1.

CORPORATE GOVERNANCE
INTRODUCTION
 What is corporate governance?
o It is the process by which corporations are made responsive and accountable to the rights and wishes of
stakeholders, especially shareholders – hence, it is a process and structure by which the company’s business and
affairs are directed and managed, with the goal of enhancement of a long-term shareholder value.
 Why do we need corporate governance?
o Agency costs in company due to separation of ownership and management – see s 157A, Companies Act (CA).
 Managers may have contrary incentives – e.g. remuneration pegged to revenue or growth size and
hence managers tend to seek revenue growth over profit growth.
 Principals (shareholders) incur costs to control agents (managers) due to divergent management-
shareholder objectives and information asymmetry.
 In reality, there are 2 main problems:
 [1] Shirking by managers (because no single manager will receive the full benefit of his work)
– shareholders have no incentives to rectify this (no authority (i.e. not enough voting power
to compel the company to make changes) or not interested).
o Tender offers are the best way to monitor the work of management teams.
o Source of the premium is the reduction in agency costs experienced.
 [2] Self-dealing by managers – managers have substantial interest in preserving their
company’s independence and thus their salaries and status.
 What is good corporate governance?
o Does not mean mere conformance (accountability), but also the goal of enhancing corporate performance
(enterprise) – for the company to do well, the company must take risk, and the risk profile it must assess includes
compliance with corporate governance.
o Principles of good corporate governance – transparency, accountability, integrity, fairness, independence.
 Singapore and the Asian model of governance.
o Previously, we had a merit-based approach in regulating the capital markets in Singapore, where the regulator
was the gatekeeper. In a significant change, we moved to a market-drive, disclosure-based regime of supervision
between 1998 and 2000.
 Changes were made to the CA, the Securities and Futures Act (SFA) and the SGX Listing Manual (LM).
 Also, the first Code of Corporate Governance was issued (CG Code).
o Singapore adopts the outsider-based model – the outsider model of corporate governance is characterised by
clear separation of management control and shareholder ownership, often having dispersed share ownership,
and short-term stakeholders.
 Corporate governance in Singapore is mainly carried out by substantial shareholders, independent non-
executive directors, and strangely, also minority shareholders (through the s 216, CA statutory
derivative action (only recently extended to listed companies)).

2012 CODE OF CORPORATE GOVERNANCE

 The CG Code was first introduced in 2003, and subsequently revised in 2005.
o Since the last review, global events such as the recent financial crisis have highlighted pertinent corporate
governance issues and led to a closer study of corporate governance issues around the world.
o Hence, the 2012 review is meant to continue the effort in promoting a high standard of corporate governance
among listed companies in Singapore – this effort is critical to maintain investor confidence and enhance
Singapore’s reputation as a leading and trusted international financial centre.
 The CG Code has:
o 4 main sections – [1] board matters, [2] remuneration matters, [3] accountability and audit, and [4] shareholder
rights and responsibilities.
o 3 divisions – principles, guidelines, and commentaries.
 Roles and responsibilities of the committees.
o Nominating Committee – 3 minimum members, independent majority (no need to be non-executive), and
independent Chairman.
 Implement procedures to assess board effectiveness and contribution of each director, determine the
evaluation process and procedures of board’s performance, and consultation on new appointments of
directors, resignations of directors and results of performance evaluation.

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  CRITICISM: Weakest committee because appointment is probably by the substantial shareholders –
although there may not be direct association with the substantial shareholder, that noble objective is
already undermined right from the start (during appointment). Furthermore, evaluation process is not
rigorous because these parties probably knew each other beforehand.
 Solution perhaps is that appointment must be cleared by an external party – e.g. SGX?
o Audit Committee – 3 minimum members, non-executive independent majority, including independent Chairman.
At least 2 members including the Chairman should have recent accounting and financial expertise or experience.
 Review audit matters, review financial reports, review adequacy of company’s internal controls, and
establish and implement whistle-blowing policy.
 Was already a mandatory requirement for all listed companies listed in Singapore.
 Introduced as a response to the collapse of Pan-Electric Co Ltd in 1985 – legal proceedings
against errant directors revealed gaping holes in the director’s responsibility for financial
reporting, maintenance of internal controls and role of the auditor in detection and prevention
of fraud.
 Amcol Holdings Ltd debacle.
 SGX suspended Amcol’s shares from trading in June 1996 after discovering irregularities in the
financial management of the listed company.
 Debacle exposed the deficiencies of the Audit Committee in practice.
o SGX immediately issued a new Chapter 9B, LM (now r 719(2), LM) to strengthen the
powers of the Audit Committee, e.g. giving them power to initiate and review
investigations into any suspected fraud or irregularity that threatens the financial
position of the company.
o Remuneration Committee – 3 minimum members, non-executive independent majority, including independent
Chairman.
 Make recommendations to the board for a framework of remuneration and specific remuneration
packages for each director and the CEO, to review and cover all aspects of directors’ remuneration, and
to review remuneration of senior management.
 CRITICISM: Committee may not be well-versed in setting remuneration rates. Even if external
consultants are sought, consultants themselves may not be familiar with the industry and may have to
be guided by the board, and because they are paid by the board, there may be some deference.
Furthermore, directors are often paid with share-options and their gains from dividends may
circumvent this remuneration check.
 Stock options not a proper compensation mechanism because it sharply misaligns the
incentives of the directors and those of the shareholders during the designated time frame –
loyalty to the company vs. loyalty to his own interest; e.g. short-term boosting of the
company’s stock prices (through high risk investments) that may not benefit the company in
the long term.
o Note: Other committees for big companies include Risk Management Committee, Executive Committee, etc.

[1] BOARD MATTERS

 Board’s conduct of affairs.

o Principle 1, CG Code: The board must lead and control the company, is collectively responsible for the long-term
success of the company, and must work with management to achieve this objective.
o Guideline 1.1, CG Code: Board’s role is to:
 Set strategic objectives.
 Establish effective controls.
 Review management performance.
 Identify key shareholder groups.
 Understand and meet obligations to shareholders and other stakeholders.
 Consider sustainability issues.
o Guideline 1.3, CG Code: Board may delegate authority to make decisions to any board committee, but cannot
abdicate its responsibility. Any such delegation must be disclosed.
o Guideline 1.6, CG Code: Incoming directors should receive “comprehensive and tailored induction”.
 All directors should also receive regular training, particularly on relevant new laws, etc.
 The company is responsible for arranging and funding the training.
 Rationale – directors are the major integral part of an organisation, they have major role in the decision
making process and thus the success or failure of an organisation is largely dependent upon them.
 Hence, companies should play a more proactive role in providing continuous training for
directors – important so that directors will adhere to good corporate governance services.

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  Note: This is a 2012 amendment.
 MAS recommends that companies arrange and fund training for new and existing directors,
and disclose the induction, orientation and training provided in its annual report. Furthermore,
 MAS introduces a new requirement for the Nominating Committee to review and make
recommendations to the board on training programmes.
 Board composition and guidance.
o Principle 2, CG Code: There should be a strong and independent element on the board able to exercise objective
judgement on corporate affairs independently (in particular, from management/10% shareholders).
 No individual/small group of individuals should be allowed to dominate the board’s decision making.
o Guideline 2.1, CG Code: Independent directors should make up at least 1/3 of the board.
o Guideline 2.2, CG Code: Independent directors should make up at least ½ of the board where:
 Chairman and CEO is the same person; or
 Chairman and CEO are immediate family members; or
 Chairman is part of management; or
 Chairman is not an independent director.
 Rationale – strong and independent element on the board is important to enable the board to exercise
judgement, and in some situations, it is extremely important that the board should not be dominated
by any individual or groups of individuals.
 In the 4 specified situations, the possibility of conflict of interest arising is more pronounced.
 Note: This is a 2012 amendment.
 MAS will allow 5 year transition period to allow time for changes (starting on 01/05/2016).
o Guidelines 2.3 and 2.4, CG Code: Definition of “independent” director – negative definition, i.e. directors are not
independent if they have:
 [a] Relationship with 10% shareholder.
 Where the director or immediate family is a 10% shareholder of the company.
 Where the director is/has been directly associated with a 10% shareholder of the company in
the “current or immediate past financial year”.
o “Directly associated” is when the director is accustomed or under an obligation,
whether formal or informal, to act in accordance with the directions, instructions or
wishes of the substantial shareholder in relation to the corporate affairs of the
corporation, not to be considered “directly associated” when the appointment of the
director in question was proposed by the substantial shareholder.
 [b] Relationship with external organisations.
 3-year cooling off period when the director or immediate family member was employed by
the company or any of its related corporations.
 1-year cooling off period when there are any significant payments or material services received
from the company or any of its related corporations.
o Payments aggregated over any financial year in excess of $200,000 should generally
be deemed as a “significant payment”.
o “Material services” shall be determined by the company involved.
 [c] Tenure on the board.
 9-years limit to independence – the board should have discretion to determine the directors’
continued independence once the independent director has served for more than 9 years.
 Rationale – refer to below at Independent Directors.
 Note: This is a 2012 amendment.
o Guideline 2.6, CG Code: Board diversity – board and board committees should compromise of directors who as
a group provide an appropriate balance and diversity of skills, experience, gender, and knowledge of the
company.
o Guideline 2.7, CG Code: Non-executive directors should constructively challenge and help develop proposals on
strategy, as well as review the performance of management.
o Guideline 2.8, CG Code: Non-executive directors are encouraged to meet regularly without the presence of
management so as to facilitate a more effective check.
o Note: Independent directors.
 Independent directors feature prominently in corporate governance codes because they are essential
in providing guidance, supervision as well as checks and balances for effectively corporate governance
to protect the overall interests of the company.
 Chairman and CEO.
o Principle 3, CG Code: There should be a clear division of responsibilities between the leadership of the board
and the executives responsible for managing the company's business.
 No one individual should represent a considerable concentration of power.

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 o Guideline 3.1, CG Code: Chairman and CEO should be separate persons to ensure balance of power, increased
accountability, and greater capacity for the board to make independent decisions.
o Guideline 3.2, CG Code: Role of the Chairman – ensure effectiveness of the board, set agenda, promote culture
of openness and debate, ensure directors receive complete information, ensure effective communication with
stakeholders, encourage constructive relation between board and management, facilitate contribution by non-
executive directors, and promote a high standard of corporate governance.
 Board membership.
o Principle 4, CG Code: There should be a formal and transparent process (through the Nominating Committee)
for the appointment and re-appointment of directors to the board.
o Guideline 4.1, CG Code: Nominating Committee should be established for all board appointments.
o Guidelines 4.3 and 4.4, CG Code: If director has multiple directorships, he must ensure that he sufficient time
and attention is given to the affairs of each company. The Nominating Committee should decide the maximum
number of directorships that a director can hold (since the Nominating Committee’s overall mandate is to
recommend the appointment of directors who can serve the board effectively).
 Rationale – directors are expected to allocate sufficient time/effort so as to oversee their companies
effectively. The more directorships they hold, the less able they are to carry out their duties
 Note: This is a 2012 amendment.
o Guideline 4.5, CG Code: Alternate directors are discouraged – directors should not appoint alternate directors
except for limited periods and in exceptional case.
 Rationale – directors usually appoint alternate directors sometimes when they are unable to attend,
or on specific projects to provide the technical expertise required. However, there are concerns that:
 Alternative directors unfamiliar with company affairs may not be appropriately qualified.
 Alternative directors are not approved by the shareholders.
 Having alternative directors is poor corporate governance – appointment suggests that it is
questionable whether the original director is able to discharge his full fiduciary duties.
 Note: This is a 2012 amendment.
o Guideline 4.7, CG Code: Key information regarding the directors should be disclosed in the Annual Report.
 Board performance.
o Principle 5, CG Code: There should be a formal annual assessment of the effectiveness of the board (by the
Nominating Committee) as a whole and its board committees and the contribution by each director to the
effectiveness of the board.
 Access to information.
o Principle 6, CG Code: Directors should be provided with complete, adequate and timely information (by
management) prior to board meetings and on an on-going basis so as to enable them to make informed decisions
to discharge their duties and responsibilities.

INDEPENDENT DIRECTORS

 Introduction.
o Independent directors feature prominently in corporate governance codes because they are essential in
providing guidance, supervision as well as checks and balances for effectively corporate governance to protect
the overall interests of the company.
o Agency costs problem – requires board to supervise the management of the company.
 However, the board is usually also vested with the management powers of the company beyond its
supervisory role – the conflicting roles of exercising management functions and monitoring
management only serve to increase agency costs as the directors lose incentive to monitor themselves.
 This problem is made worse when we realize that the significance of the board’s role in addressing
agency costs is increased in Singapore, where, unlike other jurisdictions using the outsider model, there
is no active market for corporate control.
o Hence, in view of these conflicting roles of the board, directors who are independent are in a better position to
monitor the management by developing objective judgments.
 Furthermore, the recent “Report of the Steering Committee for Review of the Companies Act” proposes
to change the CA to expressly provide in s 157A, CA that directors can be responsible for just supervision
of the management of the company – this increases the supervisory role of the board and hence the
need for independent directors.
 Role of the independent directors.
o Monitoring function – traditional role.
 Having independent directors monitoring management would reduce such an issue because
independent directors have less incentive to act contrary to shareholders’ interest.
 Eugene F. Fama and Michael C. Jensen, “Separation of Ownership and Control” (1983)

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  The role involves reviewing performance of senior management, including conflict of interest
transactions, and monitoring company’s financial processes, compliance standards with regulatory
requirements, and act as an auditing function.
o Managerial function beyond mere monitoring, as evident in s 157A, CA.
 Increased specialist knowledge.
 Complex business decisions often require expertise in varied fields from law, accounting,
management, finance, etc.
 Outside perspective.
 Psychological studies suggest that insiders working and making decisions together do suffer
from “cognitive biases”, or “group-think”. It is not deliberate malice or self-interest, but rather,
falling into similar pattern of thought which can lead to bias assessment.
 Resource gathering role.
 The reputation and presence of independent directors can promote the firm’s good image to
3rd parties by ensuring integrity in the organisation.
 Improvement of management’s thought process.
 Managers, aware that they will have to report their recommendations and decisions to the
board should be more inclined to put in more effort to ensure that they possess the necessary
facts and understanding, streamlining the thought processes of management, allowing
transparent articulation of issues and solutions.
 Board meetings without presence of management.
 In Singapore, corporations are instructed to appoint a lead independent director where the
Chairman is not independent.
 He should organise periodic meetings for the rest of the independent directors without the
presence of other directors. In such meetings, he is to solicit feedback from the other
independent directors.
 In particular, the Audit Committee, is also directed to hold annual meetings with both the
external and internal audit teams without the presence of management.
 Issues remaining with regard to independent directors.
o No conclusive evidence that a board dominated by independent directors actually help shareholders enhances
their wealth.
 A long-term study (Sanjai Bhagat and Bernard Black, “The Non-Correlation between Board
Independence and Long-Term Firm Performance”) found that there was no correlation between board
independence and long term performance of large American firms.
 A study of 260 listed companies in Singapore shows that regression in the proportion of independent
directors has a positive relationship with Tobin’s Q but negative with ROA.
 This means that a board having a higher proportion of independent directors boosts market
confidence in the monitoring role of the board in reducing agency problems – more market
confidence  boosts shares  boosts values of the firm.
 However, the negative ROA suggests that too much outside interference may have a negative
impact on the accounting performance of the company.
 A growing body of economics research has been unable to find any such connection between board
independence and corporate profitability.
 In fact, it suggested the opposite – “firms with supermajority independent boards perform
worse than other firms, and that firms with more inside than independent directors perform
about as well as firms with majority (but not supermajority) independent boards”.
o Cost of excessive independence.
 Having excessively powerful or numerous independent elements on the board, which may be overly
focussed on the monitoring function, could impugn on the smooth management of the company.
Emphasising the monitoring function at the expense of the board’s managerial function is not the path
to improving corporate governance.
 Affecting diversity, collegiate and trust.
 Corporate decisions tend to be made more efficiently in highly collegial groups – adding
outsiders to the mix could spoil this balance of consensus.
 Adversarial relationships.
 Taken to its extreme, excessive independence and excessive emphasis on monitoring may
contribute to an adversarial relationship developing between both groups of insiders and
outsiders – independent directors may “meddle too much”.
 Effective boards need certain level of trust between management and board.
 Distrust and strong adversarial relationship chill communication, leading to manipulation or
withholding information from the independent directors, limiting their ability.
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  Information monopolies and structural holes.
 Excessive independent could ironically end up with a totally opposite effect – a board with
only 1 insider, the CEO, could actually empower the CEO instead of constraining him due to
the monopoly of information that he possesses.
 The CEO would be able to “monopolize the flow of information and executive decision making”,
creating a structural hole.
o Without any executive or insider directors, independent directors will lack access to
management personnel aside from the CEO – they’ll be totally reliant on information
presented to them by the CEO and will find it hard to challenge him.
 Financial costs.
 Tightening of definition of independent directors and other rules.
o These reforms mean that it will be harder for companies to find individuals capable
of serving as independent directors (an especially pertinent point in Singapore where
qualified individuals are already minimal), and exacerbated by the risk of legal liability.
o Likely that companies will have to offer higher director pay rates.
 Also, cost of restructuring boards and implementing new processes.
 Furthermore, also miscellaneous and ancillary costs – including the administrative costs of
having numerous board committees, holding extra independent director meetings, etc.
 China Sky Chemical Fibre (2011)
o Issue of an independent director who provided accounting services to the company – potential conflict of
interest for the independent director to review his own firm’s work as the Chairman of the Audit Committee.
 SGX (2012)
o Issue of an independent director (Davinder Singh, CEO of Drew & Napier) representing the company in a lawsuit.
o SGX had to re-designate Singh as non-independent, and he stepped down from the SGX Regulatory Conflicts
Committee. Also, no legal fees have been paid to Singh yet on this lawsuit.

[2] REMUNERATION MAT TERS

 Procedures for developing remuneration policies.

o Principle 7, CG Code: There should be a formal and transparent procedure for developing policy (by the
Remuneration Committee) on executive remuneration and for fixing the remuneration packages of individual
directors.
 No director should be involved in deciding his own remuneration.
o Guideline 7.1, CG Code: Role of the Remuneration Committee – see above and Introduction.
o Guideline 7.2, CG Code: Remuneration Committee recommends remuneration framework to the board for
endorsement.
 CRITICISM: Why is the board still eventually approving of its own pay? Lack of independence. Here’s
where the say-on-pay regulations should come in – endorsement from shareholders instead.
o Guideline 7.3, CG Code: Remuneration Committee should seek expert advice inside and/or outside if needed.
 Level and mix of remuneration.
o Principle 8, CG Code: The level and structure of remuneration should be aligned with the long-term interest and
risk policies of the company, and should be appropriate to attract, retain and motivate (a) the directors to
provide good stewardship of the company, and (b) key management personnel to successfully manage the
company.
 However, companies should avoid paying more than is necessary for this purpose.
 Note: This is a 2012 amendment.
o Guideline 8.3, CG Code: Remuneration of non-executive directors should be appropriate to the level of
contribution and responsibilities of the directors (taking into account effort and time spent).
 Compensation should not be excessive that their independence may be compromised – Remuneration
Committee to ensure that existing key relationships will not affect independence and objectivity of the
remuneration consultants.
 Note: This is a 2012 amendment.
 Disclosure on remuneration.
o Principle 9, CG Code: Every company should provide clear disclosure of its remuneration policies, level and mix
of remuneration, and the procedure for setting remuneration, in the company's Annual Report.
 It should provide disclosure in relation to its remuneration policies to enable investors to understand
the link between remuneration paid to directors and key management personnel, and performance.
o Guideline 9.1, CG Code: Current remuneration disclosure practice.
 Companies to disclose the link between remuneration and performance of executive directors and key
management personnel.
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  Remuneration of each individual director and the CEO on named basis and aggregate and total
remuneration paid to the top 5 key management personnel (who are not directors or the CEO)
within bands of S$250,000.
 Within bands of S$250,000 – enhanced disclosure of link between the remuneration and performance
is important in ensuring that companies do not adopt remuneration policies which encourage
employees to take on excessive risks to the detriment of the long-term interests of the company.
 However, the Committee is mindful that full disclosure may lead to negative impact on
competition for talent given the tight labour market in Singapore.
 Note: This is a 2012 amendment.
o Guideline 9.3, CG Code: Must also disclose the remuneration of employees who are immediately family
members of the director/CEO whose remuneration exceeds $50,000/year.
 Citigroup (2012)
o Issue that CEO’s retention pay was not linked to any financial matrix, and the Institutional Shareholder Services
(an influential proxy advisory service) recommended shareholders vote against the compensation package.
o 55% of shareholders voted against the pay packages.
 Hong Fok Corp (2012)
o Issue that there was no Remuneration Committee on the board to assess the huge remuneration packages of
the key management. When the key management personnel were asked about their respective roles, they
provided vague and unsatisfactory responses.

[3] ACCOUNTABILITY AND AUDIT

 Accountability.
o Principle 10, CG Code: The board should present a balanced and understandable assessment of the company's
performance, position and prospects.
 Risk management and internal controls.
o Principle 11, CG Code: The board is responsible for the governance of risk.
 The board should ensure that management maintains a sound system of risk management and internal
controls to safeguard shareholders' interests and the company's assets.
 The board should also determine the nature and extent of the significant risks which the board is willing
to take in achieving its strategic objectives.
o Guideline 11.2, CG Code: Review of adequacy and effectiveness should be done at least annually, and can be
carried out internally or with the assistance of any competent 3rd parties.
o Guideline 11.3, CG Code: Board must disclose in the Annual Report whether it has received assurance from the
CEO and CFO.
 Note: This is similar to the disclosure requirement under r 1207(10), LM – see below.
o Guideline 11.4, CG Code: Board oversight on risk management, but CEO and CFO to provide assurances on the
effectiveness of the risk management and internal control systems.
 Rationale – addressing concerns that this may result in a delegation of the board’s responsibilities
regarding risk management.
 Board will still be ultimately responsible for the risk governance of the company, and should
determine the nature and extent of risks which the company may undertake.
 Board must also ensure that management maintains a sound system of risk management and
internal controls.
 Note: This is a 2012 amendment.
 Role of the board in the governance of risk should comprise the following:
 Determining approach to risk governance for the company.
 Setting and instilling the right culture throughout the company for effective risk governance.
 Ensuring that the risks relevant to the company are properly identified – e.g. internal risks
inherent in the company‘s business model and strategy, and risks from external factors.
 Monitoring company‘s exposure to key risks that could undermine its strategy, reputation or
long-term viability. Also, provide for periodic environmental scans to gauge any possible
impact on the risk profile of the company.
 Ensuring management put in place action plans to mitigate risks identified where possible.
 Providing oversight of the risk management system, and system of internal controls, and
reviewing their adequacy and effectiveness at least on an annual basis.
 Board may choose to establish a separate Board Risk Committee or other appropriate means
to assist it with the above responsibilities.
 Role of management in the management of risks is to:

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  Design, implement and monitor the risk management and internal control systems of the
company in accordance with board policies.
 Identify the risks relevant to the business of the company and manage the business in
accordance with risk policies/directions from the board.
 Identify changes to risks or emerging risks and promptly notify the board.
 Ensure the quality, adequacy and timeliness of the information that goes to the board.
o China Aviation Oil (2004)
 Issue of option trading having started without establishing risk management policies. The board failed
to properly account for and disclose speculative derivatives in its financial statements, and also did not
fully implement the respective duties on risk management and trading control.
o Note: Internal controls.
 Internal controls is a designed process implemented in order to provide reasonable assurance in
ensuring effectiveness and efficiency of the business operations of the company, the reliability of
financial reporting, and compliance with applicable laws and regulations.
 Requirement under s 199(2A), CA.
 Singapore-incorporated public companies must devise and maintain a system of internal
controls to provide sufficient and reasonable assurance that the company’s assets are
safeguarded, and that transactions are properly authorised and recorded  accountability.
 Requirement under r 719(1), LM (Internal Controls).
 A company should have a robust and effective system of internal controls, addressing financial,
operational and compliance risks.
 Must report back to the Audit Committee and the board – the Audit Committee may
commission an independent audit on internal controls for its assurance, or where it is not
satisfied with the system of internal control.
 Disclosure requirement under r 1207(10), LM (Annual Report Disclosure).
 Opinion of the board with the concurrence of the audit committee on the adequacy of the
internal controls, addressing financial, operational and compliance risks.
o Note: “Adequacy” seems to be a lower standard than “robust and effective”.
 It is no longer just “comply or explain” – requires a positive statement.
o This is very important!
 SGX Advisory Note 2012 on what the board must do.
o Must give “opinion”, not just “believe”.
o Must give specific reference to “financial, operational and compliance controls”.
o Must state basis for its opinion or scope of the review by the board and Audit
Committee.
 If no clean opinion, must disclose areas of concerns and how they will be
addressed.
 Opinion should be in the directors’ report.
 Many examples of failed internal controls – e.g. Barings Bank ($1.3 billion trading losses by Nick Leeson
because he was able to control the accounting entries for the stocks that he traded), Barclays Bank (no
system and control relating to its LIBOR and EURIBOR submissions), Enron (consistent profits made the
board turn a blind eye to increasingly complex transactions).
 Some examples of specific internal controls.
 Operations Manual.
 Rigorous executive training.
 Rigorous assessment of responsibilities.
 Alignment of remuneration policies with long term strategic goals.
 Strict separation of accounting duties.
 Auditor independence.
 Tough rules to enforce compliance.
 Audit Committee.
o Principle 12, CG Code: The board should establish an independent Audit Committee with written terms of
reference which clearly set out its authority and duties.
o Guideline 12.1, CG Code: Role of the Audit Committee – see above.
o Note: Auditor independence.
 Strengthening auditor’s independence is another pillar of corporate governance – seen in the
Accountants (Public Accountants) Rules.
 Generally, an audit firm shall not perform book-keeping or payroll services, etc. that may impair auditor
independence if the audit client is a public company.

