Download December 2012

Examiner’s report
F4 Corporate and Business Law (RUS)
December 2012
General Comments
The examination consisted of ten questions, all of which had to be attempted in three hours. The first seven
questions required candidates to demonstrate their knowledge on subjects selected from across the syllabus. The
remaining three questions were case study scenarios for which it was necessary to apply knowledge of legal
principles to the requirements. All questions carried equal marks.
The majority of candidates were well prepared and were able to write competent answers to most of the
questions on the paper. There was little evidence of time pressure, and though some candidates wrote less than
ten answers, evidence suggests that they chose to do so in order to maximise the number of marks they could
earn on their stronger topics rather than running out of time.
Questions on company law were answered to a higher standard than those on general business law. This is to be
expected, as the knowledge-based questions in this area can be answered successfully by discussing or
explaining the relevant laws. Questions requiring application of the law were handled less confidently, and even
where answers identified the correct principles, they were often superficial and failed to explore the scenarios in
any depth. In many cases, answers to questions 8 to 10 were simply too brief, often coming to correct
conclusions without stating the rationale underpinning them.
The syllabus area on which candidates perform best is capital and financing. This is beneficial, in that there is
usually at least one question on the paper drawn from this area. However, it can also be a problem if candidates
place too much emphasis on matters relating to capital when they are relevant to other questions. For example,
question 4(a) asked candidates to explain the process of forming a company. While having the necessary capital
in place is a very important aspect, it was inappropriate to discuss only this requirement in the answer to the
exclusion of matters such as having a founders’ agreement, putting a Charter in place and so on.
The subject on which candidates demonstrate least confidence is corporate governance, but it was encouraging
to note that answers on this topic were of a higher quality that similar questions in the past. While it is
recognised that corporate governance is both relatively new to the syllabus and has only become higher profile in
Russia in recent years, it is becoming increasingly relevant. Future candidates can now avail themselves of
several past questions and answers on the ACCA website.
Candidates seem to recognise the benefits of good examination techniques as well as having a sound knowledge
of the subject. Most write in essay form, using sub-headings and short paragraphs, which is the most
appropriate approach for the majority of the questions. Some candidates decided to write tabulated answers to
question 3, which asked for five differences between a labour contract and a contract for service, and this can be
a good approach to such questions, provided it does not detract from the explanations given.
The examination saw some examples of practices to be avoided or modified.
When faced with ten questions, time management is always important. It is always beneficial to attempt all of
the questions and not to spend too long on a few very strong topics to the exclusion of others. Typically, it is
usually easy to score the first 2-3 marks on any questions based on rudimentary knowledge, and these marks
can be vital for marginal candidates.
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The verb in the question is very important. For example, if the question asks the candidate to ‘explain’, this
should always be taken as a need to write more than a list of unsupported phrases. The number of marks
available for a part of a question is a guide to the level of depth required.
Candidates should place little reliance on information relevant to past questions if the subjects with which they
are faced are on different areas. There was some evidence that candidates had come to the examination with
pre-prepared answers to questions that had appeared in previous examination sessions, or possibly topics that
had been predicted by their lecturers.
If questions are sub-divided, long, general introductions should be avoided. The exception here is for scenario
questions, in which valuable marks are awarded for stating the law before applying it to the specific issues in the
scenario. However, it is necessary to apply relevant knowledge, and without doing so it is difficult to score
marks.
Specific Comments
Question One
The question asked candidates to explain the role of legal codes and federal laws.
The quality of answers was reasonable, and most candidates were able to score more than half the marks
available. Credit was given for being able to write a brief definition, supported by an explanation of where these
statutes fall in the hierarchy of the laws of Russia and one or two examples of each. Most candidates correctly
observed that legal codes and federal laws are subordinate to the Constitution but superior to state, district and
municipal laws.
Some candidates wrote largely correct answers but were unspecific in differentiating between the roles of the two
sources of law. In such cases, the answer to question (b) virtually repeated the answer to part (a).
Common mistakes in this question included spending too long describing the legislative process, and writing very
general answers on all of the sources of law in the Russian Federation, thereby going far beyond the scope of the
requirement. Some answers included a description of many specific examples of legal codes and federal laws,
without explaining their role in the legal system.
Question Two
The question required an explanation of the meaning and operation of forfeit and pledge as a means of securing
civil obligations.
Forfeit and pledge have been examined relatively frequently, so candidates were quite well prepared for this
question. Nearly all candidates were able to define forfeit and most described it correctly as a form of
compensation for breach of contract that can be set down in the contract as liquidated damages or decided by a
court. Some answers included the different types of forfeit that can be imposed.
The majority of candidates knew how a pledge operates, with many making the point that it is a form of
collateral contract. To earn high marks it was necessary to explain briefly how a pledge is realised in the event of
a breach of contract.
Some wasted time by listing or even describing all six methods of securing an obligation as set down in the Civil
Code. Some candidates who knew the topic very well spent far too long on the answer, which meant that they
had to be brief on other questions.
A small number of candidates confused forfeit with surety or earnest money, or confused pledge with guarantees.
Question Three
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Candidates were asked to explain five differences between a labour contract and a contract for service between a
company and a service provider.
