization.

o Customization: Terms are set by the exchange, leaving little room for customization.

3. Settlement and Risk Management:

 Forward Currency Contract:

o Settlement: Typically settled at the end of the contract term; physical delivery or cash
settlement can occur.

o Risk Management: Counterparty risk is higher as it depends on the financial stability of

the contracting parties.

 Futures Currency Contract:

o Settlement: Marked-to-market daily, and profits or losses are settled daily until the end
of the contract term.

o Risk Management: Lower counterparty risk due to the involvement of a clearinghouse

which acts as an intermediary and guarantees the transaction.