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  If audit client is a public company, the audit firm shall conduct a review with the audit client to ensure
that auditor independence is not compromised if:
 Amount of fees received by it from non-audit services is 50% or more of total audit fees.
 Total size of the non-audit fees paid for the services is significant.
 If audit firm is a public company, then audit firm must undertake a review to ensure any threat of self-
interest is insignificant (if the fees are 5% or more of the firm’s total fees).
 For a private company, the threshold is 15% or more.
 Internal audit.
o Principle 13, CG Code: The company should establish an effective internal audit function that is adequately
resourced and independent of the activities it audits.

[4] SHAREHOLDE R RIGHTS AND RESPONSIBILITIES

 Shareholder rights.
o Principle 14, CG Code: Company should treat all shareholders fairly and equitably, and should recognise, protect
and facilitate the exercise of shareholders' rights, and continually review and update such governance
arrangements.
o Rationale – exercise of shareholder rights a key ingredient for responsible ownership.
 Shareholders can play an important role in enhancing corporate governance if they exercise their rights
appropriately – a shareholder’s vote at general meetings is a means for a shareholder to express his
views and expectations to the board, and his input will help set the tone and expectation for the
governance of the company.
 However, shareholders should be cognisant of not overreaching into management discussions and
focus the annexure on the relationship between shareholders and company boards.
o Note: This is a 2012 amendment.
 Communication with shareholders.
o Principle 15, CG Code: Company should actively engage their shareholders and put in place an investor relations
policy to promote regular, effective and fair communication with shareholders.
 Conduct of shareholder meetings.
o Principle 16, CG Code: Company should encourage greater shareholder participation at general meetings of
shareholders, and allow shareholders the opportunity to communicate their views on various matters affecting
 Companies to put all resolutions to vote by poll and make an announcement of the detailed results.
 Rationale – voting by poll and the disclosure of results will also lead to greater transparency of the level
of support for each resolution and encourage greater shareholder participation at general meetings.
 Note: This is a 2012 amendment.
 Oriental Century (2009)
o Shareholder owned 29.9% stake in the company, and had relied primarily on the company’s IPO prospectus
without conducting any separate checks. Shareholder was also not represented on the management.
o After the CEO confessed to having inflated sales and cash balance, and had diverted unspecified sums to an
interested party, the shareholder had to write of S34.6 million of its worthless stake.
 Hong Fok Corp (2012)
o Minority shareholders attempted to reject the directors’ report and audited results by show of hand. After 4 –
5 resolutions were voted down by show of hand, the chairman demanded a poll, and the resolutions passed.
o Issue of possible unfair situation for the minorities if the chairman is allowed to switch to poll-voting after the
results of the vote by show of hand is unsatisfactory.

SGX LISTING MANUAL

ENFORCEABILITY OF LI STING RULES

 The Listing Manual (LM).

o Provides for all listing regulations and requirements.
o SGX has absolute discretion as to application and interpretation of the rules.
o For securities trading under the SGX:
 Mainboard (Listing Manual).
 Catalist (Catalist Listing Manual).
 What happens when there is contravention of the rules in the LM?
o [1] SGX and [2] the courts have certain enforcement measures, and also [3] SFA has civil/criminal liabilities.
 [1] The SGX.
o SGX is the main body which administers, regulates and monitors compliance with the requirements of the LM.
9
 o SGX also maintains surveillance of all trading activities on the SGX, conducts investigation on suspected
infractions and complains, and executes disciplinary and enforcement measures.
o Powers of SGX to halt trading, suspend, and delist a listed company.
 r 1302, LM: Trading halt and voluntary suspension.
 (1) May be granted by SGX upon request (on SGX’s discretion).
 (2) Trading halt not to exceed 3 market days or such short extension as SGX agrees.
 (3) SGX may change trading halt to a suspension.
 30 minutes for dissemination of information – to enable the listed company to disclose
material information.
 r 1303, LM: Suspension of trading by SGX (on SGX’s discretion).
 (1) Percentage of securities in public’s hands less than 10%.
 (2) Assets now consist wholly or substantially of cash or short-dated securities.
 (3) Unable to continue or demonstrate that it is able to continue as going concern – e.g. when
there is an application to place the issuer (or significant subsidiary) under judicial management,
or for liquidation, or when issuer is unable to assess its financial position and inform the market
accordingly.
 (4) Inability/unwillingness to comply with listing rule SGX’s discretion.
 (5) SGX finds it necessary/expedient in the interest of maintaining a fair, orderly and
transparent market.
 (6) SGX finds it appropriate to do so.
 (7) SGX releases an announcement relating to the issuer that SGX finds it market sensitive.
 r 1305, LM: Delisting by SGX (on SGX’s discretion).
 (1) Inability/unwillingness to comply with listing rules.
 (2) SGX finds it necessary/expedient in the interest of maintaining a fair, orderly and
transparent market.
 (3) SGX finds it appropriate to do so.
 (4) No listed securities.
 rr 1307 and 1309, LM: Voluntary delisting as applied by the issuer (subject to SGX’s agreement).
 r 1307(1), LM: Shareholders’ approval must be obtained.
 r 1307(2), LM: Must be approved by special majority of 75%.
 r 1307(3), LM: Must not be voted against by 10% or more in nominal value of share.
 r 1309(1), LM: Issuer should provide a reasonable exit alternative (normally in cash) to the
shareholders and holders of any other classes of listed securities to be delisted.
 r 1309(2), LM: Issuer should appoint independent financial adviser to advise it on the exit offer.
 [2] Statutory sanctions under the SFA.
o Power of the courts.
 s 25, SFA: Power of court to order observance or enforcement of business rules or listing rules.
 Note: This is the method a minority shareholder aggrieved by the failure can take to compel
an errant company to comply with the rules in the LM.
o With regard to the interpretation of the LM, even though r 105, LM states that the
“rules are interpreted, administered and enforced by SGX”, it does not mean that it
ousts the jurisdiction of the court to review SGX’s interpretation of the LM (Zephyr
Holdings v Jack Chia (Australia) Ltd & Ors (1988)).
o However, if SGX had chosen to waive compliance with a rule after adopting the
correct interpretation of a rule, it may be that the court will have no jurisdiction in
the matter (Kwikasair Industries v Sydney Stock Exchange (1968)).
 s 325, SFA: Power of court to make the necessary orders against a person who is in breach of business
rules or listing rules.
 s 325(d)(i), SFA: (For continuing breach) an order restraining a person from carrying on
business to deal in securities or trade in futures contracts.
 s 325(d)(ii), SFA: An order restraining a person from acquiring/disposing/any dealing with
securities or trading in any futures contracts.
 s 325(d)(iii), SFA: An order to appoint a receiver over the property – receiver can acquire and
take possession, deal, and has any such powers over the property.
 s 325(d)(iv), SFA: An order declaring the a contract made in violation void or voidable.
 s 325(d)(v), SFA: An order directing a person to do/refrain from doing a specific act for the
purpose of securing compliance with any other orders in this section.
 s 325(d)(vi), SFA: Any ancillary order deemed desirable in the consequence of making of any
of these orders in this section.

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  [3] s 203, SFA is the statutory backing to the disclosure requirements under the LM or requirements by the SGX.
o A breach of s 203, SFA (due to the failure to disclose material information intentionally, recklessly, or negligently)
results in civil liabilities and civil penalties under the SFA.
o Note: Under s 331, SFA, a director will be personally guilty of a criminal offence committed by the company if it
was done with his consent or connivance or is attributable to any neglect on his part.
 Note: Rules focused here will be Continuing Listing Obligations (Chapter 7, LM), Changes in Capital (Chapter 8, LM),
Interested Person Transaction (Chapter 9, LM), Acquisitions and Realisations (Chapter 10, LM), Takeovers (Chapter 11,
LM), and Circulars and Annual Reports (Chapter 12, LM).

CONTINUING LISTING OBLIGATIONS (CHAPTER 7, LM)

 In general, continuing listing requirements classified under 3 main categories.

o Classified as: [1] immediate public announcements, [2] periodic reports, and [3] other obligations of a non-
disclosure nature.
o It is mainly set out in Chapters 7, 8, 9, 10, 11 and 12, LM.
 The statutory backing for SGX Listing Manual found under s 203, SFA.

[1] IMMEDIATE PUBLIC ANNOUNCEMENTS

DISCLOSURE OF MATERIAL INFORMATION

 Public announcement via SGXNET.

o r 702, LM mandates that a listed company must release all required announcements via SGXNET unless
otherwise specified.
o r 703, LM sets out the general principles of disclosure rules – announcements should be made where necessary
to avoid the establishment of a false market in the securities of the listed company or in circumstances where
such information would likely materially affect the price of the securities.
 To comply with this, must observe SGX’s Corporate Disclosure Policy set out in Appendix 7.1, LM – see
the details below.
 “Information to be disclosed to avoid false market or materially affect share price”.
 Note: This includes shares of the issuer, subsidiaries and associated companies.
 Paragraph 8 of Appendix 7.1, LM states a non-exhaustive list of matters which are likely to
require immediate disclosure under r 703, LM:
o Joint venture, merger or acquisition.
o Declaration or omission of dividends or the determination of earnings.
o Firm evidence of significant improvement or deterioration in near-term earnings
prospects.
o Subdivision of shares or stock dividends.
o Acquisition or loss of significant contract.
o Purchase or sale of a significant assets.
o Significant new product or discovery.
o Public or private sale of a significant amount of additional securities of the issuer.
o Change in effective control or a significant change in management.
o Call of securities for redemption.
o Borrowings of a significant amount of funds.
o Occurrence of an event of default under debt or other securities or financing or sale
agreements.
o Significant litigation.
o Significant change in capital investment plans – i.e. building of factories, increasing
plant and machinery, and increasing of production lines.
o Significant dispute or disputes with sub-contractors, customers or suppliers, or with
any parties.
o Tender offer for another company’s securities
o Valuation of the real assets of the group that has a significant impact on the group’s
financial position and/or performance.
 Copy of the valuation report must be made available for inspection at listed
company’s registered office for 3 months from date of announcement.
 CRITICISM: There is no definition on what is “material” information.
o However, Paragraph 4 of Appendix 7.1, LM states that “material information”
includes information, known to the issuer, concerning the issuer's property, assets,

11
 business, financial condition and prospects; mergers and acquisitions; and dealings
with employees, suppliers and customers; material contracts or development
projects, whether entered into in the ordinary course of business or otherwise. It also
includes information concerning a significant change in ownership of the issuer's
securities owned by insiders, or a change in effective or voting control of the issuer,
and any developments that affect materially the present or potential rights or
interests of the issuer's shareholders.
 Exceptions – non-applicability of Part II, Chapter 7, LM (covers both rr 703 and 704, LM) on immediate announcement.
o r 703(2), LM: If doing so would breach the law – e.g. secrecy under the Banking Act, or confidentiality terms in
contracts, or other confidential information protected under the law.
o r 703(3), LM: Listed company may temporarily refrain from disclosing information if all 3 conditions in this Rule
are satisfied:
 [1] A reasonable person would not expect the information to be disclosed;
 [2] The information is confidential; and
 [3] The information falls within one of the following categories:
 Contains an incomplete proposal or negotiations.
 Contains matters or supposition or is insufficiently definite to warrant disclosure.
 Is generated for the internal management of the entity.
 Is a trade secret.
o Note: These [1], [2] and [3] are conjunctive (hence, should any of the conditions cease to be satisfied, the
exception will similarly cease to be available, and the issuer must disclose the information immediately).
 They are allowed because immediate disclosure would prejudice the listed company’s ability in its
pursuit of corporate objectives or when matters are uncertain.
o But disclosure would have to be made if rumours in the market develop regardless (Paragraph 3 of Appendix
7.1, LM and Paragraphs 15, 16 and 17 of Appendix 7.1, LM (“Clarification or Confirmation of Rumour”).
 Also, even though disclosure may be temporarily not required, the strictest confidentiality must be
maintained.
 SGX’s Corporate Disclosure Policy.
o Appendix 7.1, LM sets out SGX’s Corporate Disclosure Policy, which generally covers obligations under r 703, LM.
 [1] Immediate disclosure of material information which is likely to have a significant effect on the price
of the company’s securities or where such information would be considered as important by a
reasonable investor in his investment decision.
 [2] Announcements made must be made simultaneously to the business and financial press and to the
SGX during normal trading hours.
 [3] If there are rumours relating to trading in the securities market, a listed company must give a
confirmation or denial of any rumour or report which is likely to cause an effect on the price of the
company’s securities.
 [4] Listed company has to disclose or clarify rumours which concern unusual market movement or
trading activities triggered by a leak of sensitive information.
 [5] Proper action must be taken by listed companies to curb insider trading – e.g. company policies to
restrict officers from trading until public disclosure of price sensitive information.
 [6] Listed companies are not permitted and should refrain from making unwarranted promotional
disclosures or announcements designed to gain publicity beyond that which is necessary for providing
investors with information to make an informed investment decision.
 Case study on the golden rules on proper framing of statements – Zhongguo Powerplus.
o Chairman guaranteed that the company would have a double-digit growth in the next 3 – 5 years.
o SGX’s actions: Issued a statement noting that no director or representative of a listed company should make
statements that mention profit guarantees without disclosing the basis for such statements.
 Must exercise due care, and ensure that the statements are properly substantiated.
 Case study on failure to announce material information via SGXNET – Trek 2000.
o Facts: On 19/01/2006, Trek 2000 was reported by Reuter that it expected sales and earnings to grow in the near
future. Trading volume increased, and on 20/01/2006, SGX requested Trek 2000 to announce the contents of
the media but Trek 2000 refused until much later.
o HELD: Trek 2000 breached rr 702 and 703, LM.
 Selective disclosure of material information to the media which materially affected the price or value
of its securities, and failure to announce information via SGXNET on a timely basis.
 Failure to announce material information immediately despite being alerted by the SGX.
o SGX’s actions: Reprimanded Trek 2000, and required Trek 2000 to put in place steps to ensure full discharge of
its continuing obligations in a true and appropriate manner.

12
 o MAS’s actions: Civil penalty of S$75,000 (without court action), and Trek 2000 admitted to contravening s 203(2),
SFA by negligently failing to notify SGX of earning projects.
 Case study on failure to announce material information via SGXNET – Chuan Soon Huat.
o Executive chairman of the company suffered a stroke in December 2003 but the board did not announce this.
He was incapacitated and did not attend any meeting in 2004 and 2005. However, in the company’s annual
report, he was still stated as having set the agenda for each board meeting and ensured information flow
between management and the board.
o HELD: 6 of 7 directors arrested, but eventually charged under s 157, CA for failing to use reasonable diligence in
the discharge of their duties as directors by failing to disclose a change in effective control of the company to
the SGX. Executive directors were fined $5,000 and disqualified from acting as a director for between 3 to 5
years, and the independent directors were fined $5,000 and disqualified for 1 year.
 Case study on failure to announce material information via SGXNET – Airocean.
o In the trial court, directors were convicted and sentenced in 2011 for consenting to the company making a
misleading statement to the SGX and its reckless failure to disclose material information to the SGX that was
likely to materially affect the company’s share price.
 An independent director, Peter Madhavan was sentenced to 4 month’s fail and fined S$120,000.
o HELD: However, the High Court overturned the decision and acquitted all 3 directors because it held that the
evidence was insufficient to show beyond a reasonable doubt that the undisclosed information was material,
and that they had not acted recklessly in deciding not to announce.
 Instead, the High Court found that the directors had acted properly and prudently in seeking legal
advice on whether or not to disclose what they knew.
o Note: Refer to Expansion Pack – Airocean for an in-depth analysis of Airocean.

ANNOUNCEMENT OF SPECIFIC INFORMATION

 In addition to r 703, LM, an issuer must immediately announce the following.

 General matters under r 704, LM.
o Immediate announcements should be made for the following general matters – change of address, proposed
amendments to MOA/AOA, call on securities, general meetings, winding up/judicial management, breach of
loan covenants resulting in cash flow problems, grant of options, appointment/resignation of key personnel,
share pledge arrangements, changes in directors’ interest, change in substantial shareholders’ interest, changes
in capital.
o Case studies on changes in substantial shareholdings and MAS enforcement.
 DBS Asset Management Ltd.
 Company failed to notify the SGX on 7 separate occasions in 2004 of its direct shareholding
changes in Citiraya Industries Limited. The company also failed to notify Citiraya, and as a result,
Citiraya was unable to disseminate the information to the market as required under r 704(3),
LM.
 MAS’s actions: Composition fine of $16,000 for breaching s 137, SFA. MAS also issued warning.
MAS took into consideration that the company had taken active steps to report changes in its
deemed interests as soon as it was notified.
 EDBV Management Pte Ltd (2004); Franklin Resources, Inc. (2006) had same facts/outcome.
 Appointment or cessation of service.
o r 704(7), LM: Any appointment or resignation of any director, CEO or other executive officer of equivalent rank,
company secretary, registrar or auditors should be announced immediately.
o r 704(8), LM: Appointment of audit committee members.
o r 704(9), LM: If a relative of a director, CEO or substantial shareholder is appointed into managerial position in
the listed company or its subsidiaries, this fact must be announced immediately.
 Relative – a person’s immediate family and includes the person’s spouse, child, adopted.
o r 704(10), LM: Any subsequent promotion must also be announced.
o r 704(11), LM: Appointment of legal representative.
o r 704(13), LM: Within 60 days of each financial year, company must make announcement if any of its managers
are a relative with the company’s directors/CEO/substantial shareholders.
 If not, must also issue a negative statement.
 Appointment of special auditors by SGX.
o r 704(14), LM: Immediate announcement must be made along with other information as directed by the SGX
where a special auditor is appointed by SGX for the investigation into the affairs of the company.
o Case study on compliance issues with SGX’s directions – Daka Designs.

13
  On 17/11/2005, based on (the then) r 704(12), LM, SGX requested Daka Designs to appoint a special
auditor to investigate into its affairs following Daka Designs’ profit warning on 11/10/2005 and the
provision of HK$30 million against the amounts due from a related company.
 Special auditors informed SGX that they were unable to complete their work as a result of constraints
imposed by Daka Designs – could not establish reasons for losses suffered, whether Daka Designs had
properly accounted for those losses, etc.
 But Daka Designs was found not to have appropriate internal controls, overstated its financial
statements, and did not reflect the use of its IPO proceeds in its prospectus.
 HELD: Breached (the then) r 704(12), LM by refusing to cooperate with special auditors appointed to
determine state of its business affairs.
 SGX’s actions: Halted trading.
 General meetings.
o All notices to convene meetings should be provided to SGX.
o r 704(15), LM: Shareholders should be notified at least 10 market days before AGM.
 However, a minimum of 15 market days required for meetings held in relation to passing of a special
resolution.
o r 704(16), LM: All resolutions put at GM must be announced after meeting (regardless of whether it was passed
or not).
 Acquisitions and realisations.
o For acquisition and sale of shares:
 r 704(17), LM: Acquisition of shares in other companies.
 Acquisition resulting in the listed company holding 10% or more of the paid-up capital of
another listed company on the SGX.
 Acquisition resulting in the listed company’s aggregate cost of investment to exceed each
multiple of 5% of its latest audited consolidated net tangible asset.
 Acquisition between 20% - 100% of the shareholding interests in a new target company.
 Acquisition of more shares in an existing subsidiary or an associated company.
 r 704(18), LM: Sale of shares in other companies.
 Sale resulting in the listed company holding < 10% of the paid-up capital of another listed
company on the SGX.
 Sale resulting in the listed company’s aggregate cost of investment to fall below each multiple
of 5% of its latest audited consolidated net tangible asset.
 Sale of shares in a company causing it to cease to be a subsidiary or an associated company.
 Sale of shares in an existing subsidiary or an associated company resulting in the listed
company’s reduced shareholding in those entities.
o Residual category for all other acquisitions and sale of assets in Chapter 10, LM which are not shares.
 r 704(19), LM: Immediate announcement required for acquisition or sale of shares or other assets
specified under Chapter 10, LM.
o Note: Under r 721, LM, transactions outside the ordinary course of business for all sale and purchase agreements
must be publicly disclosed and a copy of such agreement must be made available for public inspection for a
period of 3 months from the date of announcement.
 Announcement of results, dividends, etc.
o r 704(24), LM: Announce all dividend recommendations or declaration (or decision not to).
o r 704(25), LM: Must not announce dividends or passing of dividend unless it is accompanied by results (quarterly,
half, or financial year) or results already announced.
 Books closure.
o r 704(26), LM: An intention to fix a books closure date.
 Must have minimum 10 market days’ notice (excluding date of announcement and book closure date).
 5 market days after AGM.
 Payment > 6 market days but < 15 market days after books closure.
o r 704(27), LM: Must not close until at least 8 market days after last closure.
 Winding up, judicial management and red alert concerning cash flow.
o rr 704(20), (21), (22), and (23), LM: Immediate announcement have to be made if:
 A winding up/judicial management application (for the listed company or its subsidiaries) has been filed
with the court.
 There has been an appointment of a receiver/judicial manager/liquidator.
 There has been a breach of any loan covenants, which would result in a cash flow problem.
 Appointment of a compliance advisor.
o Paragraph 7 to Practice Note 2.1, LM empowers SGX to require the appointment of a compliance advisor on a
selective and “need-to” basis – e.g. if the company is in breach of the listing rules, or a transition period.
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 o The role of the compliance advisor is to advice the board of directors on the applicable rules and regulations to
the listed company.