This question offered perhaps the best prospect of producing a good quality answer based on general knowledge,
and in many cases full marks were awarded.
Although most questions on F4 papers lend themselves to an essay-based approach, it was entirely appropriate
to write tabulated answers in this case. Candidates who did so usually put their points across clearly and with
the appropriate level of depth.
Nearly all answers correctly identified the different sources of law as the Labour Code and the Civil Code. The
majority of candidates discussed very specific rights or employees emanating from a labour agreement, such as
rest hours, holiday entitlement and so on. Some did so at the expense of discussing less obvious differences,
such as the vicarious liability of employers for the acts of their employees and the degree of control exercised over
the manner in which obligations are carried out.
Unsuccessful answers rarely included incorrect information but tended to focus on a different requirement to the
question that was set. For example, some answers included exhaustive descriptions of the content of a labour
agreement, while others had detailed discussions of matters such as redundancy or dismissal. These topics have
been examined in the recent past and were obviously anticipated as potential areas to be examined by the
candidates who wrote about them.
Question Four
Part (a) of the question asked candidates to explain the process through which a joint stock company is formed.
It was possible to obtain full marks in several different ways, as at least one mark was available for any
substantive relevant fact, and there are many more than five such facts that could be included in an answer.
However, to score full marks it was necessary to produce a reasonably broad description of the process rather
than focusing on one or two aspects.
By definition, the process of forming a company must start with an agreement between the founders and must
conclude with State registration. Candidates who omitted these events immediately restricted the number of
marks they could earn.
The most common mistake was to spend too much time discussing the capital requirements for the new
company. Some answers only discussed this aspect of the process to the exclusion of all other aspects, and
could therefore only score a limited number of marks. In particular, there was much evidence of pre-prepared
answers on company capital, but unfortunately for these candidates, the question was on company formation,
and not just capital.
Again, some answers digressed beyond the scope of the requirement, with discussions of the process necessary
to form limited liability companies, no doubt prompted by an eagerness to demonstrate knowledge of the
relatively recent changes in the law.
Part (b) of the question required a discussion of the implications of separate legal personality for the founders
and shareholders of a company, and for the company itself.
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There were some very strong answers to this question, and few had any difficulty in explaining the nature of
separate legal personality. However, it should be noted that it is always necessary to focus answers to the
precise requirement, so those who produced very good descriptions of the meaning of separate legal personality
without going on to explore the ramifications for founders, shareholders and the company were unable to score
full marks.
Question Five
Candidates were asked to explain the legal provisions relating to increasing and decreasing share capital, and to
explain the rules applicable to the distribution of dividends.
This question scored the highest average mark on the paper.
Candidates dealt with the legal processes for increasing and decreasing capital very well.
methods of doing so and scored up to two marks in explaining these.
Most knew the
There was some uncertainty as to whether the general meeting of shareholders or the board of directors have the
legal right to take such decisions. However, most candidates knew of the circumstances under which companies
must reduce their capital and the associated obligations.
Dividend law was also described well, with most answers stating that dividends can only be distributed from net
profits. Some answers discussed the prohibition applicable to dividend payments if a company displays
symptoms of bankruptcy or is in the process of insolvency.
Some candidates spent considerable time discussing what does and does not comprise distributable earnings,
and in a few cases these discussions were supplemented by numerical examples. As the topic is broad, it is not
necessary to drive home individual points in great detail as long as the principle is clearly described.
Question Six
The question required an explanation of how the internal audit commission is appointed, the eligibility criteria
applicable to its members, and its duties and powers.
Most candidates knew that the appointment of the internal audit commission lies within the terms of reference of
the general meeting of shareholders, though a few candidates thought this right belonged to the board of
directors.
Most answers to this part of the question discussed the need for independence, and some answers explored
organisational aspects, such as the necessity to ensure objectivity, even though in most companies the internal
audit committee members are employees.
Generally, most candidates were able to score some marks by describing the duties and powers of the internal
audit commission, though there was a great deal of uncertainty as to the demarcation between its role and that
of the external auditors. Some candidates went as far as to say that the roles of the two bodies are the same,
and some thought that the internal audit commission reported to the external auditors.
Answers that were produced as lists of phrases, unsupported by explanations, could only earn limited marks. In
this respect candidates have to judge how much they can write in the available time. In the context of this
question, identifying a point supported by a brief explanatory sentence is appropriate.
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Question Seven
Candidates were asked to explain the meaning of corporate governance and the parties responsible for corporate
governance, and to discuss the relevance of corporate governance to companies whose securities are not traded
on a recognised capital market.
Answers to this question were better than those to similar questions on previous papers, but this topic continues
to be troublesome for the majority of candidates.
Most candidates produced a brief definition of corporate governance, and credit was given if it was described in
terms of activities relating to direction and control. Quite often, however, candidates thought corporate
governance was entirely concerned with legal compliance or good management practices. Many answers were
vague, and in some cases pure guesswork.
Some candidates supported their answers with practical examples, most often Yukos and Enron. Some referred to
‘recent’ scandals in these companies (Enron filed for bankruptcy in 2001, and Yukos in 2006).