[2] PERIODIC REPORTS

 Rationale.
o Financials of listed companies serve as main guide and source of information for the investors in relation to the
general business affairs and liquidity of the listed companies. And so, listed companies are required to furnish
SGX with financial statements and annual reports at regular intervals
 [1] Financial statements – r 705, LM.
o Mandatory quarterly reports to ensure accountability and timely disclosure – format in Appendix 7.2, LM.
o Quarterly report if the market capitalisation is > $75 million as at 31/03/03/time of listing/last trading day of
each calendar year commencing 31/06/06.
 r 705(2), LM: Must comply even if market capitalisation subsequently decreases < $75 million.
o Deadline.
 r 705(1), LM: Full year results within 60 days of year end.
 r 705(2), LM: Interim results within 45 days of quarter end.
o r 705(5), LM: (For interim financial statements), directors must provide a confirmation to the best of their
knowledge, nothing has come to the attention of the board of directors which may render the interim financial
results to be false and misleading.
 May be signed by two directors on behalf of the board of directors.
 Note: Negative assurance confirmation would not trigger an obligation to audit the interim results and
does not increase compliance costs and is less onerous than requiring the directors to certify that the
account are true and fair.
 Note: This is to bolster s 201(15), CA, which requires directors to give a confirmation in the statement
by directors in annual financial accounts report that company is solvent and the financial statements
presented to shareholders are true and fair.
o r 706, LM: SGX reserves right to require additional information to be disclosed.
 [2] Annual report – r 707, LM.
o General.
 Annual report must contain enough information for a proper understanding of the performance and
financial conditions of the listed companies and its principal subsidiaries as specified in Part II of Chapter
12, LM.
o Deadline.
 r 707(2), LM: Issue to shareholders and SGX at least 14 days before AGM.
o Content.
 r 708, LM: Chairman’s statement to provide a summary of the collective view of the board.
 r 709, LM: Contents of the annual report must include the information required in r 1207, LM.
 r 1207, LM: General information.
o Includes – (5) annual audited accounts, balance sheets, cash flow statements,
disclosure if there are deviations from prescribed accounting standards, (6) auditor
fees, (7) statement showing direct and deemed interest of the directors, (8), material
contracts/loans of the company, (9) details of shares and substantial shareholders,
and
 r 1207(4), LM: (a) Review of the company’s (and its principal subsidiary) operating and financial
performance in the last financial year – (b) review must include:
o (i) Developments subsequent to the release of the financial statements which would
materially affect the issuer’s operating and financial performance.
o (ii) Analysis of the business outlook.
o (iii) Prospectus-type information relating to the background of directors and key
management.
o (iv) Prospectus-type information relating to risk management policies and processes.
o Issuers are encouraged (but not required) to follow the Operating and Financial
Review (OFR) Guide when preparing their reviews.
 Issued by the Council of Corporate Disclosure and Governance.
o Note: Objective of such review is to give users a better understanding of the listed
company by providing an analysis of the listed company’s business seen through
insiders, and also meant to facilitate assessment of business.
 r 1207(10), LM: Opinion of the board with the concurrence of the audit committee on the
adequacy of the internal controls, addressing financial, operational and compliance risks.
o Note: “Adequacy” seems to be lower standard than “robust and effective”.
15
 o It is no longer just “comply or explain” – requires a positive statement.
o This is very important!
o SGX Advisory Note 2012.
 Board must give “opinion”, not just “believe”.
 Board must give specific reference to “financial, operational and compliance
controls”.
 Board must state the basis for the opinion or the scope of the review by the
board and the Audit Committee.
 If board cannot give clean opinion, must disclose the areas of concerns and
how they will be addressed.
 Opinion should be in the directors’ report.
 r 1207(19), LM: Statement reflecting whether and how the issuer has complied with the best
practices on dealing in securities.
o (a) Company must devise and adopt an internal compliance code to provide guidance
to its officer when dealing in its securities.
 Internal controls include financial, operational, compliance, information
technology, etc. – all these have to report back to the Audit Committee and
the board.
o (b) Officer should not deal with company’s securities on short-term considerations.
 Closed window of no trading (r 1207(19)(c), LM).
 2 weeks before announcement till the announcement of 1Q, 2Q
and 3Q results; or
 1 month before announcement of half-year or financial-year results.
 Closed window ends on date of announcement of those relevant results.

[3] OTHER OBLIGATIONS (OF A NON-DISCLOSURE NATURE)

 Part IV of Chapter 7, Listing Manual prescribes obligations of a non-disclosure nature which are applicable under certain
situations.
o Internal controls – r 719(1), LM.
 A company should have a robust and effective system of internal controls, addressing financial,
operational and compliance risks.
 Must report back to the Audit Committee and the board – the Audit Committee may commission an
independent audit on internal controls for its assurance, or where it is not satisfied with the system of
internal control.
o Instances of suspected fraud or irregularity – r 719(2), LM.
 If such fraud/irregularity is likely to have a material impact on the company’s operating results or
financial position, the Audit Committee must take steps to discuss with the external auditor, and report
the matter to the board.
o Transactions outside the ordinary course of business for all sale and purchase agreements – r 721, LM.
 Public disclosure of such agreements and a copy must be made available for public inspection for a
period of 3 months from the date of announcement.
o Free float – rr 723 and 724, LM.
 Requirement to maintain a free float of > 10% of listing securities on the SGX.
 If % falls < 10%, company must as soon as practicable announce the fact and SGX may suspend trading
of the class of shares or all the shares of the securities.
 SGX may allow the company 3 months (or longer if SGX agrees) to raise the securities back to > 10%.
o Company to be notified of share pledging arrangements – r 728, LM.
 Company is required to obtain an undertaking from the controlling shareholder that he will notify the
company of the share pledging arrangements as soon as he is aware.
 Upon notification by the controlling shareholders, the company must immediately announce
these share pledging arrangements – including the name of the controlling shareholder, the
amount of shares subject to the agreement, the other parties involved (who is getting the
shares), and other material details.

CHANGES IN SHARE CAP ITAL (CHAPTER 8, LM)

 Introduction.
o r 801, LM: This chapter deals with issuers changing their capital either by issuing additional equity securities or
adjusting existing capital.

16
 o This chapter also sets out the requirements and procedures for listing additional equity securities.
 Directors are under a duty to act for proper purposes in deciding whether and when to issue shares in
the listed company (Criterion Properties v Stratford UK Properties (2004)).
 General requirement.
o r 803, LM: Issuer must not issue securities to transfer a controlling interest without shareholders’ approval.
 “Controlling interest” refers to 15% (or more) of the issued share capital.
o r 804, LM: Unless the issue is made pro rata to all shareholders (or is a share option scheme or share scheme in
Part VIII, Chapter 8, LM), no director (or his associate) may participate in an issue of securities (directly or
indirectly) unless shareholders’ approval has been gotten for the specific allotment.
 Such directors and associates must abstain from voting for the approval.
 General mandate.
o r 806(2), LM: Shareholders’ approval is not required if there is a general mandate.
 Effective period – mandate remains in force until the next AGM, or until revoked or varied.
 Limit – however, the limit must not be > 50% of the issued share capital, and the aggregate number
issues other than on a pro-rated basis to existing shareholders must not be > 20%.
 Note: 20% is a sub-limit, which means the remaining 30% can still be issued pro-rata.
 Preferential offering.
o r 807, LM: If existing shareholders are offered specific entitlement in new issues of securities, such an
entitlement must be on a prorated basis, with no restriction on the number of shares held before the entitlement
can accrue.
o r 808, LM: However, once the basis for such an entitlement is declared, the listed company cannot amend it
except with SGX’s approval.
 Issue of shares, company warrants, and convertible securities for cash (other than rights issue (which is an issue of rights
to buy additional shares in a company made to the company’s existing shareholders, usually to raise capital under a
seasoned equity offering)).
o Announcement of issue.
 r 810, LM: Company must announce such an issue promptly with an accompanying statement on the
terms and purpose of the issue, including the amount proposed to be raised from the issue.
 C.f. rights issue under r 814(1), LM.
o Issuance.
 If specific shareholders’ approval is obtained, rr 811(1) and (2), LM (which impose restrictions on the
pricing of shares (cannot be > 10% discount to the weighted average price of trades on the full market
day of placement)) and restrictions the conversion price (same)) is not applicable.
 Restrictions on issuance.
 Unless specific shareholders’ approval is obtained (pursuant to r 812(2), LM) and SGX’s
approval (under rr 812(2) and (3), LM), r 812, LM generally prohibits a placement to directors,
substantial shareholders, immediately family members, related/associated/sister companies
of the substantial shareholders, and companies in which the directors/substantial
shareholders have > 10% shareholding.
 Must maintain > 10% free float of shares (i.e. held by the public) as per r 723, LM.
o r 724, LM: If it falls < 10%, must make announcement and SGX may suspend trading.
 r 813, LM: Company can borrow shares from its substantial shareholders to facilitate an issue provided
that the substantial shareholder does not receive any direct/indirect financial benefit.
 Share buybacks.
o Part XIII of Chapter 8, LM concerns share buybacks by the listed company.
o r 881, LM1: Listed company must obtain prior specific shareholders’ approval before purchase of its shares.
 Must be read together with s 76B(3), CA which prohibits a company from acquiring > 10% of its issued
share capital between one AGM and the next.
 Under s 76H, CA, a company buying back its shares can hold them as treasury shares which can be
cancelled, sold for cash, transferred as consideration for the acquisition of shares/assets of others, or
transferred pursuant to an employee share scheme at a later date.
o r 882, LM: Via on-market or off-market purchases.
o r 883, LM: Listed company must provide information to shareholders – e.g. reasons for the proposed share
buyback, consequences of the buyback, details of other buybacks in the previous 12 months.
o r 884, LM: Dealing restrictions – cannot be more than 5% above the average closing price of the shares.
o r 885, LM: For off-market purchases, it has to be on an Equal Access Scheme (company has to issue offer
document to all shareholders).

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INTERESTED PERSON TRANSACTIONS (CHAPTER 9, LM)

 Introduction.
o r 901, LM: This chapter supplements the law governing conflicts of interest in the CA and seeks to regulate and
guard against the possible risk that interested persons could influence the listed company’s group to enter into
transactions with interested persons that may adversely affect the interests of the listed company or its
shareholders.
 r 902(2), LM: Must consider the economic and commercial substance of the transaction, and not just
its pure legal form.
o Subject to certain exceptions, all other interested person transactions must either be announced immediately
or approved by the shareholders.
 r 923, LM: SGX will not entertain any application for the waiver of Chapter 9, LM provisions.
 Defining “interested person transaction” – it is a transaction between an entity at risk and an interested person.
o “Entity at risk”.
 Includes the listed company, subsidiaries/associated companies of the listed company which are
unlisted, over which the listed group and/or its interested persons have control.
o “Interested person”.
 Includes a director, CEO or controlling shareholders of a listed company, or an associate of the
aforementioned persons (which includes immediate family, trustees, of a trust in which he/his
immediately family have > 30% beneficial interest).
o “Transaction” – 6 types.
 Provision or receipt of financial assistance.
 Acquisition, disposal or leasing of assets.
 Provision or receipt of services.
 Issuance or subscription of securities.
 Granting of or being granted options.
 Establishment of joint ventures or joint investments.
 Requirements in the LM.
o Threshold applicable to an interested person transaction.
 Threshold 1 – 3% for announcement.
 r 905, LM: Listed company must make immediate announcement of any interested person
transactions of a value equal or more than 3% of the group’s latest audited net tangible assets,
but below $100,000 no need.
 Announcement must include – details and nature of interests of the interested persons, details
of the transaction, rationale/benefit for the entity at risk, statement by the Audit Committee
(that the transaction is on normal commercial terms and not prejudicial to the interested of
the listed company and its minority shareholders), and current total of all interested persons
transaction.
 Threshold 2 – 5% for shareholders’ approval.
 r 906, LM: Further provides that listed company must obtain shareholder approval for any
interested person transactions of a value equal or more than 5% of the group’s latest audited
net tangible assets, but below $100,000 no need.
 r 919, LM: Interested persons of the transaction in question must abstain from voting on all
resolutions to approve of the transaction in question.
 General mandate.
o r 920, LM: Company can seek general mandate on an annual basis from shareholders for recurrent transactions
of a revenue nature or trading nature necessary for day-to-day operations.
 E.g. purchase and sale of supplies and materials (but not assets, undertakings and businesses).
 General mandate must be disclosed in the annual report.
 Request for general mandate must be supported by an independent financial advisor’s opinion or Audit
Committee report determining transaction price are on commercial terms and will not prejudice the
company’s and its minority shareholders’ interests.
 General mandate must be subject to annual renewal.
 No need to for a new opinion/report in subsequent renewal if company can confirm that the
circumstances have not changed since the last shareholders’ approval.
 Exceptions.
o r 915, LM: Sets out exceptions to the general rules of rr 905 and 906, LM.
 (1) Payment of dividends, bonus issue, preferential offer made to all shareholders on pro-rated basis.
 (2) Employee share option scheme approved by the SGX.
 (5) Transaction for provision of goods and services that are provided on normal commercial terms.
18
  (6) Provision of financial services by a financial institution licensed by the MAS on normal commercial
terms and in the ordinary course of business.
 (8) Directors’ fees and remuneration.
o r 916, LM exempts certain interested person transactions from the requirement of procuring the relevant
shareholders’ approval (in r 906, LM).
 (1) The entering into, or renewal or tenancy of real property of not more than 3 years if the terms are
supported by independent valuation.
 (2) Investment in or provision of loan to a joint venture where risks and rewards are in proportion to
the participation of each party.
 (4) Certain contracts awarded to an interested person or received from an interested person by way of
public tender.

ACQUISITIONS AND REALISATIONS (CHAPTER 1 0, LM)

 Introduction.
o r 1001, LM: This chapter sets out the rules for transactions by issuers or unlisted subsidiary, principally
acquisitions and realisations.
 Involves acquisition or disposal of assets, including options for the acquisition or disposal of assets by
the listed company or an unlisted subsidiary.
 “Assets” includes securities and business undertakings (r 1002(2), LM).
 Express exclusion for those related to the ordinary course of business or of a revenue nature (“revenue”
= to be used within a short period of time, c.f. “capital” over a longer period) (r 1002(1), LM under
definition of “transaction”).
 Note: Under r 721, LM, transactions outside the ordinary course of business for all sale and
purchase agreements must be publicly disclosed and a copy of such agreement must be made
available for public inspection for a period of 3 months from the date of announcement.
 In determining whether a transaction is in the “ordinary course of business”, SGX will consider
the company’s existing core business.
o rr 704(15) and (16), LM: Immediate announcement of such transactions.
 Note: If there is a change in control of the issuer, it would by default be very substantial ([4]).
 Classification of transactions.
o Transactions are classified into a 4 categories (r 1004, LM), and separate transactions within the last 12 months
may be aggregated into 1 transaction by the SGX (r 1005, LM).
 Generally, Chapter 10, LM only applies to disposal of vendor shares in another company belonging to
the listed company.
o r 1006, LM lays down the formula for computing the amount of the transactions for r 1004, LM classification.
 (a) NAV of assets compared with the group’s NAV (disposal only).
 (b) Net profits attributable to assets compared to group’s net profit.
 (c) Consideration compared to market capitalisation.
 (d) Number of equity securities issued as consideration (acquisition only).
 Note: If the resultant amount is negative based on the computation, listed company must consulted
SGX as to whether Chapter 10, LM still applies (r 1007, LM).
o [1] Non-disclosable transactions (5% or less) – r 1008, LM.
 Voluntary announcement – there is no necessity to disclose.
 However, if company wishes to disclosure, must include the details of the consideration (r
1010(3), LM) and the value of the assets acquired/disposed of (r 1010(5), LM).
 However, if consideration is satisfied wholly/partly in securities that will be listed, still must disclose
after the terms have been agreed (r 1009, LM).
o [2] Disclosable transactions (> 5% - 20%) – r 1010, LM.
 Mandatory immediate announcement.
 r 1010, LM sets out requirements with respect to disclosure details – (1) particulars of the assets, (2)
description of the trade, (3) aggregate value of the consideration, (4) whether there are any material
conditions attaching to the transaction (e.g. put, call or other options), (5) the value of the assets being
acquired, (6) if disposal, the excess or deficit of the proceeds over the book value, (7) net profits, (8),
effect of the transaction on NTA per share of the company, (9) effect of the transaction on earnings per
share of the company, (10), rationale for the transaction, (11) whether any director/controlling
shareholder had any direct/indirect interest in the transaction, (12), details of any service contracts.
 Disclosure should come with a valuation report (r 1011, LM) or a profit forecast report (r 1012,
LM).

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  Case study on compliance with waiver conditions and interpretation of interest under r 1010,
LM – Keppel.
o Keppel Telecommunication and Transportation Limited (Keppel) announced the
acquisition of a 20% equity stake (and an option or an additional 10%) in Computer
Generated Solutions, Inc (CGS) in 2000. It sought a waiver of r 1007, LM (now r 1010,
LM) so that the acquisition did not require shareholders’ approval.
 Waiver was granted that Keppel sets out information in r 1006, LM (in
particular, that no directors or substantial shareholders of Keppel have any
direct or indirect interest in the transaction).
 Keppel made an announcement as to that.
 However, Keppel Corporation Ltd (KCL), a substantial shareholder of Keppel
had extended a loan amount of $80 million to CGS to assist them in placing
out the Keppel shares.
o SGX’s actions: Found that Keppel was in breach of r 1006(1)(j), LM because the loan
agreement was an interest that should have been disclosed – KCL’s arrangement with
CGS was crucial that the acquisition succeeded. Hence, it was in breach of the terms
of the waiver of r 1007, LM (now r 1010, LM) Hence, SGX publicly reprimanded Keppel
for the breaches.
 Case study on compliance with disclosure requirements concerning acquisition of assets –
Firstlink.
o Firstlink Investment Corporations Limited (Firstlink) failed to announce immediately
and with adequate the details of Golden Concept Enterprise Limited and La Petite
Bodyline UK Limited.
o Firstlink only disclosed the acquisition in its FY 2004 annual report (dispatched in April
2005) approximately 5 months after signing the sale and purchase agreement. The
disclosure also didn’t contain all the details specified in r 1010, LM.
o SGX’s action: Found that Firstlink breached rr 703(1) (failure to announce material
information in a timely manner), 704(15) (failure to announce specific information
immediately), and 1010, LM (failure to make immediate announcement of the
acquisitions). Hence, SGX reprimanded Firstlink, and required the company to advise
the steps that will be taken to ensure the full discharge of its continuing obligations
in a timely and appropriate manner.
o [3] Major transactions (> 20%) – r 1014, LM.
 Mandatory immediate announcement.
 Must be made conditional upon shareholders’ approval.
 Paragraph 1 of Practice Note 10.1, LM: SGX may grant a waiver for shareholders’ approval in
any major transactions if the transaction was in the “ordinary course of business – SGX will
consider the company’s existing core business.
 For acquisitions.
o Paragraph 3.2.1 of Practice Note 10.1, LM: Shareholder approval not required if
acquisition will result in an expansion of an issuer’s existing core business.
o Paragraph 3.2.2 of Practice Note 10.1, LM: But shareholders’ approval required if
acquisition changes the “risk profile” of the issuer even if it does not change the “main
business”.
o Non-exhaustive or conclusive factors for “risk profile” in Paragraph 3.2.3 of Practice
Note 10.1, LM:
 Whether acquisition will significantly increase the scale of the issuer’s
existing operations (e.g. if any of the values in rr 1006(c) or (d), LM is 100%
or more.
 Whether acquisition will result in change of control of the issuer.
 Whether acquisition will have significant adverse impact on the issuer’s
earnings, working capital and gearing.
 Whether acquisition will result in expansion to a new geographical market
or business sector.
 Whether acquisition has been foreshadowed and that investors have had an
opportunity to vote on it at previous general meetings.
 For disposals.
o Paragraph 3.3.1 of Practice Note 10.1, LM: Shareholder approval usually required
because disposal of core business tend to result in a material change to the nature of
the issuer’s business.

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 o Paragraph 3.3.2 of Practice Note 10.1, LM: However, in exceptional circumstance,
SGX may waive r 1014, LM if the disposal has been foreshadowed and that investors
have had an opportunity to vote on it at previous general meetings.
 r 1010, LM for disclosure details in announcement.
 Circular containing the information in r 1010, LM must be sent out to the shareholders.
 Note: This Rule does not apply in the case of an acquisition of profitable assets if the limit breached is
only r 1006(b), LM.
o [4] Very substantial acquisitions or reverse takeovers (> 100% regardless of whether the acquisition is deemed
to be in the listed company’s ordinary course of business, or which there is a resultant change in the control of
the listed company) – r 1015, LM.
 Mandatory immediate announcement upon finalisation of terms.
 Must be made conditional upon shareholders’ approval + SGX’s approval.
 r 1010, LM for disclosure details in announcement + 3 years of proforma financial information of the
assets to be acquired.
 Options to acquire or dispose assets.
o r 1019, LM: Transaction must be made conditional upon shareholders’ approval.
 Shareholders’ approval at the time of the grant of the option.
 r 1019(1), LM: If option is not exercisable at the discretion of the issuer.
 r 1019(2), LM: If option is exercisable at the discretion of the issuer but the terms are fixed.
 Shareholders’ approval at the time of the exercise of the option.
 r 1019(3), LM: If option is exercisable at the discretion of the issuer and the terms are not fixed
but based on contingent factors.
o Announcement must be made at the time of the acquisition or grant of the option.

TAKEOVERS (CHAPTER 11, LM)

 Introduction.
o r 1101, LM: This chapter sets out the requirements which apply to takeovers.
 Listed companies subject to a takeover bid must comply with both the Singapore Code on Takeovers
and Mergers and Listing Manual.
 Requirements of the Listing Manual.
o r 1102, LM: Target company must make a request to suspend trading and make immediate announcement of
takeover offer once it has been notified of a takeover offer by an offeror.
o r 1103, LM: Target company must send to all shareholders not subject to the takeover offer and convertible
securities holders documents sent to shareholders subject to the takeover offer.
o r 1104, LM: Reverse takeover.
 Listed company must lodge with SGX all information and documents required for admission to the
Official List if the merger/amalgamation with an unlisted entity (i.e. reverse takeover) has resulted in
the control of the listed company being acquired by the unlisted entity.
o r 1105, LM: Where offeror owns 90% of shareholdings in listed company in the event of a takeover, SGX may
suspend listing of the securities in the ready and odd-lot market unless it is satisfied that at least 10% of the
shares are held by at least 500 public shareholders.

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2. EQUITY CAPITAL MARKET FUNDRAISING
INTRODUCTION
 Equity fundraising refers to raising of capital in the equity markets, either through an initial or secondary offering.
 2 key institutions – Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX).
o Regulatory framework – mainly the Securities and Futures Act, and the SGX Listing Manual.

INITIAL PUBLIC OFFERING (IPO) PROCESS IN SINGAPORE

 IPO is a company’s first public sale of shares that enables it to raise equity capital from members of the public.
 Advantages of listing on a securities exchange.
o Prestige due to the stringent and rigorous listing requirements of the exchange.
o Share-based compensation arrangements can be put in place – e.g. employee share option plans, performance
and restricted stock plans.
 Helps to align interests of employee and directors with that of shareholders.
 Provide greater flexibility in the structuring of compensation packages.
 Motivate and retain employees.
o Bolstering and diversifying equity base.
o Access to the equity capital markets and allowing the company to raise fund, which is a cheaper source of capital
as compared to traditional bank financing.
o Provides exit for investors in a private company.
 Disadvantages of listing on a securities exchange.
o Constraints on management’s actions – ongoing requirement to disclosure financial and business information
as well as dissemination of information to public shareholders, requiring meaningful time, effort and attention
of management.
o Costs and expenses – IPO, compliance, legal, accounting and marketing costs, higher overheads.
o Duties of directors and the interests of public shareholders.
 Main types of listing vehicle – company, business trust, investment fund, etc.
 Location of listing.
o Mainboard – listing supervised by the SGX.
o Catalist – listing supervised by an SGX-approved sponsor.
 Advantages of Catalist over the Mainboard.
 Faster time-to market.
 Ability to obtain large shareholders’ mandate for subsequent fund raising.
 Need only seek shareholders’ approval for significantly large acquisitions and disposals.
 Main types of listing.
o Primary listing.
 In a primary listing, company must first meet SGX’s initial listing requirements for either a Mainboard
or Catalist listing, and then comply with all of SGX’s continuing listing obligations after listing.
o Secondary listing.
 In a secondary listing, company already listed on another exchange with rules equivalent to SGX may
seek secondary listing on SGX. However, the company does not have to comply with SGX’s continuing
listing obligations after listing – the company only has to undertake to disseminate information
concurrent with its release to its home exchange.
o Dual listing.
 In a dual listing, the company already listed on another exchange (tend to) come from a jurisdiction
whose listing rules are not equivalent to SGX, and hence, the company must fully comply with both SGX
listing rules and the home exchange rules – onerous.

CURRENT REGIME: 2 -TIER APPROACH

 Modern process – MAS to enter the process earlier with a concurrent review.
o Advantage – MAS concerns to be resolved by the time eligibility-to-list letter is issued.
o Disadvantages – regulators may not be of the same view = IPO slowing down.
 Furthermore, this is the worst of 2 regimes – now, there is both the checklist (Fifth Schedule to the SFA
Regulations) and the satisfaction of the “reasonable investor test”. Also, although the MAS technically
has control, SGX-ST still retains come control over satisfaction of merits of the listing
 [1] The role of SGX-ST under the Securities and Futures Act (SFA)

22
 o SGX-ST no longer vets drafts prospectuses for accuracy of information – responsibility now lies with the issuer
and the professional advisors who are required to conduct due diligence.
o To avoid duplicity, the Listing Rules no longer prescribe detailed prospectus disclosure requirements.
o Issuer now submits listing application and prospectus/offering memorandum to SGX-ST.
 Review takes between 8 – 12 weeks, and SGX-ST will issue an eligibility-to-list letter.
 SGX-ST may require material amendment or additional information.
 [2] Role of MAS.
o MAS takes over the role of the Registry as the statutory regulator.
o After receiving the eligibility-to-list letter, issuer may lodge preliminary prospectus with MAS.
 After lodging with MAS, issuer can conduct book-building exercise during this exposure period, subject
to advertising restrictions.
o Issuer can only launch the IPO after MAS has registered the prospectus.
 Note: Although new regime is a disclosure-based regime, there is a degree of merit regulation.
o [1] Power of MAS to refuse to register a prospectus under s 240(13), SFA.
 s 240(13)(f), SFA gives MAS residual discretion to refuse to register a prospectus where it is in the public
interest to do so.
 Press release issued by MAS in connection with NagaCorp Ltd prospectus.
 In the incident involving Nagacorp Ltd regarding a Cambodian-based casino seeking to list on
SGX-ST, AS refused to register the prospectus partly because of concerns over the auditing of
the entity in the light of regulations regarding money-laundering.
 This provision may prevent offers that pose high risks to investors – e.g. companies with no profit record
but which satisfy the market capitalisation test, or those new issues where there are questions
concerning the promoter’s probity.
o [2] Power of MAS to serve a stop order for a prospectus under s 242, SFA.
 In a post-registration situation where a deficiency is discovered, but before trading of the newly-offered
shares commences, MAS may issue stop order under s 242, SFA to prevent trading.
 s 242(1), SFA: Stop orders may be issued if a prospectus has been registered and:
o (a) MAS is of the opinion that prospectus contains a false or misleading
statement/matter.
o (b) There is an omission of an information that is required to be included, or inclusion
of information that is prohibited (under s 243, SFA).
o (c) MAS is of the opinion that the prospectus does not comply with SFA requirements.
o (d) MAS is of the opinion that it is in the public interest to do so.
 s 242(3), SFA: But if trading in listed securities has commenced, stop order cannot be issued.
 Even if shares are issued, the issue is deemed to be void and the application money will be returned.

PROSPECTUS REQUIREME NTS UNDER THE SECURITIES AND FUTURES ACT

 Prospectus is the primary marketing material for an IPO in Singapore – however, more importantly, it functions as a
disclosure document for prospective investors.
 General disclosure requirement – must contain all information reasonably required by investors and their professional
advisers to make an informed assessment (i.e. the “reasonable investor test”).
o s 243(1), SFA: Prospectus shall contain:
 (a) “All the information that investors and their professional advisers would reasonably require to make
an informed assessment” on the following matters:
 Rights and liabilities attaching to the securities.
 Asset and liabilities, profits and losses, financial position and prospects, and prospectus of the
issuer (and if issuer is controlled by another party, then all the above information of that party).
 For units or options over shares and debentures, the capacity of the person making the offer
or invitation to issue or deliver the relevant shares and debentures.
o What is information for a reasonable investor?
 Exeter Group Limited v ASC (1998)
 HELD: Court rejected argument that retail investors would be expected to consult professional
advisers, and hence [s 243(4), SFA] would reduce the amount of disclosure required.
 This case highlights that rules-based minimal compliance approach may be insufficient under
the SFA, because the underlying principle is the broad standard of disclosure as illustrated by
the s 243, SFA reasonable investor test.
 National Exchange Pty Ltd v ASC (2004)
 HELD: Investors’ attention must be drawn to any qualifying material in the prospectus – cannot
assume that reasonable person would scrutinise the document so carefully.

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 o Investors are entitled to have information presented in an easy-to-read format.
 Pancontinental Mining v Goldfields Ltd (1995)
 HELD: Offerees entitled to have business forecasts clearly set out because they were of real
and material assistance – such data was also the norm in the industry.
 Fraser v NRMA Holdings Ltd (1995)
 HELD: Investors entitled to have relevant information presented clearly, and not have it
scattered throughout the offer document.
o Limits to disclosure.
 s 243(2), SFA: Disclosure only to the extent that:
 It is reasonable for investors and their professional advisers to expect to find in the prospectus.
 A person whose knowledge is relevant actually knows the information, or in the circumstances,
the person ought reasonably to have obtained the information by making enquiries.
 Boundaries based on – industry norms, relevance and reliability of information, etc.
 Specific requirements – e.g. financial statements, directors, management, shareholders, conflicts of interest, interested
person transaction, business, major disposals and acquisitions.
o s 243(1), SFA: Prospectus shall contain:
 (b) Matters prescribed by MAS.
 The checklist prescribed by the Monetary Authority of Singapore (MAS) – Fifth Schedule to the
Securities and Futures (Offers of Investments) (Shares and Debentures) Regulation 2005.
 Note: Some information not needed under the checklist may still be considered important.

LIABILITY FOR FALSE OR MISLEADING STATEMENT

 Criminal liability under s 253, SFA.
o Penalties.
 Fine up to $150,000 and/or imprisonment up to 2 years.
 For continuing offences, fine up to $15,000/day.
o Persons liable.
 Offeror and its directors – (no need intention or recklessness).
 Issue manager or underwriter (does not include sub-underwriter) named with consent who:
 Intentionally or recklessly makes false or misleading statement or omission.
 Knows of false or misleading statement or omission and fails to take appropriate remedial
action without delay.
 Is reckless as to whether statement is false or misleading or whether there is omission.
 Experts (or any persons) named with consent who:
 Intentionally or recklessly makes false or misleading statement or omission.
 Makes statement on which false or misleading statement in prospectus is based if he knows
such statement is false or misleading and fails to take immediate steps to withdraw consent.
 Civil liability under s 254, SFA.
o Penalties.
 Liable to compensate for loss or damage.
o Persons liable.
 Same as that of criminal liability, however, there is no need to show intention or recklessness.
 Defences under s 255, SFA.
o ss 255(1) and (2), SFA: Due diligence defence.
 If person demonstrates that he had made all reasonable inquiries and believed on reasonable grounds
that there was no false or misleading statement or omission.
 I.e. whatever information in the prospectus has been checked and verified – person needs to
undertake a fact-finding or verification exercise.
o ss 255(3) and 255(4), SFA: Reasonable reliance defence.
 E.g. legal statement in the prospectus was in reliance on a legal expert.
o s 255(5), SFA: Public withdrawal.
 Person has publicly withdrawn his consent from being named in the prospectus.
o s 255(6), SFA: New circumstance.
 Person was unaware of a new circumstances arising.
o Additional defence for criminal liability under s 253(3), SFA.
 If person demonstrates that the false or misleading statement or omission is not materially adverse
from the point of view of the investor.
 Note: Other potential liabiltiies include:
o Common law tortious liability for negligent misstatements (see Hedley Byrne v Heller & Partners Ltd (1964)).
o s 2(1), Misrepresentation Act for fraudulent misrepresentation.
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 o Companies Act.

ADVERTISING RESTRICTIONS

 Generally, no advertisement making direct or indirect reference to an offer of securities is allowed if an accompanying
prospectus is required.
o s 251(1), SFA: Restrictions on advertisements and publicity relating to an offering of shares or debentures.
 Cannot advertise an offer.
 Cannot publish a statement that directly/indirectly refers to an offer or intended offer of securities.
 To determine whether a statement indirectly refers to an offer/intended offer, or is reasonably
likely to induce persons to subscribe for/purchase securities, must consider:
o Whether statement forms part of the normal advertising of an entity’s product and
services and is genuinely directed at maintaining customers/attracting customers?
o Whether statement communicates information that materially deals with the affairs
of the entity?
o Whether statement is likely to encourage investment decisions being made on it
rather than on the basis of information contained in a prospectus?
 However, most IPOs succeed/fail based on the efforts taken by the underwriters in marketing, hence, there are
exceptions to advertising restrictions:
o s 251(6), SFA: Advertisement before the registration of the prospectus – heavy restrictions for “tombstone
advertisements”.
 Statement can identify offeror and securities.
 Statement can state that prospectus or profile statement will be available.
 Statement can state that anyone who wishes to acquire the securities must make an application in the
prospectus-described manner.
 Statement can state how to arrange a copy of the prospectus or profile statement.
o s 251(8), SFA: Advertisement after the registration of the prospectuses – less restrictive.
 Statement can state that prospectus or profile statement is available for collection at the specified
times and places.
 Statement can state that anyone who wishes to acquire the securities must make an application in the
prospectus-described manner.
 Statement must not contain any information not included in the prospectus or profile statement.
 Book-building exercises that occurs during the pre-registration period.
o Preparing and circulating a preliminary prospectus to selected institutional and sophisticated investors.
 s 251(3), SFA: Allows preliminary document for the purposes of book-building (due to the exposure
period between lodgement with MAS and final registration).
 Can include price, amount of securities offered, time period which offer will be open.
 Can only be circulated to persons specified in ss 274 and 275, SFA (institutional and “relevant
persons” (sophisticated investors)).
 Must contain a number of prescribed statements and conditions.
o Statement identifying itself as a preliminary document subject to amendments and
completion in the prospectus.
o Statement prohibiting circulation to any other persons.
o Statement cautioning against purchase or subscription made on basis of it.
 Must not contain any application form that will facilitate offer and acceptance of securities.
 When the final prospectus is registered, must take reasonable steps to notify persons being
issued preliminary documents that the registered prospectus is available for collection.
o Circulating a research report and conducting “roadshow” presentation or meetings with such investors.
 s 251(4), SFA: Allows oral or written materials to be presented.
 Presentation can only be on matters contained in a preliminary document lodged with MAS,
and can only take place after the prospectus or profile statement is lodged by MAS.
 Can only be circulated to persons specified in ss 274 and 275, SFA (institutional and “relevant
persons” (sophisticated investors)).
 General advertisements or publication deemed not to contravene s 251(1), SFA.
o s 251(9), SFA: Some types of advertisements do not contravene prohibition on restriction – 2 broad groups
(reports by issuers, and reports by independent 3rd parties).
 (a) Notice or report to securities exchange.
 (b) Notice or report go issuer’s general meeting.
 (c) Report about issuer’s underlying entity.
 (e) News report or general comment in a newspaper, periodical, magazine, radio or television.

25
  (f) Research report published by someone who is not connected to the issuer, and does not have an
interest in the success of the offer.
 Cannot be written by anyone related to the offering, or instigated by parties in the offering.
 (e) and (f) do not apply if consideration is provided for the publication of the report (s 251(11),
SFA).
 (g) Permits pre-deal research reports by persons interested in the offering, for offers made
concurrently in Singapore and one or more jurisdictions if the pre-deal research report does not infringe
any law.
 Must have black-out period commencing 2 weeks before lodgement of prospectus where no
report can be published – i.e. can be distributed no later than 14 days after lodgement.
 Must state that it is distributed to institutional investors only, and cannot be disclosed out.
 Assign a number to each report and keep records of all recipients.
 Disclose material interest.
 (h) Allow publication to correct or clarify information in previous news report or genuine comment if it
does not contain any material information not included in the prospectus.

LIABILITY FOR CONTRAVENING ADVERTISING RESTRICTIONS

 s 251(15), SFA: Guilty of an offence, liable on conviction to a fine not exceeding $50,000, and if a continuing offence,
further fine not exceeding $5,000 a day.
 Defences.
o s 251(10), SFA: A person does not contravene s 251(1), SFA if he (a) publishes an advertisement in the ordinary
course of business and (b) did not know/had no reason to suspect that such advertisement would constitute a
contravention.

EXEMPTIONS TO PROSPE CTUS REQUIREMENTS

 Rationale for exemptions from full prospectus disclosure.

o Exemptions were necessary due to the amorphous nature of the concept of an “offer to the public”, but with
the removal of the concept, clear stating of the exclusions is even more important.
 s 247, SFA: Application for exemption from requirements as to form or content of a prospectus or profile statement.
o MAS has power to exempt from a requirement if the cost of requirement > need of the public for investor
protection, or if it would not be prejudicial to the public interest.
o Note: This does not confer MAS the power to waive the issuance of a prospectus altogether.
 That power is granted under s 273(5), SFA.
 Subdivision (2) of Division 1 of Part XIII, SFA – the “safe harbours”.
o s 272, SFA: Issue or transfer of securities for no consideration.
 Rationale – don’t need prospectus because if you had not receive payment for it, you should not incur
the liability of offering a prospectus.
o s 272A, SFA: Small offers – limit of $5 million within a period of 12 months to designated group of offerees.
 Cousins, family members of the founder of the company when raising small moneys.
 Rationale – meant to facilitate the transfer of shares for small start-ups.
o s 272B, SFA: Private placements – limit of not more than 50 persons within a period of 12 months.
 Note: Not limited to small start-ups, but also for larger companies doing small offerings.
o s 273(1), SFA: Offer made under specific transactions in certain circumstances.
 (a), (b) and (c) Offer made in connection with the Takeover Code (e.g. takeover transaction where it is
shares-for-shares, transaction relating to a scheme of arrangement, etc.).
 Takeover transaction or scheme of arrangement must comply with all relevant requirements.
 (cd) and (ce) Rights issue of unlisted and listed securities (whether renounceable or not).
 (d) Offer of previously issued securities generally or to existing members or debenture holders.
 (f) Offer made to “qualifying persons” (whether the securities have been previously issued or not),
where the securities are to be held by that person, or for the benefit of that person.
 s 273(4), SFA defines “qualifying persons” as a bona fide director, former director or,
consultant, adviser, employee or former employee of the entity or a related corporation of
that entity (being a corporation), or if he is the spouse, widow, widower or a child, adopted
child or step-child below the age of 18 of such person.
o s 273(5), SFA: MAS’s exemptive power.
 MAS has power to exempt and completely waive the issuance of a prospectus altogether.
 But this only operates for 6 months from the date of declaration.

26
  This was because legislature wanted to promote Singapore as a bond market, but problem was
the lack of legislative exceptions, hence compromise.
o Hence, for bond offerings, MAS can issue a declaration order exception.
o Recently used for ETF offerings.
o Also for ATM offerings – confusing because different bank requires different
documents, hence general declaratory order to exempt.
o s 274, SFA: Offer made to institutional investors.
 Under s 4A, SFA, “institutional investors” mean a bank or merchant bank, finance companies,
Government or statutory body, insurance companies, pension funds, and other parties which are
institutional in character.
 They know how to look after themselves and do not need the benefit of a prospectus.
o s 275, SFA: Offer made to “relevant persons” (which includes accredited investors and purely investment-
holding entities).
 Under s 4A, SFA, “accredited investors” mean an individual with net personal assets of > S$2 million, or
a company with net assets > S$10 million.
 These high net-worth individuals and substantial companies are regarded as sophisticated investors.
 They know how to look after themselves and do not need the benefit of a prospectus.
o Note: Restrictions on subsequent offers or sales for ss 274 and 275, SFA.
 s 276, SFA: First sale of shares/debentures acquired under exemptions in ss 274 or 275, SFA.
 Such that if these institutional or “relevant” (sophisticated) investors on-sell to non-
institutional or non-“relevant” (unsophisticated) investors, a prospectus will be required.
 If categories of investors remain the same as those exempted institutional or sophisticated
investors, then there is no problem.
 But what if it is someone else?
o s 276, SFA applicable, and will probably come under more amendments – any
subsequent offers and sale of such securities will be subject to resale restrictions.
o s 276, SFA inapplicable if securities have been held for at least 6 months from the
date they were first acquired.
o s 277, SFA: Offer made using an offer information statement.
 E.g. an existing publicly-listed company issuing new shares, or a company that wants to do a rights issue
– company need only to prepare an offer information statement, which is akin to an abridged
prospectus (but must still be lodged with MAS).
o s 278, SFA: Offer in respect of international debentures.
 (1) Offer of debentures is by a foreign incorporated body, and the offer is:
 (a) made by a holder of capital markets services licence; and
 (b) Made to institutional, professional or business investors.
 (2) To quality for exemption, debentures must be denominated in currency other than Singapore Dollar,
with face value of at least US$5,000, and the shares of the issuing corporation must be listed on a
recognised securities exchange or guaranteed by a listed company.
o s 279, SFA: Offer in respect of debentures made by the Government or international financial institutions of
which Singapore is a member.
o s 280, SFA: Offer using automated teller machine or electronic means.
 Rationale – an ATM itself as a mini prospectus, since the menu option requires indication that one has
read the prospectus and the electronic document also considered a prospectus because it causes
attention to the offer.
 (2) ATM must indicate that prospectus is available, how it can be obtained, and that it should be read
before application for securities.
 Note: s 281(1), SFA: MAS can revoke any exemption if necessary in the public interest or for the protection of investors.

IPO TIMELINE (MAINBO ARD)

Event Timing
Preparation Variable – 2 to 3 months.
 Issuer appoints members of the deal team – issue manager,
underwriter, lawyers, accountants, etc.
 Deal team’s work:
o Factual due diligence on the company and its business.
o Legal due diligence.
o Consider any desired restructuring of the group or business.
o Drafting of prospectus and listing application.
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 o Consulting with SGX on potential deal breakers – e.g.
conflicts of interest, suitability of controlling shareholder,
inability to comply with listing rules, etc.
Submit listing application to SGX and submit draft prospectus with MAS. Concurrent review by both SGX and MAS
 Issue manager will address SGX’s queries. (although in practice, MAS only commences
 If issuer need exemption from the SFA prospectus disclosure review after SGX confirms that there’s no
requirements, application may be made to MAS. outstanding issues) – 6 to 8 weeks.
SGX grants Eligibility to List (ETL). Pre-deal research may be issued prior to
Publish pre-deal research. ETL, but typically only after ETL.
 Educate institutional investors on issuer, its business and prospects.
 Permitted if conditions under s 251(9)g, SFA and Regulation 15,
Securities and Futures (Offers of Investments (Shares and
Debentures)) Regulations are complied with.
Lodge preliminary prospectus with MAS (upload on OPERA). 14 clear days between publication of pre-
deal research and MAS lodgement.
Register prospectus with MAS. 7 to 28 days after MAS lodgement.
 Final prospectus is registered by the MAS once all its comments have
been addressed to its satisfaction.
Open public offer. 2 days minimum (excluding the date the
offer opens).
Close of public offer.
Announcement of outcome of offer, subscription rate, balloting, etc. Refunds for unsuccessful applicants within
24 hours of balloting.
Listing. Typically 5 days after close of public offer.

SECONDARY OFFERING PROCESS IN SINGAPORE

 A secondary offering is the issue of additional shares by a company to raise seasoned equity.
 Secondary offering can be through:
o [1] Rights issue.
 [a] Renounceable – shareholders who do not wish to take up entitlement may sell it on the exchange.
 [b] Non-renounceable (i.e. preferential offerings) – entitlements are only to the shareholders.
 Similarities between the 2.
 Offered pro rata.
 General mandate – up to 50% issued shares (excluding treasury shares).
 Pricing discount – no limit for rights issue, and preferential offering using specific mandate (if
general mandate, then maximum discount of 10% to market price).
 Both can be underwritten or non-underwritten.
o If underwritten, company cannot invoke force majeure after ex-rights trading – if
invoked before ex-rights trading, SGX approval must be obtained.
o If not underwritten, company cannot withdraw issue after ex-rights trading –
however, SGX may permit scaling down of shareholders’ application for the rights
issue to avoid triggering take-over obligations.
 Differences between the 2.
 Rights issues are renounceable – shareholders’ approval not required if within the general
mandate, and an OIS is required.
 Preferential offerings are non-renounceable (no trading of provisional allotments or “nil-paid”
rights) – shareholders’ approval required for discount of more than 10% to market price, and
OIS is not required if not underwritten.
o [2] Private placements.
 Unlike rights issue, private placements are not made pro rata – e.g. only to specific shareholders.
 r 805, LM generally states that an issuer may not issue equity securities without prior approval of shareholders.
o Exception – r 806, LM allows issuer to rely on existing share issue mandate instead of specific approval.
 Validity.
 Unless earlier revoked, the general share issue mandate is valid until the conclusion of the first
AGM following the meeting at which it was obtained.
 Ordinary resolution.
 Limit of 50% total issued shares at date of general meeting for pro rata offer to existing
shareholders – hence, consider this when it’s a rights issue or preferential offering.
 Sub-limit of 20% for other offers – hence, consider this when it’s a private placement.
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  Limits may be adjusted for new shares arising from convertibles/options/awards subsisting at
date of general meeting and subsequent bonus/consolidation/subdivision.
o Note: This means that even with 20% issued on non-pro rata basis, the remaining 30%
can still be issued as long as they are on a pro rata basis.
 r 803, LM states that any issue resulting in transfer of controlling interest must require prior approval of shareholders.
o Note: This is a separate requirement from the authority to issue securities.
o “Controlling interest” refers to 15% or more of the total number of issued shares of the issuer (excluding the
treasury shares) – hence, must consider whether a placee will become a controlling shareholder after issue?
 Prospectus is required for all offers of securities (including secondary offers) unless specifically exempted.
o Common exemptions – refer to above.
 Offer to existing members of issuer – preferential offerings (see ss 273(1)(cd) and (ce), SFA).
 Offer to no more than 50 persons in any 12 months period – placement (see s 272A, SFA).
 Offer to institutional investors – placement (see s 274, SFA).
 Offers to accredited investors and other persons (who purchase securities for consideration of
$200,000 or more) – placement (see s 275, SFA).
 Offer to the public via Offer Information Statement (OIS) – renounceable rights issue (see s 277, SFA).
 Key disclosure items for OIS (a summary prospectus).
o Offer statistics and timetable.
o Use of proceeds and expenses incurred.
o Information on issuer.
 Directors and substantial shareholders.
 Issued share capital and outstanding debentures.
 Litigation and arbitration.
 Details of securities issued in the last 12 months.
 Material contracts.
 Any material breaches of banking covenants.
o Financials.
 Income statement – 3 years audited and most recent interim one.
 Balance sheet – latest audited or interim.
 Cash flow statement – latest audited or interim with evaluation.
o Trend information for current financial year.
o Consents from issuer manager and underwriters.
 Liability for false or misleading statement – same as for prospectus.