There were many examples of pre-prepared answers, most often framed around the OECD five principles.
Unfortunately, while this could have been an appropriate model for part (b) of the question in discussing how
corporate governance is relevant to non-publicly traded organisations, many candidates chose to deal with this in
part (a), which clearly required an explanation of the parties responsible for corporate governance.
Those who correctly identified the accountabilities of directors and executives often went no further and did not
discuss the role of other bodies or individuals. For example, candidates often knew that corporate governance is
concerned with observing the rights of shareholders and their equitable treatment, but very few mentioned the
role of the tabulation commission in ensuring that proper processes are applied in convening and conducting
general meetings of shareholders.
Most answers sensibly concluded that the principles of effective corporate governance are not just relevant to
companies whose securities are traded publicly, but some limited their justification to the need to promote sales
or the reputation of the company.
Question Eight
This scenario question described a situation in which a buyer wished to purchase chocolates from a supplier, but
relied on prices published on an out-of-date website. Candidates had to explore whether the information
provided was an offer capable of acceptance, and whether legally binding contracts had come into effect.
The legal concepts that had to be applied were public offer, offer, acceptance and counter- offer.
Candidates were divided on the nature of information published on a website that has no interactive ordering
capability. However, even if the candidate did not apply the relevant provisions of the Civil Code correctly, it was
still possible to score marks by stating the relevant law before going on to apply it. Unfortunately, those who did
not state the relevant law but simply wrote down incorrect conclusions lost this opportunity.
Some discussed the nature of a public offer in considerable depth, which was entirely relevant to the first part of
the question, and a good platform for achieving a high mark.
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Most candidates knew that material modification of the terms of an offer, such as insisting on a different price, is
a counter -offer which has the effect of cancelling an original offer and creating a new one. Some candidates also
correctly observed that delivering goods for which no offer has been received may in itself constitute an offer.
A very common mistake was to write a very brief answer, with either correct or incorrect conclusions, without
substantiating the reason for those conclusions. It should be noted that even if the conclusion is incorrect, the
rationale applied may contain information capable of generating marks.
Question Nine
Candidates were asked to apply their knowledge of the law relating to limited liability companies to a scenario in
which two participants sought to withdraw in order to form a competing business. One element of the case was
the obligation of the departing participants not to form a business in direct competition with the company
subsequent to their departure.
Most concluded that the participants had a right to withdraw from the company, and that the remaining
participants enjoyed pre-emption rights to acquire their stakes in the company. Some answers went on to state
that if the remaining participants chose not to exercise such rights, their shares in the business could be offered
to third parties.
An incidental observation not related specifically to the issues in the case is that many candidates seemed
unaware of the changes to the law related to limited liability companies, as they believed that all participants
have a statutory right to withdraw. This is no longer the case, but as the question explicitly stated that the
participants in this instance did have such a right, any misconceptions did not affect the marks awarded.
Part (b) of the question saw candidates divided as to whether a restraint of trade clause will bind those leaving
the company. In this scenario, the correct conclusion was probably the obvious one, in that if the individuals
accepted an obligation not to compete for a specified period of time, that obligation is legally binding on them.
Some candidates argued that if the marketing focus of the new company that was to be created differed
significantly from the mainstream business of the existing company, an obligation not to compete might not bind
the individuals.
Again, the most common mistake was to write a conclusion without supporting it with the underlying legal
principles.
Candidates who produced quality answers often failed to capitalise on even better marks by not following
through their conclusions. For example, the conclusion that the departing participants would be in breach of
their obligation by setting up a competing business was worth one mark, but more marks could be obtained by
describing the actual consequences, such as financial compensation awarded by the court and the basis on
which it might be assessed.
Question Ten
The scenario described a company experiencing financial difficulties. In response to liquidity problems, the chief
executive officer persuaded the board of directors to sell a warehouse at a discount. The company also
purchased obsolete inventory from a supplier in which the chief executive officer’s brother-in-law had a large
equity stake.
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Candidates were asked to discuss the implications of the sale of the warehouse, and the implications of the
purchase of obsolete inventory.
Many candidates suggested that the sale of the warehouse could be a major transaction within the meaning of
the Federal Law on Joint-Stock Companies. Although there was insufficient evidence to draw a definitive
conclusion on this, candidates were right to discuss this and were given credit for doing so. In most cases,
answers failed to examine the consequences of the sale at an undervalue. Some ignored the statutory obligation
of directors to act in the best interests of the company and simply concluded that if it was decided by the board
of directors, they have a right to do it and there is no consequence. This is not the case.
Nearly all candidates who attempted the question concluded that the purchase of the inventory should definitely
be regarded as an interested party transaction, and as such should have been sanctioned by a general meeting of
shareholders, or at minimum by a decision of ‘uninterested’ directors.
Some answers explored the implications of the transactions under insolvency law, given that the question stated
that legal proceedings had commenced against the company.
Once again, many of those who came to correct conclusions did not follow their argument through, and failed to
earn marks that were available for exploring the potential liabilities of those involved.
A minority of candidates approached the question from a purely commercial viewpoint without any discussion of
the law at all.
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