RESTRICTIONS ON PRICING

 Rationale – in a secondary offering, there is often a discount to the market price offered (since existing shareholders can
always purchase additional shares from the open market (no need to participate in the rights offerings), hence to entice
them, discount offered).
o Restrictions are imposed to:
 Protect minority investors from excessive dilution and excessive discounts.
 Prevent issuers from favouring certain classes of persons (e.g. directors, substantial shareholders,
immediate family members, etc.).
 r 811, LM: Pricing restrictions for non-pro rata private placement of new shares and non-renounceable rights issues (i.e.
preferential offerings) relying on general mandate.
o In such cases, the issue price of the new shares can be set to a maximum discount of 10% based on the weighted
average price for trades on the SGX:
 For the full market day on which the placement/subscription agreement is signed, or
 (If not traded for a full market day (e.g. if signed during a trading halt)), for the preceding market day
up to the time the placement/subscription agreement is signed.

RESTRICTIONS ON PLACEES

 r 812(1), LM: New shares cannot be placed to:

o (a) The issuer’s directors and substantial shareholders.
o (b) The director’s/substantial shareholder’s Immediate family (e.g. spouse, child, adopted child, step child,
sibling, parents).
o (c) The substantial shareholder’s (if it is a company) substantial shareholders, related companies, associated
companies, and sister companies.
o (d) Companies in whose shares the issuer’s directors and substantial shareholders have an aggregate interest of
at least 10%.
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 o (e) Any person who, in SGX’s opinion, falls within the above categories.
 Exception for (a) – r 812(3), LM: Placement to substantial shareholder is permitted if (conjunctive):
o Substantial shareholder does not have:
 Representation (directly or indirectly) on the issuer’s board.
 Control or influence over the issuer, in connection with day-to-day affairs of the issuer and terms of
placement;
o Placement effected through an independent process – e.g. book-building;
o Placement made to more than 1 placee; and
o Substantial shareholder’s shareholding in the issuer immediately after placement is not more than immediately
before placement.
 Exception for (b), (c) and (d) – r 812(4), LM: Placement to these placees permitted if SGX is satisfied that the person is:
o Independent; and
o Not under the control or influence of any of the issuer’s directors or substantial shareholders.
 Exception for (a) to (d) – r 812(2), LM: Restrictions on persons do not apply if:
o Specific shareholder approval for such placement has been obtained; and
o Placee, and its associates, abstain from voting on the resolution approving the placement.

TIMELINE & KEY DOCUMENTS

 General rule under r 1207(18), LM: Issuer must disclose in its annual report whether or how it has complied with the
stated best practices:
o Listed issuer and its officers should not deal in the issuer’s securities during a blackout period because there
may be materially price sensitive information during the period:
 (If quarterly financial statements are not required) 1 month before announcement of the issuer’s half
year or full year financial statements.
 (If quarterly financial statements are required) 2 weeks before announcement of each 1st three
quarters and 1 month before full year financial statements.
 Note: Usual insider trading laws apply.

Events for Placement Timing

Preparation. Variable.
 Working group prepares placement agreement and OIS (if necessary).
 Placement agent to conduct due diligence and get issuer to confirm that no
developments have occurred that could be material to placement and are not yet
disclosed.
Announce placement.
Lodge OIS (if required).
Launch placement.
 Placement typically takes place outside trading hours – if issuer wishes to undertake
placement during trading hours, it will have to call for a trading halt on SGX.
Submit Additional Listing Application (ALA) to SGX. 5 to 15 market days.
Receive Approval In Principle (AIP).
Announce receipt of AIP via SGXNET. As soon as possible.
Give notice of completion. Minimum 3 market days.
Completion.
 Allot and issue placement shares against receipt of placement proceeds.
 Deliver share certificate to the Central Depository (CDP).
 Placement shares credited to placees’ securities accounts.
Listing of placement shares. Market day after completion.
 Note: Timeline for placement and rights issue (renounceable and non-renounceable) are largely similar – however, there
are prescribed periods in rights issue within which offer documents must be despatched to shareholders, and closing
dates for shareholders to indicate acceptance.
 Key documents.
o Corporate authorisations.
 Board resolutions.
 Shareholders’ circular and resolutions (if necessary, e.g. when no general share issue mandate).
 EGM must be convened, notice of EGM with resolutions must be passed containing
information on proposed placement or rights issue.
o Transaction documents.
 Placement Agreement.
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  Share Lending Agreement (if applicable).
o Offering documents.
 OIS or other offering circular.
o SGX listing application.
 Additional listing application.
 Voluntary weighted average price (VWAP) of issuer’s share price.
 Confirmation letter from issuer.
 Confirmation letter from placement agent.
 SGX compliance checklist for placement.
o Others.
 Regulatory filings – e.g. return of allotment to ACRA.
 CDP instructions to credit shares.
 Placing letters (by placement agent).
o Optional.
 Legal opinions (for placement agent).
 Comfort letter on OIS (for placement agent).
 Investor representation letter (by Qualified Institutional Buyers if offer is to be made in the United
States under permitted exemptions).
 SGX announcements.
o Launch of placement.
o Results of placement.
o Receipt of Approval in Principle (AIP).
o Allotment an issue of placement shares.
o Substantial shareholding notifications (if applicable, e.g. change in substantial shareholder).
o Note: Release of material announcement should be released “outside trading hours” (before 8am and after
5:06pm).
 But if material announcement need to be released during trading hours, a trading halt (of at least 30
minutes) will be imposed after release of material information.
 Disclosure requirements under r 810, LM: Issuer must announce issuance of shares for cash promptly, stating:
o Terms and purpose of issue.
o Amount of proceeds to be raised.
o Intended use of proceeds on percentage allocation basis (can be a range).
o Identity of placement agent (if any).
 If a placement agent is not appointed, or if appointment is subject to restrictions, announcement must
also state:
 Identities of placees and number of shares placed to each of them.
 How such placees were identified and rationale for placing to them.
 Restrictions and/or directions imposed on placement agent by issuer regarding identities of
and/or allocation to placees.
o If shareholders’ approval is required, circular must include above disclosures and basis of discount.
 Continuing disclosure requirement under r 704(30), LM: Issue must immediately announce:
o Material disbursement of proceeds from IPO or other equity fundraising under Chapter 8, LM.
o Whether it is in accordance with the stated use and percentage allocated in the IPO prospectus or
announcement of equity fund raising.
o And if there is material deviation from the stated use of the proceeds, reasons for such deviation.
o Note: Issuer annual report to include status report on above.

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3. ACQUISITION OF SHARES (PUBLIC COMPANY)
INTRODUCTION

 Takeover generally involves a larger company taking control of assets or management of a smaller company.
o But the contrary is possible as well – e.g. reverse takeovers (also known as leveraged buyouts where the smaller
companies borrow from lenders to raise required financing to facilitate the takeover).
o A transaction or series of transaction whereby an acquirer (individual, company or group) acquires control:
 [1] Of the assets of a company by becoming the direct owner of the assets.
 [2] Of the management of the company (and obtaining indirect control of its assets).
 Merger often signify a marriage amongst equals – companies tend to be roughly of the same size.
o An arrangement whereby assets (and liabilities) of the companies become vested in a single company.

STRUCTURAL CONSIDERA TIONS

 2 basic structures for buying and selling a business:

o Sale and purchase of assets or business – direct purchase/ownership + assets transferred from seller  buyer.
o Sale and purchase of shares of company – purchase/ownership of shares of the target company.
 The target’s legal position is not altered in any way (i.e. assets and liabilities of the business continue
to belong to the company, and its existing contractual relationships will be unaffected).
 [1] Identification.
o Asset sale.
 Sale of assets on a piecemeal basis – need to identify every single asset and liability and need to
determine whether that asset or liability is to remain or to be transferred.
 Used when there exists non-related business that the acquirer is not interested in.
 Particularly attractive where the selling company is subject to:
o A major claim in litigation; or
o Some other contingent liability; or
o Whether the business being acquired is one which is likely to attract significant
product liability or employer’s liability claims.
o Business sale.
 Sale “as a going concern” – business to be transferred is identified in functional terms (i.e. all that is
required to ensure continuity of business with the acquirer.
 Used when the buyer wants the entire business of the seller.
 However, if the selling company has more than 1 business, and the buyer only wants 1, the
transaction would have to be by an asset sale.
 [2] Allocation of liabilities in the business.
o Asset sale.
 Liabilities (historic, current, prospective, or contingent (if any)) would remain with the seller, unless
expressly transferred.
 Rules of privity of contract means that the seller remains liable for all creditors, and includes
all other liabilities incurred by him and for all goods sold by him before the sale – this is despite
the fact that the buyer may have agreed to assume those liabilities.
o Business sale.
 Liabilities relating to the business would go along with the sale, unless expressly excluded.
 Seller will be able to walk away from the business upon completion of the sale and purchase,
save to the extent of any warranties of indemnities that he may have had to give to the buyer.
 [3] Formalities of transfer.
o Asset sale.
 Need to comply with all necessary formalities for the transfer of title to each and every asset.
o Share sale.
 Need formal transfer of shares in the company.
 Compliance with legal requirements for share transfer will suffice.
 Advantage of simplicity and (generally) speeds.
 Note: Additional issues in the acquisition of shares.
 Granting of financial assistance.
o s 76, Companies Act: A company shall not give any financial assistance for the purpose
of, or in connection with, the acquisition of shares.
 But note the possibility of “whitewash”.
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  Validity of issue of shares.
o s 161, Companies Act: Directors shall not exercise any power of the company to issue
shares, without the prior approval of the company in general meeting.
 [4] Consents from 3rd parties.
o Asset sale.
 May need to obtain consent of 3rd parties.
 Assignment of contracts and leases – e.g. if there are terms that prohibit transfers.
 Ownership of assets.
 Change of employer.
 Prohibition on disposal of substantial assets.
 s 160(1), Companies Act: Directors dispose the whole or substantially the whole of the
company’s undertaking or property unless it has been approved by the company in general
meeting.
o Under s 160(2), Companies Act, the Court may, on the application of any member of
the company, restrain the directors from entering into a transaction in contravention
of s 160(1), Companies Act.
o However, under s 160(3), Companies Act, a transaction entered into in contravention
of s 160(1), Companies Act, shall, in favour of any person dealing with the company
for valuable consideration and without actual notice of the contravention, be as
valid as if the subsection has been complied with.
o Share sale.
 May have pre-emptive rights in the AOA – i.e. right of first refusal.
o Other considerations.
 Foreign parties/assets – exchange control restrictions, foreign investment approvals.
 Other 3rd party approvals – mortgagee bank, MAS, JTC, merger controls, etc.
 [5] Parties involved.
o Incapacity of sellers.
 Factors affecting ability to transfer good title.
 Individual – bankrupt, underage shareholder?
 Corporation – insolvent?
o Are there many shareholders?
 If so, it might make an acquisition by shares impractical to negotiate with all of them for the purchase
of their shares – unless a general offer under the TC, or a scheme of arrangement, etc. can be utilised.
 [6] Taxation.
o Asset sale.
 There may be tax deductions for asset’s purchase price.
o Share sale.
 Taxed once since sale proceeds will be received by the seller of shares personally (c.f. double taxation
on asset sales).
 Stamp duties on shares are generally lower than on assets.
 Stamp duty – land (3%), shares (0.2%), scripless trading on the SGX.
o Relief from stamp duty.
 M&A scheme – $200,000 relief refunded per year, if the buyer and seller
meets all the Qualifying Conditions.
 s 15, Stamp Duties Act: Relief on reconstruction and amalgamation (if 90%
of consideration in the form of shares), and relief on transfer of assets
between associated companies.
o Other considerations.
 Income tax.
 s 23(2), Income Tax Act: Carry forward of capital allowances.
 s 37(5), Income Tax Act: Carry forward of losses.
 More than 50% change in shareholders may mean loss of certain tax reliefs/benefits.
 Goods & Services Tax – 7%.
 Sale of shares.
 Sale of assets – as a going concern, or otherwise.
 [7] Documentation.

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DUE DILIGENCE

INTRODUCTION
 What is due diligence?
o The gathering, organising, analysing and verifying relevant/appropriate information relating to a particular
commercial transaction – it varies depending on:
 The nature of the transaction.
 The parties involved.
 The quality and quantity of data supplied.
o It stems from the principles of freedom of contract, and caveat emptor.
 Types of due diligence.
o Legal due diligence – examines legal affairs of the target business/target company.
 Purpose of legal due diligence in an acquisition.
 Buyer’s perspective.
o To check what it is buying.
o To structure and negotiate transaction.
o To ascertain the need for indemnity (warranty protection) or if it should walk away.
o To ascertain if any ancillary documents need to be signed.
o To plain integration steps after deal is completed.
o To avoid post-deal disputes.
 Seller’s perspective.
o To “groom” the target business/target company for sale.
o To prepare an information memorandum.
o To assist in the process of disclosure against warranties in the sale agreement.
o To ensure commercially sensitive or confidential documents are not released to
potential buyers.
 Note: Warranties and indemnities are not a substitute for due diligence, but complementary.
 Purpose of legal due diligence in an IPO.
o Business/operational due diligence – examines broader issues (e.g. industry, competitors, business’ strengths
and weaknesses, etc.)
o Financial/tax due diligence – examines financial affairs of the target business/target company
o Environmental due diligence – e.g. where business involves manufacturing sites, must identify any
contamination, pollution, or other environmental risks and issues.

DUE DILIGENCE PROCESS

 General process – protect data (seller only)  acquire data  vet data  index, store and organise data  distribute
data  collaborate  analyse data  report and meetings.
 Data room.
o What is a data room?
 Data room is a repository of documents and information which might be of interest to buyers.
 It can be set up by the seller/buyer and their advisors/counsels.
 Issues to consider – ease of access, ease of administration, confidentiality, security concerns,
cost to set up, etc.
 A virtual data room is an electronic equivalent of a physical data room.
o What information should be included and when?
 Treatment of commercially sensitive agreements, information, etc.
 Tiered release of data – e.g. in accordance with the TC.
 Preparing a due diligence report.
o Considerations of the parties – typical areas of risks in the industry, deal structure, etc.
o Reviewing documents – what to look out for.
 Corporate records.
 Tracing of title to shares.
 Restriction on transfer of shares.
 Minority shareholder protections.
 Encumbrances over shares.
 Restrictions against granting security.
 Material contracts – supply contract, sale contracts, leases, etc.
 Share sale – change of control/shareholding.
 Business sale – prohibition against assignment.
34
  Term/termination of material contracts.
 Warranties, indemnities, and guarantees.
 Onerous and unusual terms.
 Governing law.
 Acquisition/disposals.
 Deferred consideration due.
 Unexpired warranty or indemnity obligation.
 Restrictive covenants.
 Joint venture/shareholders’ agreements.
 Board representation.
 Minority shareholder protection.
 Restriction on transfer of shares.
 Financing obligations.
 Consequences of default/deadlock.
 Finance documents.
 Repayment provisions on change of control/shareholding.
 Penalties on prepayment.
 Outstanding indemnities.
 Unusual events of default and security.
 Financial covenants.
 Land/buildings.
 Check title, planning, contractual relationships, contingent liabilities, etc.
 Conduct legal requisitions.
 3rd party consents.
 Whether title documents, tenancy agreements, etc. are stamped?
 Licenses/permits.
 Whether there is compliance with business operations, asset compliance, environmental
issues, health safety issues, etc.?
 Whether the license allow a change in control?
 Insurance.
 Whether essential assets are covered by insurance or are there any gaps in coverage?
 Outstanding insurance claims.
 History of claims made.
 Employment.
 Employment retention – whether the employees can be transferred, or can they resign?
 Employee benefits – e.g. retrenchment benefits.
 Termination provisions.
 Collective agreements – e.g.unions.
 Restriction covenants – e.g. non-compete, non-solicit.
 Protection and compliance under the Employment Act.
 Litigation.
 Number (if any) of litigation claims pending and in progress.
 Whether litigation claims are covered by insurance?
 Whether there are any litigation threatened?
 Accounts.

THE SINGAPORE CODE ON TAKE-OVERS AND MERGERS (TC)

 The TC is a non-statutory set of rules administered by the Securities Industry Council (SIC).
o It has statutory recognition and is issued pursuant to s 321, Securities and Futures Act.
o However, it is non-statutory in that a breach of the Takeover Code is not a transgression of the law.
 The non-statutory form has important advantages:
 Prompt ruling as opposed to court judgments which would take time.
 Flexibility in administering/interpreting provisions according to specific circumstances as the
non-statutory rules are not rendered in legal language.
 Certainty as the court is normally reluctant to review the SIC’s rulings, particularly in the midst
of a takeover offer – parties are not likely allowed to use the court process to stall or frustrate
a takeover offer.

35
 o Nonetheless, if breached, it may result in sanctions by the SIC – e.g. private reprimands, public censure, or any
further action (such as depriving the offender of the ability to enjoy facilities of the securities, or require the
person concerned to pay shareholders of the target company, etc.).
 In the case of advisers, the SIC may also require such advisers to abstain from taking on TC-related work
for a stated period of time.
 The TC applies to the take-overs of, although the SIC may waive application to the first 4:
o Corporations, including foreign-incorporated companies, with a primary listing on the SGX-ST.
o Registered business trust, including foreign-registered business trust, with a primary listing on the SGX-ST.
o Unlisted Singapore companies with more than 50 shareholders and net tangible assets of $5 million or more.
o Unlisted business trust with more than 50 unitholders and net tangible assets of $5 million or more.
o Real estate investment trusts.
 The TC applies to all offerors (whether individual or company, Singapore resident or not), and extends to act done or
omitted to be done in and outside Singapore.
 However, the SIC may waive application of the TC entirely.
o Factors the SIC considers – number of shareholders based in Singapore, extent of trading in Singapore, and
whether Singaporean shareholders are regulated by any shareholder protection outside Singapore.

OTHER SOURCES OF LAW/REGULATION

 Companies Act.
o s 215, Companies Act deals with compulsory acquisition.
o s 210, Companies Act deals with schemes of arrangements.
o ss 215A – 215J, Companies Act deal with amalgamations.
 Securities and Futures Act (SFA).
o Part VIII, SFA contains legislative provisions relating to take-overs.
o Offences relating to take-overs – making a fake offer, cannot pay up for offer, etc.
o s 295A, SFA deals with compulsory acquisition relating to real estate investment trusts.
 Business Trusts Act.
o s 40A, Business Trusts Act deals with compulsory acquisition in relation to a business trust.
 When acquiring/target company is listed in the SGX-ST, the SGX-ST Listing Manual (LM) applies.
o r 1102, LM: Target company must make a request to suspend trading and make immediate announcement of
takeover offer once it has been notified of a takeover offer by an offeror.
o r 1103, LM: Target company must send to all shareholders not subject to the takeover offer and convertible
securities holders documents sent to shareholders subject to the takeover offer.
o r 1104, LM: Reverse takeover.
 Listed company must lodge with SGX all information and documents required for admission to the
Official List if the merger/amalgamation with an unlisted entity (i.e. reverse takeover) has resulted in
the control of the listed company being acquired by the unlisted entity.
o r 1105, LM: Where offeror owns 90% of shareholdings in listed company in the event of a takeover, SGX may
suspend listing of the securities in the ready and odd-lot market unless it is satisfied that at least 10% of the
shares are held by at least 500 public shareholders.
 General body of contract and tort law.
 Note: Special industries.
o Industries critical to national interests have specific statutes requiring regulatory approval for share ownership.
 Acquisition of substantial shareholding in Singapore-incorporated banks, finance companies and
insurance companies require MAS approval.
 Acquisition of substantial shareholding in Singapore-incorporated newspaper and broadcasting
companies require MITA approval.

TAKE-OVER PROCESS UNDER THE TAKE-OVER CODE

PRE-BID STEPS AND OB LIGATIONS

 Commencement and approach to the target.

o r 1, TC: Offer should be in the first instance be made to the board of the target or its advisors.
 Rationale – the takeover bid may be more likely to succeed if it has the board’s active recommendation,
and the offeror may need to have assistance from the target’s board to gain the target’s financial
information that is not already public, typically during due diligence.
o r 1.2, TC: If offer is not made by ultimate offeror, identity of the ultimate offeror must be disclosed at the outset.
o r 1.3, TC: Board must be satisfied that the offeror is in a position to complete the offer – e.g. in the form of
comfort/assurance from the offeror’s financial advisor.
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INFORMATION

 r 2, TC: Secrecy is of utmost importance.

o Fundamental obligation is that absolute secrecy should be maintained at all times, and that all persons must
conduct themselves so as to minimise the risk of an accidental leak of information.
o Flow of information must be channelled and timed carefully – premature announcement would create a false
market, but late announcement increases the risk of leakages.
 r 9, TC: Sharing of information by the target.
o Information may be provided to the offeror – e.g. during due diligence.
o Equality of information – information must be provided equally, fully, and promptly to any other competing
offerors, even if it is not welcomed by the target.
 Note: Restrictions on pre-announcement and post-announcement dealings.
o r 11.1, TC: Pre-announcement dealings.
 No dealings of any kind in the securities of the target company are allowed by a person with price-
sensitive information prior to the announcement of the offer.
o r 11.2, TC: Post-announcement dealings.
 Before offer has become unconditional as to acceptances, offeror and concert parties cannot sell
securities in the target unless 24 hours’ notice is given with SIC approval.
 After offer has become unconditional, offeror and concert parties cannot sell securities in the target
unless 24 hours’ notice is given and the offer documents discloses such intention to sell.
 Where the offer consideration includes securities of the offeror, the offeror and concert
parties cannot deal in those securities during the offer period.

ANNOUNCEMENT OF OFFE R

 rr 3.1 and 3.2, TC: Obligation to announce.

o Initially lies with the offeror – i.e. before the target’s board is approached.
 If the target’s board is reliably informed that a party is intending to make a bid such that there is
untoward movement in share price, the target may make announcement even before it is approached.
 General Principle 6, TC: Announce only after the most careful consideration.
o Thereafter with the target – i.e. after its board has been approached.
 rr 3.1 – 3.3, TC: Situations where an announcement must be made.
o When a firm intention to make an offer is notified to the board of the target, must also inform the market.
o Acquisition of shares resulting in an obligation to make a mandatory offer.
o When the target becomes the subject of rumour or speculation, or there is untoward movement in price.
o Extensive negotiations for a possible offer – the more people are involved in the negotiation the less likely that
information will be kept confidential (increased probability of leakage).
o Purchaser being sought for a large shareholder (holding 30% of more) who is intending to sell shareholding.
 Types of statements.
o Definitive.
o Holding announcement – talks are still in negotiations, but not yet at the stage for a formal announcement.
 Note 5 to r 3, TC allows holding announcement to state that talks are taking place (without naming
potential offeror) or that a potential offeror is considering making an offer.
 If following such announcement, no further announcement has been made in respect of the
possible offer within 1 month, an announcement must be made setting out the progress on
the talks or the consideration of the possible offer.
 Obligation to provide monthly update continues until firm intention to make the offer or
decision not to proceed with an offer is announcement.
o Statement requesting SGX to suspend trading in its stock instead of making an immediate announcement.
 r 3.5, TC: Contents of the offer announcement.
o [1] Terms of the offer.
o [2] Identity of the offeror – not just the actual offeror (often just an SPV), but also must have substantive
information, such as the ultimate person who is behind the offer.
o [3] Details of shares the offeror holds in the target company (along with its concert parties).
o [4] Conditions to which the offer is subject.
o [5] Details of any arrangement which might be material to the offer.
o [6] Details of shares the offeror holds in the target company which has been granted as a security interest
(charge, pledge, etc.), borrowed from another person, or lent to another person.
o [7] If offer is for cash (or involves an element of cash), confirmation by financial advisor or another appropriate
3rd party as to availability of sufficient resources to complete the offer during the offer announcement.

37
CONDUCT DURING OFFER

 r 4, TC: Upon announcement of firm intention to make an offer, offeror cannot withdraw the offer without SIC’s consent.
 r 7.1, TC and General Principle 8, TC: Independent advice.
o Target’s board must obtain competent independent advice immediately.
 Rationale – target’s board is interested and cannot provide impartial advice, either because there is the
threat that the new owners will replace the incumbent directors in a hostile takeover, or there may be
benefits to the incumbent directors in a friendly takeover.
o Target’s board must communicate the substance of the independent advice to the shareholders – especially if
there is a divergence of views amongst the board, or between the board and the independent adviser as to the
merits of the offer or recommendation being made.
 r 8.1, TC: Shareholders must be given all information necessary to make an informed judgment on the merits of the offer.
o Offeror’s formal offer document containing the formal offer should normally be posted to shareholders of the
target between 14 – 21 days after the announcement of the firm intention to make an offer.
 Document must also be available for inspection.
o Target’s board has 14 days after posting to circulate a circular to its own shareholders.
o Offer must initially be open for at least 28 days after date of posting – extension by SIC allowed up to 60 days.
 Target’s board may accept and support the bid, reject and oppose the bid, or adopt a neutral stance.
o r 24.1, TC: Communication of financial adviser and board’s stance (their decision) to shareholders.

DUTIES OF THE OFFEROR

 General Principle 1, TC: The spirit and precise wording of the TC is to be observed.
 General Principle 3, TC: Offeror must treat all target shareholders of the same class equally.
o r 18, TC: Comparable offers for different classes of capital.
 To make comparable offers where target has multiple classes of shares – equity + preference shares.
 Offeror must take into account conversion rights (convertible bonds), options, and subscription rights in the target’s
shares (people who may get shares in the company in the future) – they must be given the right to exit from the company.
o r 19, TC: If target has options, rights and convertible securities, the offeror must make an appropriate offer to
those holders too – equality of treatment within the specific types is required.
 E.g. by giving them the option to exercise those rights immediately, or by purchasing instruments from
those holders (but problems of valuation), or by entering into a promise that the offeror will still
purchase the shares if later converted.
 Offeror must offer uniform terms to all shareholders.
o r 10, TC: Avoid “special deals” (such as favourable conditions) with specific shareholders not applicable to others.
o Note 4 to r 10, TC: SIC must be consulted if management of the target is to remain financially interested in the
business after the offeror is completed – basically, SIC wants the risks and rewards associated with shareholding
to also apply to the management’s retained interest.
o Note 4 to r 17.2, TC: Management retaining an interest.
 In a management buy-out or similar transaction, the offeror can offer securities to shareholders who
are in the management of the target without offering securities to other shareholders.
 SIC is okay as long as the requirements in Note 4 to r 10, TC are complied with.

DUTIES OF THE TARGET’S BOARD

 Duties under the TC.
o General Principle 3, TC: To act in the interests of the company as a whole, and not to deny shareholders the
opportunity to decide on the merits of a bid.
o r 5, TC: Not to frustrate an offer or to take other similar action without consent of the shareholders.
 General Principle 7, TC: If the board of the target has received a bona fide offer or has reason to believe
that a bona fide offer is imminent, the board cannot generally take a “frustrating action” on a bid
without shareholders’ approval in general meeting, and cannot deny shareholders the decision-
making powers.
o r 6.1, TC: Target’s board must ensure that proper arrangements are in place for it to monitor the offer.
o r 6.3, TC: Directors cannot resign until the offer becomes unconditional.
 Duties under company law – to act bona fide in the best interest of the company, and to act for a proper purpose (e.g.
cannot issue shares to dilute shareholders, and preventing the takeover).

TYPES OF TAKE-OVER TRANSACTIONS

 Note: Unlike the general offer (whose timing is prescribed by the TC), the target company has more control over the
precise timing of other transactions because they control the details.
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GENERAL OFFERS

 Mandatory offer – offeror is obliged to make a mandatory offer for all shares of the target company when certain
thresholds stipulated in the TC are reached.
 Voluntary offer – offeror makes a voluntary offer for all shares of the target company, and this offer is not triggered by
the mandatory offer rules in the TC.
 Partial offer – offeror makes a voluntary offer for a specified number of sha'res in the target company.

MANDATORY OFFER

 Although offers are usually made voluntarily by the offerors, in certain cases, the acquirers of shares in a company are
mandatorily required to make offers to other shareholders once their shareholding exceeds a prescribed %.
o Rationale – part of the rule of equality of opportunity.
 Minority shareholder bought shares on reliance of the controlling shareholder – if the controller exits,
the minority should be given a chance to exit too.
 Minority shareholders should be given the same terms of exit as those who have sold.
 In conclusion, offeror should avoid a mandatory offer (through share acquisition) during an existing voluntary offer
(especially if it wants the 90% threshold to squeeze-out) because more onerous requirements apply.

TRIGGER THRESHOLDS

 r 14.1, TC: Acquirer to mandatorily make an offer to all shareholders.

o r 14.1(a), TC: Mandatory offer is triggered both in a de facto control scenario (where a person acquires “effective”
control of the company with 30% or more of the voting rights) and creeper rule situation (where a person
holding between 30% - 50% of voting rights acquires > 1% of voting rights in 6 months).
 “Control”.
 Subjective definition would raises issues of certainty and difficulty of implementation due to
varying facts and circumstances – hence, objective definition of an arbitrary figure of 30%.
o Note: It is possible for a shareholder to acquire shareholding > 30%, and at the same time also exceed > 50%.
 Note 2 to r 14.2, TC: If the acquirer’s shareholding is beyond > 50% at the time an offer is made, a
mandatory offer made should be unconditional as to acceptances (since it’s already above the
maximum limit of 50%).
o Note: If the acquirer’s original shareholding is already beyond > 50%, any acquisition will not trigger the
mandatory offer requirements as it does not alter control.
 Creeper rule.
o r 14.1(b),TC: Mandatory offer requirement is also triggered when acquirer’s shareholding is between 30% - 50%
+ acquisitions of more than > 1% of voting rights in any period of 6 months.
 Quare: How does the acquirer obtain the 30% - 50% shareholding without triggering r 14.1, TC initially?
 Historical – original shareholding continues (e.g. IPO issuance).
 Failure offer – did trigger mandatory offer obligation previously, but failed.
o If acquirer succeeded, would be in the > 50% shareholding position.
 Whitewash – where company issues new shares to 1 particular person only (of 30% - 50%), the
company may apply to the SIC for an exemption to the mandatory public offer requirement
(e.g. where issuance of shares is meant to obtain capital).
o Because the issuance of shares by the directors requires shareholders’ approval – if
company have already approved of the issuance, SIC is more amenable.
o When acquirer already has shares in the company, even though there is no conflict
of interest on the shareholder level (shareholders have no fiduciary duties to the
company), SIC requires the acquirer who will be issued more shares to abstain from
voting on the shareholders’ resolution for approval.
 Acting in concert.
o Acquisition of > 30% de facto control, and 30% - 50% creeper acquisition is determined on an aggregate basis –
acquisitions by persons acting in concert will be aggregated with that of the offeror.
 Rationale – this prevents the offeror from concealing the extent of its interest in the target company
by acting surreptitiously with other parties in such a way as to ensure it never itself owns or control
sufficient shares to trigger the mandatory offer requirement.
o Parameters to determine “persons acting in concert” – definition is drawn in deliberately wide terms.
 Agreement or understanding.
 Can be formal or informal – can be express or implied.
 Highlights cooperation.
 To obtain or consolidate control or to frustrate an offer.
39
 o General definition is accompanied by presumptions – certain types of arrangements are presumed to be acting
in concert (unless contrary is established), and burden of proof is on the acquirer (c.f. SIC to prove).
 Company – parent, subsidiaries, associated companies (controls 20% to not more than 50% of shares).
 Company – directors.
 Partners.
 Persons who have provided financial assistance for acquisition.
 Individuals – close relatives, related trusts, etc.
o Examples of parties “acting in concert”.
 Underwriting agreement at arm’s length commercial terms is usually not considered a concert party
arrangement.
 Arm’s length agreement with a bank will not per se be treated as a concert party arrangement between
the shareholder and the bank unless such agreement involves the bank acquiring target shares or an
option over such shares, or otherwise creates an incentive for the bank to assist such person in
obtaining or consolidating efficient control of the target.
 In all doubts, the SIC should be consulted.
o Despite those examples stated under the definition of “acting in concert” under the TC, the SIC has the right to
scrutinise such arrangements to ascertain whether there are some features in the arrangements such that a
sufficient level of understanding has been created between the offeror and underwriter to amount to an
agreement/understanding within the meaning of “acting in concert”.

CONDITIONS
 Unlike a voluntary offer, the offeror in a mandatory offer cannot opt for any conditions he wishes.
 [1] Limitation on imposing subjective conditions – it must be unconditional.
o None of the customary conditions are allowed – e.g. shareholders' approval, MACs, regulatory approvals, 3rd
party clearances, etc.
o Offer can only attach 2 conditions:
 [1] Acceptance condition.
 [2] Where no prior clearance is obtained by the offeror from the Competition Commission of Singapore,
the condition relating to the Competition Act.
 [2] Acceptance condition is set at 50%.
o Cannot impose a higher threshold (r 14.2, TC).
 If % threshold is achieved, anything in excess needs to be bought as well (c.f. partial offer).
o Mandatory offers do not permit a threshold (such as 90%) to prepare for a squeeze-out to follow.
 r 33.1, TC: 12-months prohibition.
 If the mandatory offer does not become unconditional because the offer (and persons acting
in concert) fails to acquire more than 50% of the voting rights in the target company, each
member of the group acting in concert is precluded in the next 12 months from making any
further offer or from acquiring any shares in the target company if the result of such an
acquisition would trigger a mandatory offer.
o Note: It is possible for a shareholder to acquire shareholding > 30%, and at the same time also exceed > 50%.
 Note 2 to r 14.2, TC: If the acquirer’s shareholding is beyond > 50% at the time an offer is made, a
mandatory offer made should be unconditional as to acceptances (since it’s already above the
maximum limit of 50%).

TERMS
 r 14.3, TC: Consideration must be in cash or a cash alternative.

OFFER PRICE
 r 14.3, TC read with r. 21.1, TC: Minimum price rule – consideration must be at no less than the highest price paid by the
offeror (or any persons acting in concert) for shares of that class during the offer period and within the preceding 6
months.
o If the offeror considers that the highest price should not apply in a particular case, the SIC should be consulted.

VOLUNTARY OFFER

 A voluntary offer under r 15, TC is a takeover offer for the voting shares of a company made by a person when he has not
incurred an obligation to make a mandatory offer under r 14.1, TC.

40
CONDITIONS

 A voluntary offer must be conditional upon the offeror receiving acceptances in respect of voting rights which, together
with voting rights acquired or agreed to be acquired before or during the offer, will result in the offeror and person acting
in concert with it holding more than 50% of the voting rights.
o Note: Distinction between condition and pre-condition.
 Conditions are attached to the offer that the offeror has committed to make.
 Pre-conditions are conditions that must be satisfied before the making of an offer.
 [1] r 15.1, TC: Acceptance condition.
o Offer to succeed only if offeror has acquired (either in the offer or otherwise) 50% of voting rights in the target
– if 50% threshold is not achieved, the shares tendered will have to be returned.
 If % threshold is achieved, anything in excess needs to be bought as well (c.f. partial offer).
o Offeror may prescribe a higher threshold (e.g. 90%).
 But 90% can be waived during the offer, down to the minimum of 50%.
o Rationale for placing an acceptance condition.
 50% – ensures that an offeror does not acquire de facto control without a majority shareholding (i.e.
actual control).
 Hard to tell when de facto control occurs, so de jure control of 50% is most pragmatic.
 Benefits other shareholders as well because it prevents offeror from paying less to gain de
facto control in the case where remaining shareholding is diffused.
 90% – threshold required to invoke compulsory acquisition and squeeze-out the rest.
o Note: Acceptance condition applies to “voting rights” and not just shares (or mere interest in shares).
 Derivatives are not included because they do not carry voting rights (even though they represent
“interest” in securities in the UK) – hence, it may be more difficult for such a holder of derivatives to
satisfy the acceptance condition because they would still have to obtain 50% of the remaining shares
with voting rights (the counterparty will not sell the underlying shares for the derivative because they
need it to hedge their position).
 [2] Other conditions – to provide commercial certainty to shareholders that the offer will indeed be made. Regulators do
not want an offer to be subject to too many conditions, but some conditions are permitted.
o r 15.1, TC: Permitted only in specific circumstances.
 [1] Objective test can be used to demonstrate satisfaction of condition – e.g. by independent 3rd party.
 [2] Satisfaction of the condition must not be within the hands of the offeror or its directors.
 I.e. no subjective interpretation or judgement (e.g. cannot have condition stipulating approval
from offeror’s board of director because that would be in their control and should already
have been done).
 [3] Parties must take necessary steps to achieve satisfaction of the conditions.
o Essentially, a voluntary offer must not be made subject to conditions whose fulfilment depends on the subjective
interpretation or judgment by the offeror or lies in the offeror’s hands.
 Normal conditions, such as level of acceptance, approval of shareholders for the issue of new shares
and SGX’s approval for listing, may be attached without reference to the SIC.
 The SIC should be consulted where other conditions should be attached.
 SIC normally wishes to be satisfied that fulfilment of a condition in a voluntary offer be certain
and not subject to uncertainty of the offeror’s subjective judgment.
 But usually allow conditions to be included if the test is sufficiently objective and depends on
the judgment of other parties – e.g. where there are reasonable grounds for an offer to be
conditional on the satisfactory confirmation of specific statements, facts or estimates relating
to the business of the target company.
o Examples of permitted conditions.
 Regulatory approvals.
 Shareholders’ approval of the offeror.
 For a share exchange offer (consideration paid in share rather than in cash), need authority
from shareholders under s 161, Companies Act.
 Where takeover bid is classified as a major transaction/RTO under Listing Manual.
 Issuance of new shares – where share issue mandate of the offeror is not sufficiently large to
authorise the issue of offeror securities in a securities offer where the consideration includes
the offeror’s securities.
 Quare: Why not get shareholder approval before the offer?
o Confidentiality issues – offer may be confidential information, and cannot be
disclosed to the shareholders until publicly announced.
o Timing issues – notice requirements, meeting cannot be called immediately.

41
 o But may still be practicable for a voluntary offer (since shareholders’ approval can be
made a condition (c.f. mandatory offer’s prohibition of attaching such conditions).
o Bridging loan solution?
 Material Adverse Change (MAC) clauses.
 May or may not entertained by regulators because this is subjective in nature.
 General trends (changes that generally affect the economy/industry, changes in law are often
not held to constitute a MAC unless it is so severe) vs. events specific to the target (bankruptcy,
corporate action (selling off assets, etc.)).
o Significant change in information.
o Loss of material contracts, plant destroyed, etc.
o External events like the global financial crisis which made sourcing for financing for
leveraged deals difficult.
o Note: 1st two are internal MACs, and are more likely to get approval from the SIC. The
3rd is an external MAC, and the buyer should not be able to avoid completing the offer
no matter how dramatic the general ramifications (however, general events can have
disproportionate effect on the target company and may still be allowed to constitute
a MAC).
 E.g. WPP Group’s bid for Tempus Group in 2001.
o WPP argued that the 9/11 terrorist attack was a MAC, but was rejected.
o The UK Takeover Panel held that the test for MAC “requires an adverse change of
very considerable significance striking at the heart of the purpose of the transaction
in question, analogous to something that would justify frustration of a legal contract”.
Mere economic disadvantages (however large) may not be sufficient.
o The UK Takeover Panel emphasised 4 conditions to be satisfied by the offeror wishing
to invoke an MAC condition:
 [1] Exceptional circumstances have arisen which affects the target.
 [2] Circumstances could not have been foreseen at the time the offer was
announced.
 [3] The effect on the target is sufficiently material.
 [4] The effect is long term and not merely an effect on short-term
profitability.
 [3] r 3.5, TC: Competition law considerations.

TERMS

 Greater flexibility to the offeror in the case of a voluntary offer (c.f. mandatory offer).
o TC is not concerned with the evaluation of financial/commercial advantages/disadvantages of a takeover, and
offerors are free to decide for themselves the consideration and terms of the offer (so long as the duties of the
offeror (e.g. to treat all shareholders equally) are satisfied).
 r 15.2, TC: Consideration can be in cash or securities, or a combination thereof.
o When is a cash offer required?
 r 17.1, TC: Cash consideration generally required when offeror or concert parties acquired 10% of the
target’s shares using cash in the offer period and the preceding 6 months, or if there are circumstances
the SIC thinks is necessitating it.
o When is a securities offer required?
 r 17.2, TC: Securities consideration generally required when offeror or concert parties acquired 10% of
the target’s shares using securities in the offer period and the preceding 3 months, or if there are
circumstances the SIC thinks is necessitating it.
 Note 2 to r 17.2, TC: Equality of treatment.
o SIC may require securities to be offered to all shareholders even if r 17.2, TC has not
been triggered – however, this is rare unless the shareholders who originally sold the
target’s shares are directors/other persons closely connected with the offeror.
 Note 4 to r 17.2, TC: Management retaining an interest.
o In a management buy-out or similar transaction, the offeror can offer securities to
shareholders who are in the management of the target without offering securities to
other shareholders.
o SIC is okay as long as the requirements in Note 4 to r 10, TC are complied with.

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OFFER PRICE

 r 15.2, TC read with r 21.1, TC: Minimum price rule – consideration must be at no less than the highest price paid by the
offeror (or any persons acting in concert) for shares of that class during the offer period and within the preceding 3
months.

PARTIAL OFFER

 Partial offer is an offer made for certain %, and not all the remaining shares in a company (voluntary/mandatory).
o If more than the certain % tendered during the partial offer, fairest way is to have a pro-rata acceptance (3 of 5
shares from each shareholder accepted proportionately).
 r 16.1, TC: SIC’s consent is required for any partial offer.
 r 16.7, TC: SIC’s consent is required for any subsequent partial offer within 12 months from closure of a previous partial
offer (whether successful or not).

CONDITIONS

 r 16, TC stipulates that SIC’s approval is required for a partial offer for only some of the shares in the target company.
o r 16.2, TC: SIC will usually approve of a partial offer for less than 30% of the company’s voting rights.
o r 16.3, TC: SIC will not approve any partial offers which could result in the offeror and its concert parties holding
between 30% to 50% of the company’s voting rights (hence triggering mandatory offer provision in r 14.1, TC).
 In practice, partial offers are usually permitted if it would not result in the offeror and its concert parties
holding 30% or more of the company’s voting rights.
o r 16.4, TC: In a situation where the offer will result in the offeror or its concert parties holding shares carrying
more than 50% of the company’s voting rights, the SIC will grant approval only if:
 (a) The partial offer does not trigger r 14, TC (mandatory offer); and
 (b) The offeror and his concert parties do not increase their aggregate percentage shareholdings in the
target company:
 (i) In the 6 months prior to the date of the offer announcement.
 (ii) In the period between submitting the application for the SIC’s consent and the making of
the partial offer.
 (iii) During the offer period
 (iv) 6 months after the close of the partial offer.
 (c) The partial offer is approved by shareholders of the target company, unless the offeror already has
> 50% of the voting rights.
 However, shareholders’ approval still required if it results in the offeror holding > 90% of the
voting rights, or the target breaching the SGX minimum float requirement of 10%.

TERMS

 r 16.5, TC: Consideration can be in cash or securities, or a combination thereof.

o When is a cash offer required?
 r 17.1, TC: Cash consideration generally required when offeror or concert parties acquired 10% of the
target’s shares using cash in the offer period and the preceding 6 months, or if there are circumstances
the SIC thinks is necessitating it.
o When is a securities offer required?
 r 17.2, TC: Securities consideration generally required when offeror or concert parties acquired 10% of
the target’s shares using securities in the offer period and the preceding 3 months, or if there are
circumstances the SIC thinks is necessitating it.
 Note: No explicit mention if r 17.2, TC applies to a partial offer.
 Note: These rules only apply to a partial offer for less than 30% of the company’s voting rights – under r 16.4, TC, the SIC
will grant approval only if the offeror and his concert parties do not increase their aggregate percentage shareholdings
in the target company in the 6 months prior to the date of the offer announcement.

OFFER PRICE

 r 16.5, TC read with r 21.1, TC: Minimum price rule – consideration must be at no less than the highest price paid by the
offeror (or any persons acting in concert) for shares of that class during the offer period and within the preceding 3
months.
 Note: Like the rules on terms, this rule only applies to a partial offer for less than 30% of the company’s voting rights.

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COMPULSORY ACQUISITI ON

 Generally, an offeror has no power to force minority shareholders to sell their shares to it – provisions of the SFA and TC
are designed to ensure that shareholders are not coerced into accepting an offer.
o However, under certain circumstances minority shareholders’ shares may be compulsorily acquired.
 s 215, Companies Act is the only provision that legislatively/directly recognises squeeze-out for minority shareholders,
providing for the compulsory acquisition of minority shareholding in a company if 1 party owns 90% of the issued share
capital of the target company.
o Rationale – right of majority shareholders to control and director the company’s affairs, so as to facilitate
efficient corporate management, and to recognise that minority shareholders are necessarily subject to certain
controls by a sufficiently large majority of shareholders. The provision is meant to recognise the importance of
preventing minority shareholders, including apathetic or untraceable shareholders, from obstructing the
efficient management of the company (i.e. “oppression of the majority by the minority”).

PROCESS

 [1] Offer (either a scheme of arrangement, or a contract involving the transfer of all of the company’s shares (e.g. a
voluntary general offer) has been approved (within 4 months of making of offer) by 90% of shareholders*.
o This is 90% in value of the shares whose transfer is involved (i.e. shares to which the offer relates to) – this is not
90% of the company’s shares (e.g. if the acquirer already holds 60%, he must get 36% approval from the
remaining 40%), but is a more stringent approval.
o Under s 215(9), CA, shares held by a nominee of the acquirer, or a related company of the acquirer shall be
considered as being held by the acquirer – i.e. cannot vote and be counted under the 90%.
 Note: Loophole – no prohibition if it’s a related person of the acquirer (only company caught).
 [2] Within 2 months, the acquirer may give notice of the compulsory acquisition.
o The acquirer then becomes bound to acquire those shares on the same terms as the original offer.
 [3] Acquirer is entitled to acquire shares of dissenting and untraceable shareholders as well.
 [4] 2-way right – the minority shareholders can require the majority to buy as well.
o Minority shareholders’ reciprocal right of “compulsory purchase”, requiring the offeror to purchase their
remaining minority stake under certain circumstances (which may differ from the circumstances under which
the offeror compulsorily acquired shares).
o Offeror must give the remaining minority shareholders notice of their right, specifying period within which they
are entitled to exercise such right.
o Must provide the same consideration.
 Note: Mechanism under s 215, Companies Act imposes onerous conditions – hence, it is rarely used.
o [1] Needs to be preceded by a general offer.
o [2] 90% approval of the remaining shareholding (those yet to be transferred) is a steep majority requirement.
 What is discounted from the 90% threshold includes the offeror’s shares, shares of its nominees, and
those of a related company or nominees of a related company.
 Hence, must receive the acceptance for 90% of shares that one does not own.
 Usually in listed companies, there are normally shareholders who cannot, for one reason or another,
be traced, or who cannot give title (e.g. following a death or before the grant of probate).
 Note: No requirement for prior court approval.
o However, if the dissenting shareholders approach the courts, then squeeze-out is subject to court order.
o The court will disallow the compulsory acquisition to proceed if it can be shown that the proposed compulsory
acquisition is not made bona fide (other circumstances possibly include fraud, failure to disclosure material
information, material misrepresentation, or a conflict of interest leading to improper expropriation).
o Absent “special circumstances in special cases”, onus on dissenting shareholders to prove unfairness is heavy.
 In re Sussex Brick Co (1961)
 HELD: Judicial intervention in a compulsory acquisition should only occur if the scheme was
“obviously unfair, patently unfair, or unfair to the meanest intelligence”.
o Because the acceptance of an offer by so large a majority of shareholders is prima facie proof of fairness and
courts have generally declined to exercise their judicial discretion to “specify terms of acquisitions different from
those of the offer” especially in cases where the procedural requirements for compulsory acquisition has been
met.
 Re Hoare & Company Ltd (1933)
 HELD: Offer accepted by > 90% of shareholders must prima facie by a proper one, and very
strong grounds must be shown before a court will intervene.
 Re Lifecare International PLC (1989)

44
  HELD: The offer which ex hypothesi has been accepted by > 90% of fellow shareholders means
that the court starts with the assumption that it is fair.

SCHEME OF ARRANGEMENT

 r 1.12, TC: All schemes of arrangement, trust schemes, and amalgamations, are subject to the TC.
o However, SIC may exempt a scheme of arrangement or trust scheme from:
 r 14, TC (mandatory offer), r 15, TC (voluntary offer), r 16, TC (partial offer), r 17, TC (type of
consideration required), Note 1(b) to r 19, TC (appropriate offer to holders of convertibles, etc.), r 20.1,
TC (requirement to keep offer open for 14 days after it is revised), r 21, TC (purchase of voting rights in
a scheme company at above the offer price), r 22, TC (offer timetable), r 28, TC (acceptances), and r 29,
TC (right of acceptors to withdraw their acceptances) and r 33.2, TC (6 months delay before acquisition
of voting rights in the scheme company at above the offer price).
o SIC will normally grant such exemption if:
 [1] Offeror and its concert parties + common substantial shareholders of the merging companies (i.e.
those holding 5% voting rights or more in both companies) abstain from voting on the
scheme/amalgamation.
 [2] Persons and their concert parties who,
 As a result of the scheme/amalgamation:
o Would acquire 30% or more of the voting rights; or
o (If already holding 30% to 50% of the voting rights) Would increase it by more than
1% in any period of 6 months.
 Abstain from voting on the scheme/amalgamation.
 [3] Directors who are directors of both companies, or who are acting in concert with [1] and [2] abstain
from making a recommendation on the scheme/amalgamation.
 [4] The target company must appoint an independent financial adviser to advise its shareholders on
the scheme/amalgamation.
 Note: If it is a “merger of equals” or a reverse take-over, then each of the companies must
appoint an independent financial adviser to advise their shareholders.
 Acquirer cannot make the scheme of arrangement conditional (unlike offers generally) – has to be 100% or nothing.
 Consideration can be in cash or securities, or a combination thereof.
 Acquirer must engage the target’s board because it has to propose the scheme to the shareholders/creditors.

PROCESS
 [1] Approval of the scheme by board of companies involved.
 [2] Application to the court to persuade the court to order the convening of meetings of members/creditors.
o Court has discretion to consider the substantive merits of the scheme.
 Sri Hartamas Development v MBf Finance (1990)
 HELD: Court will not order a members/creditors’ meeting unless the scheme is of such a nature
in such terms that, if it achieves the statutory majority, the court would be likely to approve it.
 Considerations include:
 Proposal for the scheme – overall objectives, reasons for necessity of the scheme, foreseeable
business conditions, level of detail of the scheme.
 Proposal for the conduct of the meeting.
 Other important factors – evidence of member/creditor support, etc.
o Information to members/creditors.
 After the court orders the convening of meetings, a notice of the meeting must be issued + an
explanatory statement.
 s 211, Companies Act: Explanatory Statement.
o (1) Where a meeting is summoned under s 210, Companies Act, there shall:
 (a) Along with every notice, there must also be a statement explaining the
effect of the compromise/arrangement (in particular, it must state any
material interest of the directors), and the effect thereon of the
compromise/arrangement insofar as it is different from the effect on the
like interests of other persons.
 Standard of information required – members/creditors are entitled to such information as to enable
them to properly exercise their voting/creditor rights because the scheme is a significant corporate
event that alters their position and is binding on them.
 Wah Yuen Electrical Engineering Pte Ltd v Singapore Cable Manufacturers Pte Ltd (2003)
o HELD: Parties require such information as is necessary to make a meaningful choice.
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  Re TT International (No. 2) (2012)
o HELD: Court of Appeal reiterated the transparency principle, and emphasised that it
covers all material information a party might need to make an informed choice.
 [3] Convene a meeting of the relevant classes of members/creditors and obtain their approval.
o Members of different classes of members and creditors must be called, and each class must approve the scheme
with the requisite majority.
 s 210(3), Companies Act: Requires a majority in number (> 50% in number) representing ¾ in value (>
75% in value) of the members/creditors present and voting either in person or proxy.
o Classification of members/creditors.
 2-pronged test for classification (as laid out in UDL Argos v Li Oi Lin (2001))
 [1] Similarity of legal rights (pre-scheme rights) – e.g. common shares vs. preferential shares.
o Are the differences in the members’/creditors’ pre-scheme rights sufficiently or
materially dissimilar to require separate classification?
 [2] Similarity of effects under the scheme (post-scheme rights) – even if they are the same
class, the scheme may treat them differently.
o Are the differences in the members’/creditors’ post-scheme rights sufficiently or
materially dissimilar to require separate classification?
 [4] Court’s approval of the scheme.
o Daewoo Singapore Pte Ltd v CEL Tractors Pte Ltd (2001); RBS v TT International (2012)
 HELD: A court must be satisfied of certain matters before it sanctions the scheme:
 [1] Ensure that the applicable statutory provisions have been complied with.
o E.g. whether there was a proper classification?
o E.g. whether the company properly disseminated information as required under s
211(1), Companies Act so that members/creditors are in a position to make a
reasoned and informed decision?
 [2] Ensure that the scheme was fairly represented by the different classes of
members/creditors (if any) and that the scheme was generally just and fair to them.
o E.g. whether the majority parties are acting bona fide?
o E.g. whether the minority parties are coerced to promote the majority’s interest?
 [3] Ensure that the scheme was one where a man of business, being a member/creditor of the
class concerned and acting in respect of his interest, would reasonably approved.
o Fairness and reasonableness to members/creditors.
 The court can discount (i.e. disregard) certain votes – it must be remembered that the test for
classification turns on dissimilarity of legal rights, and not the dissimilarity of interests.
 UDL Argos v Li Oi Lin (2001)
o HELD: The court may discount/disregard the votes of those who have such
personal/special interests in supporting the proposals that their views cannot be
regarded as fairly representative of the class in question.
 Wah Yuen Electrical Engineering Pte Ltd v Singapore Cables Manufacturers Pte Ltd (2003)
o HELD: Court requires clear demonstration of divergent private motives (where it is
not clear from the voting) before it will discount relevant votes – this is because “the
members/creditors are much better judges of what is to their commercial advantage
than the court can be”.
 RBS v TT International (2012)
o HELD: Court laid down principles for discounting votes of:
o [1] Related parties.
 General norm is that related party votes are discounted in light of their
special interests.
 Rate of discount depends on the extent of common interest in the
company’s shares – i.e. how much shareholding does the related party have
in the company?
o [2] Wholly-owned subsidiaries.
 Votes from wholly owned subsidiary will be discounted to zero since they
are entirely controlled by their parent companies.
o [3] Partially-owned subsidiaries – court did not pronounce on this, but arguably:
 Discount will depend on the degree of control – e.g. if the parent had de
facto control, then also discounted to zero, but if it is an objective vote, then
may not be discounted.
 The court can make certain substantive determination of fairness.
 [5] Scheme becomes binding, and courts can exercise facilitative powers.
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 o s 210(3), Companies Act: Upon the shareholders’ and court’s approval, the scheme shall be class of
members/creditors present and voting agrees to any compromise/arrangement, it shall (if approved by order of
the court) be binding on all the members/creditors or class of members/creditors, and also on the company or,
on the liquidator (if the company is being wound-up) and contributories of the company”.
o s 212, Companies Act: Where the scheme is proposed for “reconstruction” or “amalgamation” of a company or
companies, the court has various facilitative powers to:
 Transfer undertaking, property and liabilities of the company.
 Provision for the allotting/appropriation of shares, debentures and other like interests by the transferee
company.
 Dissolution of transferor company without winding-up.

AMALGAMATION

 r 1.12, TC: All schemes of arrangement, trust schemes, and amalgamations, are subject to the TC.
o However, SIC may exempt an amalgamation from:
 r 20.1, TC (requirement to keep offer open for 14 days after it is revised), r 21, TC (purchase of voting
rights in a scheme company at above the offer price), r 22, TC (offer timetable), and r 28, TC
(acceptances), and r 29, TC (right of acceptors to withdraw their acceptances).
o SIC will normally grant such exemption if:
 [1] Offeror and its concert parties + common substantial shareholders of the merging companies (i.e.
those holding 5% voting rights or more in both companies) abstain from voting on the
scheme/amalgamation.
 [2] Persons and their concert parties who,
 As a result of the scheme/amalgamation:
o Would acquire 30% or more of the voting rights; or
o (If already holding 30% to 50% of the voting rights) Would increase it by more than
1% in any period of 6 months.
 Abstain from voting on the scheme/amalgamation.
 [3] Directors who are directors of both companies, or who are acting in concert with [1] and [2] abstain
from making a recommendation on the scheme/amalgamation.
 [4] The target company must appoint an independent financial adviser to advise its shareholders on
the scheme/amalgamation.
 Note: If it is a “merger of equals” or a reverse take-over, then each of the companies must
appoint an independent financial adviser to advise their shareholders.
 [5] For amalgamations, the amalgamation document must be posted within 35 days of the
announcement of amalgamation, and the amalgamation must be effective by 5:30 pm on the 60th day
after announcement of amalgamation.
 Consideration can be in cash or securities, or a combination thereof.
 Acquirer must engage the target’s board because it has to propose the amalgamation to the shareholders/creditors, and
the directors must give a solvency statement.

TYPES OF AMALGAMATION

 Short-form amalgamation – it is essentially an internal reorganisation.

o Vertical amalgamation – wholly owned subsidiary into parent.
o Horizontal amalgamation – among 2 or more wholly owned subsidiaries of a common parent.
o Rationale for a separate regime.
 There is no question of any other minority shareholders involved, and so no requirement for extensive
process to carry out the amalgamation. From a financial/economic standpoint, there is no change in
the interest of any party (it is only a change in the corporate structure).
 Creditors of a subsidiary still limited to assets of the subsidiary. If creditors are of the parent, then
benefit since it now has full recourse to the entire group’s assets. By and large not adversely affected.
 Standard amalgamation – those that do not qualify for short-form amalgamation (e.g. even if there is 1 share held by a
minority shareholder in a subsidiary).
 Note: Amalgamation must be between Singaporean companies.

PROCESS

 Note: [1] – [7] are generally for short-form amalgamations.

 [1] Approval of directors of the amalgamating companies involved.

47
 o Board of each amalgamating company required to verify that the proposed “amalgamation is in the best interest
of the amalgamating company”.
 [2] Give written notice (of not less than 21 days) of proposed amalgamation to every secured creditor of the
amalgamating company.
 [3] Solvency statements (as it relates to the amalgamated company) under ss 215I and J, Companies Act.
o Required in the case of amalgamated company, and also each of the amalgamating companies in the case of a
standard amalgamation.
 Solvency statement in s 215I, Companies Act must state that the board is of the opinion that there is
no ground on which the amalgamating company could be found to be unable to pay its debts.
 Solvency statement in s 215J, Companies Act is forward looking – solvency statement must state that
the board is of the opinion that the amalgamated company will be able to pay its debts as they fall due
in the next 12 months (cashflow solvency) and that the value of the assets will not be less than the
value of the liabilities (balance sheet solvency).
 [4] Shareholder’s special resolution (passed by > 75% of members present at a meeting) of the amalgamating companies.
o Note: Based on the literal reading of ss 215A – J, Companies Act, the bidding company (who has > ¾ shareholding
in the target company) and wishes to acquire the remaining shares of the target company will not be prohibited
from voting at the meeting to approve the amalgamation.
 [5] Lodging of requisite documents with the Registrar.
 [6] No requirement to prepare an amalgamation proposal in the case of a short-form amalgamation but required in a
standard amalgamation.
 [7] No approval of the creditors or court is required.
 Note: Standard amalgamation has certain additional requirements.
o Additional requirements include – [1] approval of persons previously conferred special rights (and who will now
have those rights affected) have to be obtained (see s 215C(1)(b), Companies Act), and [2] directors also come
under additional duties (e.g. to despatch an amalgamation proposal to shareholders + the declarations,
statements, and further information).

DELISTING AND EXIT OFFER

 Note: Delisting procedure can be used in itself for mergers.

o It is essentially a voluntary general offer governed by the Listing Manual.
o Acquirer must engage the target’s board because it has to propose the delisting proposal to the shareholders
and make the necessary applications to SGX.
 Application to delist is pursuant to rr 1307 and 309, LM – voluntary delisting is subject to SGX’s agreement.
o r 1307(1), LM: Shareholders’ approval must be obtained for the delisting proposal.
o r 1307(2), LM: Must be approved by special majority of 75% present and voting either in person or proxy.
 The directors and controlling shareholder need not abstain from voting either in person or proxy.
o r 1307(3), LM: Must not be voted against by 10% or more in nominal value of share present and voting.
o r 1309(1), LM: Issuer should provide a reasonable exit alternative (normally in cash) to the shareholders and
holders of any other classes of listed securities to be delisted.
 Exit offer for the exit itself is governed by the TC.
 I.e. the acquirer must concurrently make a voluntary general offer to acquire the shares of
the issuer/target (which will be conditional upon approval of the delisting proposal).
 If shareholders of the issuer/target approves, the company will be delisted, irrespective of the
outcome of the exit offer (because it is up to the shareholders whether to accept it or remain
shareholders in the delisted company).
o r 1309(2), LM: Issuer should appoint an independent financial adviser to advise it on the exit offer.
 Voluntary offer for exit itself is governed by the TC.

OTHER POSSIBLE TRANS ACTIONS

REDUCTION OF CAPITAL
 Provisions for the reduction of capital found in ss 78A – J, Companies Act.
 Utilising reduction of capital as a squeeze-out.
o [1] Through selective reduction of capital.
 Minority shareholders’ shares are bought back by the company and cancelled.
 Majority shareholders’ shareholding will thereby increase to 100% to achieve a squeeze-out.
o [2] If selective reduction sounds unfair, perhaps a partial reduction of all shareholding, and then the majority
uses the money to buy out the minority.
o Controversial but beneficial.
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  Unlike s 215, Companies Act (the provision legislatively meant for compulsory acquisition), the majority
using a reduction of capital approach utilises the company’s funds instead of paying out himself.
 Also, unlike s 215, CA (where it is > 90% of those shares outstanding and to be transferred) or s, 210,
Companies Act (scheme of arrangement requiring approval of a separate class meeting) this approach
only requires > 75% of members present at the meeting (may not even need class meeting).
o Courts generally open to such schemes, subject to compliance with process (e.g. notice) and fairness in pricing.
 Scottish Insurance Corp. Ltd. v Wilsons and Clyde Co. Ltd (1949)
 HELD: Court confirmed it had broad discretion in determining whether to confirm a reduction
in capital. However, in practice, courts reluctant to interfere with the independent business
judgement of the company’s board of directors and shareholders.
 In re Ratners Group PLC (1988)
 HELD: Proposed reduction of capital generally confirmed if court is satisfied that the
shareholders are treated equitably and they receive sufficient information regarding the
proposed reduction to be able to make an informed judgement, and that the creditors’ rights
are safeguarded.

ALTERATION OF ARTICLES OF ASSOCIATION

 Clause in the AOA providing majority shareholders a right to require the minority shareholders to sell at a price fixed by
or determinable by procedures as laid down.
o Inclusion in the AOA at the time of incorporation of the company – fairer because shareholders would have
taken up the shares with the knowledge that they might be squeezed out.
o Subsequent inclusion through alteration of AOA – problematic. Such an approach is rarely undertaken in practice
because there are some doubts in case law as to how far the courts will uphold a resolution of the company
altering its own AOA in such a case.
 Alteration of AOA.
o [1] Requires special resolution – passed by > 75% of the members present at meeting.
o [2] Alteration must be “bona fide for the benefit of the company as a whole”?
 Gambotto v WCP Ltd (1995) – now objective proper purpose test.
 Attempt by the majority shareholders to alter the company’s AOA, which would have
subsequently enabled the company to conduct a forced expropriation of the shares owned by
the minority shareholders.
 HELD: Bona fide formulation in Allen v Gold Reefs of West Africa Ltd rejected as being
inappropriate and inadequate in the current circumstances, as well as for its manifest
problems and difficulties in application. Subjective bona fide test rejected for objective
“proper purpose” test.
 Court instead, chose to adopt a proper purpose test, and held that a power can be taken only
if (i) it is exercisable for a proper purpose and (ii) its exercise will not operate oppressively in
relation to minority shareholders.
 Courts have held that where majority shareholder wishes to eliminate the minority shareholders
because it is not prepared to investment capital and management effort into the company unless it
owned all the shares, an alteration to include such an expropriation clause is invalid.
 Daften Tin Plate Co. Ltd. v Llanelly Steel Co. (1907)
o HELD: Inclusion of expropriation clause was not for the good of the company as a
whole, but rather for the benefit of the majority shareholder alone. Hence, adoption
is ineffective in the absence of an independent business reason which justifies its
inclusion.
 Dissenting minority shareholders must show malice or discrimination without benefit to the company.
 Sidebottom v Kershaw, Leese & Co Ltd (1920)
o HELD: Amendment that permitted compulsory acquisition at a fair price of any person
who has a business in competition with the company was held to be valid. Company
has the statutory power to alter its AOA by special resolution provided that the
alteration is made bona fide for the benefit of the company as a whole.
o Dissenting minority shareholders need to show either that there was malice on the
part of the majority shareholders or that the minority shareholders were being
discriminated against the benefit of the majority where there is no reasonable
prospect of benefit to the company as a whole.
 Note: Not allowed for listed companies because possible that listing rules do not allow for this (c.f. public unlisted or
private companies probably possible, but not a very popular mechanism for squeeze out).
o Stock exchange regulators might not approve of such clauses that do not seem to promote public interest.

49
 o Also, expropriation clause would prevent company from maintaining a stock exchange listing.

APPROVALS REQUIRED FOR TAKE-OVER TRANSACTIONS

General offer Compulsory Schemes of Amalgamation Delisting and exit

acquisition arrangement offer
Shareholders’ Not required – but Required – 90% in Required – 75% in Required – 75% in Required – 75% in
approval offer must be value of the value + 50% in value value + not more
conditional on the remaining number than 10% in value
offeror acquiring more shareholding not voting against
than 50% of the target in the offeror’s
shares (although a hands
higher threshold in a
voluntary offer may
be specified)
Court’s Not required Not required – Required – Not required – but Not required
sanction but dissenting scheme must be dissenting
shareholders may approved by the shareholder/creditor
apply to court to courts may apply to the
object to the court to object to
compulsory the amalgamation
acquisition
SIC’s Required – in May be required May be required May be required for May be required
clearance acceptance condition for exemption for exemption exemption from for exemption
of the offer, and any from certain from certain certain provisions of from certain
other conditions to provisions of the provisions of the the TC provisions of the
the general offer and TC TC TC
offer price

ANTITRUST & MERGER CONTROL

INTRODUCTION

 Objective of competition law is to correct market failure caused by anti-competitive behaviour.

o The Competition Commission of Singapore (CCS) administer the competition regime in Singapore.
 The Competition Act applies to any “undertakings”, defined as any individual, body corporate, etc. capable of commercial
and economic activity, regardless of whether they are foreign or Singapore-owned.

BEHAVIOUR PROHIBITIONS (ANTITRUST)

 Anti-competitive agreements.
o s 34, Competition Act: Prohibits agreements, decisions, or concerted practices between undertakings which
have the objective or effect of preventing, restricting or distorting competition within Singapore, unless they
are excluded or exempted.
 Note: Agreements need not be formal or enforceable.
 Examples in s 34(2), Competition Act include.
 Directly/indirectly fixing purchase/selling price, or any other trading conditions.
 Limit/control production, markets, technical development or investment.
 Share markets or sources of supply.
 Apply dissimilar conditions to equivalent transactions with other trading parties, thereby
placing them at a competitive disadvantage.
 Make the conclusion of contracts subject to acceptance by the other parties of supplementary
obligations which have no connection to the contracts.
 Abuse of dominant position.
o s 47, Competition Act: Prohibits any conduct on the part the undertaking, which is an abuse of a dominant
position in any market in Singapore, unless it is excluded.
 3-part test.
 [1] What is the relevant market?
o Apply the market definition tests prescribed by the CCS.
 [2] Is there a dominant position in the relevant market?
o Dominant if it has substantial market power.
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  [3] Has there been exclusionary conduct?
o Examples in s 47(2), Competition Act include:
 Predatory behaviour towards competitors.
 Limit/control production, markets, technical development or investment.
 Apply dissimilar conditions to equivalent transactions with other trading
parties, thereby placing them at a competitive disadvantage.
 Make the conclusion of contracts subject to acceptance by the other parties
of supplementary obligations which have no connection to the contracts.
 Examples of exclusions in the Third Schedule, Competition Act.
o Services of general economic interest.
o Avoidance of conflict with international obligations.
o Public policy (by Minister’s order).
o Goods and services regulated by other competition law.

STRUCTURAL PROHIBITIONS (MERGER CONTROL)

 Merger control.
o s 54, Competition Act: Prohibit mergers that have resulted, or may be expected to result, in a substantial
lessening of competition within any market in Singapore for goods and services are prohibited.
 Substantial lessening of competition likely to result in higher prices, lower quality, and less choices of
products and services for consumers.
 Merger clearance filing to the CCS is voluntary, but recommended if the merger may potentially violate s 54, Competition
Act.
o Decision whether or not to file is based on self-assessment in accordance with methodologies set out in the CCS
Guidelines on the Substantive Assessment of Mergers, read with the CCS Guidelines on Market Definition.
 Indicative quantitative thresholds.
 Merged entity will have market share of 40% or more.
 Merged entity will have market share of 20% to 40%, and CR3 is 70% or more.
o Phase 1 – standard review.
o Phase 2 – more detailed and extensive assessment.
 Methods – offeror can take 2 approaches.
o [1] Pre-conditional offer – offeror may announce a pre-conditional voluntary or mandatory offer where the
precondition is that the CCS issues a favourable decision permitting the offer to proceed.
o [2] If no pre-condition, the offer is required to be subject to the condition that the offer will lapse if the CCS
initiates a Phase 2 review or prohibits the offerror from acquiring shares in the target company.
 If it is a mandatory offer, if the CCS subsequently issues a favourable decision, the mandatory offer
must be reinstated on the same terms.
 If it is a voluntary offer, if the CCS subsequently issues a favourable decision, the offeror may reinstate
the offer, but is not obliged to, and may also announce a new offer.

ENFORCEMENT

 Consequences of infringement.
o Financial penalty of up 10% of the turnover of an undertaking for a maximum of 3 years if the CCS is satisfied
that the infringement is committed “intentionally or negligently” – serious deterrence.
o Direction by the CCS to modify, terminate or cease.
o Contracts are potentially void and unenforceable.
o Civil action, criminal liability.
o Reputational harm, and affecting future standing with CCS.
 Powers of the CCS.
o Powers of investigation – CCS may investigate if there are reasonable grounds to suspect infringement.
 Power to require production of documents and information.
 Power to take copies/extracts of any documents.
 Power to require explanation of any documents.
o Power to enter premises.
 Appeals and private action.
o s 71, Competition Act: Appealable decisions.
o s 72, Competition Act: Competition Appeal Board.
o s 74, Competition Act: High Court and Court of Appeal.
o s 76, Competition Act: Rights of private action.

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OTHER ISSUES TO CONSIDER IN AN ACQUISITION
 s 163, Companies Act: Prohibition of loans to persons connected with directors of lending company.
o (1) Company cannot:
 (a) Make a loan to another company; or
 (b) Enter into any guarantee/provide any security in connection with a loan made to another company
by any person other than a loan made by the company itself;
 If a director of the company is or together are interested in 20% or more of the total number of equity
shares in the other company.
o (7) Contravention is an offence, and offender shall be liable on conviction to a fine not exceeding $20,000 or to
imprisonment for a term not exceeding 2 years.
 s 76, Companies Act: Prohibition of financial assistance when dealing with its own shares.
o Provision does not define what “financial assistance” is – it is very broad (can be direct or indirect).
 Examples of financial assistance – includes the giving of a guarantee, the provision of a security, and
the release of an obligation or a debt.
 [1] Company lends money to A to put A in funds so that he can buy the company’s shares from
Z or subscribe for shares in the company (s 76(2), Companies Act).
 [2] Company guarantees B’s bank overdraft and on the security of this, the bank advances
money to B so that he can buy the company’s shares from Z or subscribe for shares in the
company (s 76(2), Companies Act).
 [3] Company releases an obligation or debt owed to C to the company so as to put C in a
position to buy the company’s shares from Z or subscribe for shares in the company.
 [4] Company buys an asset from D with the purpose of putting him in funds to acquire the
shares of the company (Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2)
(1980)).
o The giving of financial assistance is not illegal unless it is given [1] for the purpose of the acquisition of shares
(the relevant purpose) or [2] in connection with the acquisition.
 s 76(3), Companies Act: [1] is deemed satisfied even if relevant purpose is not the sole purpose and
may be one of several purposes for giving of the financial assistance but it must be the substantial
purpose.
 s 76(4), Companies Act: [2] is deemed satisfied if, when the assistance was given, company was aware
that the financial assistance would financially assist the acquisition of shares, or where the shares had
already been acquired, the payment of any unpaid amount for the shares or any calls on the shares
 Wu Yang Construction Group Ltd v Mao Yong Hui (2007)
 HELD: Court rejected the approach taken in Intraco Ltd v Multi-Pak Singapore Pte Ltd (1994)
which drew a distinction between the “purpose” and the “reason” of the transaction.
 Even if the company giving the financial assistance to the purchaser has a bona fide interests
with good commercial reasons, it can still give rise to the purpose of providing financial
assistance – a bona fide commercially sound “reason” can still have invalid purpose.
o Whitewash is possible.
 [1] Directors’ resolution + special resolution by shareholders + court’s approval (where creditors and
members are given a right to object) (s 76(10), Companies Act).
 [2] Directors’ resolution + s 7A, Companies Act directors’ solvency statement (s 76(9A), Companies Act)
– amount is capped at 10% of the aggregate of the total paid-up capital of the company.
 [3] Directors’ resolution + s 7A, Companies Act solvency statement + unanimous approval of
shareholders (s 76(9B), Companies Act) – amount is not capped.
o Contravention renders the transaction void if for the acquisition of its own shares, and voidable for all else.

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4. JOINT VENTURES
INTRODUCTION
 What is a joint venture (JV)?
o Not legally defined in Singapore.
o United Dominions Corporation Ltd v Brian Pty Ltd (1985)
 HELD: The term “joint venture” is not a technical one with a settled legal meaning.
 As a matter of ordinary language, it connotes an association of persons for the purpose of a particular
trading, commercial, mining or other financial undertaking with a view to mutual profit, with each
participant usually (but not necessarily) contributing money, property or skill.
 Why do parties enter into JVs?
o Cost savings.
o Risk sharing.
o Leveraging on each other’s experience, etc.
o Access to technology.
o Expansion of customer base.
o Entry into developing economies – especially if there are legal regulatory requirements for local participation.
o Entry into new technical markets.
o Pressures of global competition.
o Leveraged joint venture.
 The role of lawyers in JVs.
o Lawyers play an important role to alert parties to important legal issues, to structure the venture, to carry out
necessary due diligence, to obtain clearances and consents, to ensure proper documentation, to establish the
JV vehicle and generally, to advice constructively.

PRELIMINARY CONSIDERATIONS

PLANNING THE JOINT VENTURE TRANSACTION

INITIAL TRANSACTION PLANNING

 Confidentiality agreement.
o Exchange of information is a key feature to most joint ventures and alliance, hence parties should put in place
appropriate confidentiality agreements before initiating exchanges – it is preferable to have the certainty of a
contractual obligation of confidentiality in the event that negotiations do break down.
o Typical undertaking include:
 Not to use confidential information for any purpose other than in connection with the joint venture.
 Not to disclose information to any person except on a “need to know basis”.
 To require each individual to whom information is disclosed to also undertake confidentiality.
 If negotiations break down, must return or destroy the confidential information.
 Due diligence.
o Extent and focus of due diligence will depend on the nature of the contribution being made by the other party.
 Anti-bribery and corruption.
o Measures to safeguard against risk of bribery – increased due diligence and specific contractual measures
(“cleanliness” through representation and warranties, undertakings to monitor compliance, adopt anti-bribery
and corruption policies and procedures, etc.).
 Understanding the local regime.
o Important to be aware of the basic legal framework of the jurisdiction – e.g. limits on foreign participation,
regulatory approval and foreign investment control, repatriation of profits and capital, any currency or foreign
exchange control, taxation, corporate governance and management structure, rights to acquire property, labour
laws, etc.
 Memorandum of Understanding.
o It is preferable to set out basic commercial principles in an MOU – it is the 1st step in the formal transaction
process, aiming to crystallise key points and set the foundation for finalisation of agreements.
o Generally, MOUs are not to be legally binding subject to important exceptions because they rarely address
points in sufficient detail to enable a party to feel properly protected.
 Note: Lawyers should expressly state that the MOU is non-binding.

53
  Note: Exclusivity agreements in MOUs if entered into for consideration for a defined period can be
legally binding, and will support an action to prevent a breach of negative obligation not to undertake
competing negotiations with a 3rd party.
 rd
3 party consents and clearances.
o It is vital to identify at an early stage the specific consents and clearances which will be required from 3 rd parties
in order to establish the JV – a realistic timetable is usually needed, and these are often required:
 Regulatory approval (merger control, anti-competitive agreements, foreign investment controls)
 Industry-specific approval.
 Export controls – restrictions on the transfer of specific technologies and equipment out.
 Stock exchange regulations.
 Financing – consent from existing lenders (covenants in loan agreements).
 Existing contracts/customers – assignment of contracts, consent of counterparties.
 Taxation – tax planning.
 Employees – consultation with employees or their trade unions

PRINCIPAL LEGAL DOCUMENTS

 Provide the legal infrastructure for collaboration between the parties, and it also form a guideline for future behaviour.
o Joint venture agreement (also called a shareholders’ agreement) – depends on the legal form in question.
 Contractual alliance – based on contract between the parties.
 Partnership structure – partnership agreement.
 Corporate joint venture – joint venture/shareholders’ agreement.
 Note: Must supplement the relevant constitutional documents of the joint venture company–
e.g. MOA/AOA.
o Framework agreement – this sets out the overall basis for the establishment of the venture, the use of the
vehicle, and the ongoing relationship of the parties after the venture.
o Sale and purchase/subscription agreement.
 JV may take the form of converting an existing company into a JVC instead of creating one.
o Business plan – not a legal document, but to establish common and clear objectives.
o Ancillary contracts – asset transfer agreement, supply agreement, purchase agreement, secondment
agreements, licences, leases, etc.

JOINT VENTURE/SHAREHOLDERS’ AGREEMENT

 The JV/shareholders’ agreement embodies terms reflected/to be reflected in the JVC’s constitutional documents.
o Note: For tax/other reasons, the actual shareholder in the JV/shareholders’ agreement may not be the ultimate
parent company but a subsidiary – if so, the parent company is not bound by the JV/shareholders’ agreement.
 There should be a separate agreement/undertaking by the parent company to observe confidentiality,
non-compete obligations and guarantee of performance by the subsidiaries.
 Alternatively, the parent companies can enter into the JV/shareholders’ agreement, but agree to
transfer the shares to the subsidiaries, and guarantee performance by the subsidiaries.
 Quare: Should the JVC be a party to the joint venture/shareholders’ agreement?
o Advantages of making the JVC a party to the JV/shareholders’ agreement.
 Undertaking of obligations is direct.
 Easier to enforce obligations, particularly if the directors have little regard for shareholders’ wishes, or
whether there are multiple parties to the JV.
 Easier to enforce obligations, especially if the joint venture/shareholder agreement embody more than
rights qua members of the joint venture company.
o Disadvantages of making the JVC a party to the JV/shareholders’ agreement.
 In the event of dispute between the parties, JVC’s consent may be required.
 Terms that fetter the JVC’s statutory powers might be unenforceable against the JVC.

CHOOSING THE LEGAL FORM

 Basic legal categories – [1] contractual alliances, [2] partnerships, and [3] corporate joint ventures.
 Considerations when deciding the legal form.
o Decision is Important because it affects level of customised drafting necessary to establish the desired business
relationship – i.e. decision will affect the governance of the JV, the rights of individual parties, the fiduciary duties
owed between the parties, the rights to terminate or wind-up, and the ease/ability to introduce new participants
into the JV.

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 o Each legal form will have its own framework, and not all regulatory frameworks are similar – e.g. corporations
(Companies Act), partnerships (Partnership Act), contractual (other contractual Acts).
o Factors to consider include – liability exposure, tax cost, nationality considerations, competition law factors,
local jurisdiction requirements (regulatory), management structure, funding costs, accounting treatment,
transferability, ease of termination and unwind, reporting and publicity requirements, administrative costs,
formalities of formation (lack of hassle).
 Weight given to each factor varies from venture to venture.

CONTRACTUAL ALLIANCE
 Advantages.
o Lack of formality – easier to form, administer, revise or end the JV.
o Tax efficiency – tax “transparency” since expenditure is incurred directly by the parties rather than through a
separate corporate entity.
o Easier to manage resources – parties generally maintain management control over its own resources.
o Ease of termination and unwind – generally easier, and important if JV is meant to be relatively short-term.
o Flexibility – ease of amending terms and relationship without formality.
 Disadvantages.
o Lack of identity – may affect dealings with 3rd parties.
o Lack of firm organisational structure – looser structure may create problems of monitoring the other party’s
activity (danger of opportunistic behaviour).
o Risk of partnership – unincorporated venture may constitute partnership in some jurisdictions.
o Transfer – more difficult for party to transfer its interest in the JV activity to a 3rd party.
o Competition law – may have anti-trust difficulty.
o Need for “bespoke” drafting – contracts need to be carefully drafted.

PARTNERSHIPS
 Note: What constitutes a “partnership” varies from jurisdiction to jurisdiction.
o In Singapore, a partnership will exist simply if there are contractual arrangements between parties establishing
a common business or undertaking, particularly one in which the parties share in profits and losses.
 Advantages.
o Flexibility and simplicity – easily formed and may have less formalities required than a corporate structure.
o Tax transparency – tax passes through to each partner.
o No public filings – no need for transparency if the parties do not like it, lack of need to incur publicity expense.
 Disadvantages.
o Absence of corporate identity – a partnership may suffer from a lack of central management structure.
o External finance – fewer ways to obtain external finance.
o Liability – generally, each partner is jointly liable for acts of other partner, and liability is unlimited.
 Note: However, there is possibility of limited liability partnerships.
 Advantages.
o When compared with general partnerships.
 Limited liability for members – similar to the corporate structure.
 Ability to grant security such as a fixed/floating charge.
 No loss of limited liability for any member engaged in management, and no
requirement for a general partner – unlike the limited partnership.
 Separate legal entity.
 Continuity in the transfer of interest by members.
o When compared to the corporate structure.
 Offers tax transparency – tax passes through to the parties directly.
 No rules on capital maintenance.
 Flexibility in organising rules and management structure.
 Private constitutional documents.

CORPORATE JOINT VENTURE

 Note: Location of the joint venture company (JVC) may be affected by tax, political reasons, etc.
 Advantages.
o Identity – company has a strong independent identity, e.g. McDonalds, General Electric.
o Limited liability – JV parties free from liabilities of the company (only as shareholders), but in practice, parties
often asked to give guarantees (so not really limited).

55
 o Financing – companies hold assets in its own name, so it is easier to obtain financing, direct agreement between
company and the financing party.
o Continuity – a corporate structure enables sales of interests and introduction of new members without affecting
the direct legal ownership (e.g. share transfers relatively easy and stated in AOA).
o Transfer of interest – outgoing party can easily sell and realise its interest.
o Flexibility of share rights – share structure is flexible (e.g. golden shares) and easily changed.
o Clear accounting structure – for internal accounting and reporting purposes.
o Established legal framework – it is a universally recognised type of entity with an established set of corporate
procedures and laws.
 Disadvantages.
o Compliance requirements – formal regulations will add to costs, but quite minor.
o Publicity/disclosure – requirements to file certain documents publicly and will add to administration cost and
loss of confidentiality.
o Less flexibility – governance structures more rigid (e.g. tighter rules to regulate profit distribution).
o Employees – harder for individual parties to retain direct management over its own employees and resources.
o Formality – company generally involves more formality for incorporation.
o Complexity on winding-up of venture – greater complexity (e.g. must apply to court).

CONTRIBUTIONS TOWARDS THE VENTURE

 Contributions can take differing forms.

o Transfer of physical assets – business undertakings, intangibles (e.g. intellectual property, goodwill).
 Consequences of hard asset injection – harder for contributors to take it out (c.f. soft assets are more
easily revoked).
o Intellectual property and technology – issues of ownership, valuation, competition, etc.
o Employees – issues of identification/selection, employee consultation, transfer, terms of employment, control
procedures (e.g. for hiring, managing and firing employees), work permits, employee benefits, employee
pension schemes, share incentives, etc.
o Supply of services – e.g. sweat equity (employment in exchange for shares).
o Cash capital or other provision of finance.
 Valuation of contributions – pricing of acquisition depends on valuation.
o No universally accepted method – it is essentially a commercial standard (valuation is not science, but depend
on the attitudes of each party in a venture, and hence, independent valuators are often involved).
 Some use EBIT, EBITDA, strategic or synergy benefits, or more intangible factors.
 In some cases, inclusion of a “control premium” may be appropriate to recognise the commercial reality
of the transaction if 1 party is effectively acquiring control of the venture.
 For some assets (such as the supply of services) where value is difficult to ascertain, a possible method
to circumvent is to issue esops (which is the right to purchase stocks in the future (if target is met)).
o Some legal rules apply to valuation:
 Shares cannot be issued at a discount – minority discount to signify lack of control.
 There may be legal requirement for independent valuation where shares of a company are issued in
exchange for non-cash consideration.
 Equalisation measures.
o If contributions are unequal, the obvious possibility is simply to adjust the equity shares of the parties in
proportion of their respective valuation.
o However, some may decide to have 50:50 ownership believing that it will strengthen the venture – hence,
parties can consider mechanisms to equalise the valuation gap:
 Equalisation payment – party contributing less payout the other party.
 Cash contribution – party contributing less could inject more cash.
 Debt rather than equity – debt issued to party contributing more.
 Where debt is used, the repayment terms, subordination, and rate of interest must be clarified.
 Borrowing by the JVC – JVC can borrow from outside banking sources to pay for the “excess” assets by
the party contributing more.
 But this reduces the borrowing capacity of the JVC and may be undesirable.
 Management and service charges – party contributing more can extract payments.
 Leasing/adjustment of assets – using lease cost to equalise (JVC pays the party contributing more the
lease price).
 Disproportionate distribution of dividends – reduces the inequality over time.
 Quare: What do the parties get after making the contributions?
o E.g. consider whether they should get ordinary/preference shares, etc.
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STRUCTURING CONSIDERATIONS

COMMON LEGAL CONSIDERATIONS

 Common issues in joint venture context.

o Conflicts of interest – contributing party (of goods, services, technology, etc.) will naturally want to protect its
legal and commercial interest vis-à-vis the JVC.
o Enforcement by JVC – must ensure that legal obligation under an ancillary contract can be enforced.
o Termination of contract – e.g. if contributing party leaves, should the ancillary contract still be enforced?
o Separate contracts – instead of being in the JV/shareholders’ agreement, easier to amend, terminate, etc.
o Allocation of liabilities – for non-performance.
o Allocation of ordinary/preference shares, etc.
o Time for negotiation – whether ancillary contract to be settled at a later date.
o Governing law.
o Dispute resolution.
o Competition law.

COMMON ESTABLISHMENT CONSIDERATIONS

 Sale and purchase/asset transfer agreements.

o Principle issues include – valuation, warranties, enforcement of warranties, pre-transfer liabilities, non-cash
consideration, IPR, employees, enforcement by JVC, tax, timing of transfer, formality of transfer, etc.
 Funding agreements.
o 3rd party borrowing – project finance without recourse or with limited recourse to the JV assets.
o Shareholder loan – debt/equity subscription.
o Venture capital – lenders take certain rights in relation to the JVC.
 Other agreements include – IP agreements, property agreements, employee secondment agreements, management
contract, supply contract, services contract, etc.

MINORITY PROTECTION
 Extent of minority protection must fit the JV, and will generally be a matter for contractual negotiation.

(LIMITED) STATUTORY PROTECTION

 Some statutory rights already provided in various corporate legislations.

o If minority holds > 25%, then it has the power to block resolutions that require supermajority.
o Right to call for meetings, information, etc.
o Right to a derivative action and an oppression remedy under ss 216A and 216, Companies Act.
o Right to seek just and equitable winding up under s 254(1), Companies Act.
 Other than these limited statutory provisions, minority rights in a corporate context are generally weak, and hence in the
JVC, the minority would want to contract for stronger rights.
o E.g. difficult to succeed in an oppression claim under s 216, Companies Act when there is no breach of the written
shareholders’ agreement of the JVC.
o Also, in a JVC, parties are likely to contribute materially to manage and operations (c.f. shareholders in a
corporation), and each party in a JVC is there for a reason.
o The problem is that the parties usually have different interests – need to have a deadlock breaker.
 Note: s 392, Companies Act may limit the consequences of non-compliance with statutory safeguards.
o A member’s right to insist on full procedural compliance is circumscribed by the court’s power to correct the
irregularities under the saving provision of s 392, Companies Act.
o What comes under s 392(1), Companies Act?
 Absence of quorum.
 Defect, irregularity or deficiency in notice or time.
 Accidental omission to give notice of the meeting to any member.
 Note: Golden Harvest Films Distribution (Pte) Ltd v Golden Village Multiplex Pte Ltd (2007) held that
the list under s 392, Companies Act is not exhaustive.
o Effect of s 392, Companies Act.
 Procedural irregularities that comes within s 392(1), Companies Act are prima facie corrected unless it
is proved that the irregularities have caused or may cause “substantial injustice” that cannot remedied
by any order of the court under s 392(2), Companies Act.
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  “Substantial injustice”.
o Must be more than just ordinary prejudice (Thio Keng Poon v Thio Syn Pyn (2010)).
o Mere irregularities per se will not suffice (Golden Harvest Films Distribution (Pte) Ltd
v Golden Village Multiplex Pte Ltd (2007)).
o It is determined by the “holistic weighing and balancing of the various interests of all
relevant parties” – not just 1 party but all the parties involved (The Oriental Insurance
Co Ltd v Reliance National Asia (2008)).
o There must be a nexus between the irregularity and the substantial injustice that has
occurred – causation requirement.
 City Pacific Ltd v Bacon (No. 2) (2009)
 HELD: Members would not have voted differently even if procedure
was complied with. P “must show that there may have been a
different result if the proper notice had been given”.

CONTRACTUAL PROTECTI ON

 8 main key aims.

 Relationship between the JV/shareholders’ agreement and the AOA.
o JV/shareholders’ agreement is governed solely be contract and only binds the parties in it.
o AOA is regulated by the Companies Act and binds all shareholders, including future shareholders.
o AOA can be amended by shareholders with > 75% voting rights.
 Quare: Should contractual protection for a JVC be in the shareholders’ agreement or articles of association (AOA) for
direct enforcement?
o Share rights – rights attaching to shares should be in the AOA.
o Positive obligations – on the majority shareholder usually appear in the shareholders’ agreement.
o Veto rights – depends.
 Inclusion in the AOA has advantages:
 Class rights in AOA are capable of being enforced directly against the JVC.
 Directors are bound by AOA and matters which are subject to veto in the AOA are beyond their
power to undertake unless the requisite consent is obtained.
 But practical considerations to keep it in the shareholders’ agreement.
 AOA are public, and some matters could be confidential “internal housekeeping”.
 Some veto matters may be hard to express as a class right.
 Class rights in AOA cannot effective regulate actions/transactions carried out by JVC’s
subsidiaries (only binds the JVC itself).

BOARD REPRESENTATION

 Board representation to ensure its participation in management through representation on the board of directors of the
JVC, such that it is kept informed to the JVC’s day-to-day business on key issues.
 This can be done through the following ways:
o Identifying in the AOA or shareholders’ agreement the shareholders who are collectively to have this right, or
stipulate that the right of appointment will attach to holders.
o Provide that any shareholder holding not less than X% shall be entitled to appoint a director.
o AOA could also include the presence of its nominees as a necessary requirement for quorum in a board.
o Right to prevent the delegation of key powers of the board and the right of representation to the delegated
committee.
o Requirement of reasonable notice before board meeting and agenda.
o Written resolution requiring approval of all directors.
 However, the problem is that most JVC will not be managed through formal board meetings.
o Much will depend on the “spirit” of the JVC relationship and its practical management procedures to ensure
appropriate participation by the minority.

CONSENT RIGHTS

 Consent rights to ensure its involvement in major business decisions including that its consent is required on key matters
(i.e. a right of veto) – in practice, the minority may get this consent rights over major decisions, and certain “reserved
matters” usually require unanimity between the parties.
o Note: Unlike board reserved matters, having shareholders’ reserved matters is beneficial because shareholders
do not owe fiduciary duties to the company and can vote however they want.

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  Such rights can be drafted into the shareholders’ agreement to extend to any equivalent decisions taken by any
subsidiaries of the JVC/material subsidiaries.
o However, the lawyer’s drafting must be very careful – client must know exactly what he wants. Parties may
argue for implied terms. Parties may also decide whether these rights should be entrenched through a board
decision or by the shareholders themselves.
o Moreover, the strength of consent rights for a minority may be balanced by other contractual provisions.
 May be provided that the majority may buy out the minority if said rights are used persistently to block
decisions.
 Or, if the minority does not have said rights in some decisions, he may request a put option to force sell
his shares to the majority.
o In cases where there are many minorities, decision making may be too difficult because each minority has a
separate right of veto, and hence, it is common for certain matters to require the approval of a supermajority of
shareholders rather than absolute unanimity.
 Consent rights may be subject to limitations – e.g. consent rights may cease if minority’s shareholding falls below a
specified %, or frequent use of veto may signify permanent breakdown in JVC relationship and allow majority to buy-out.

ANTI-DILUTION

 Anti-dilution to protect against its equity stake in the JVC being improperly diluted by subsequent share issue.
 Minority will wish to ensure that its equity stake in the JVC cannot be diluted by alterations to the share capital of the
JVC which would be undesirable, hence, some mitigating options:
o Providing for subsequent rights issue to be pro-rata.
 But majority may offer rights issue when it knows that the minority cannot take up the offer, hence
must also restrict inopportune share distribution.
o Minority consent for issue, allotment, redemption, grant of options of its shares or securities.
o New shares to be offered at fair value with a right of a party to require certification by the company’s auditors
over what fair price is.
o Catch-up clause – giving a loan to the minority to ensure its percentage equity stake.
 Note: Price protection – this is a stronger right.
o Minorities may want to use a “full ratchet” provision which entitles the investor to obtain additional shares at
no cost so that its average price per share is made equal to the price per share applicable in the subsequent
down round.
o May also take the form of “weighted average” adjustments to entitle the investors to obtain additional shares
but takes into account the effect of the aggregate price of shares issued in all prior investment rounds as well as
price per share in the current round.

DIVIDEND POLICY

 Dividend policy to ensure that it receives a proper distribution of profits from the JVC.
 Decision to declare dividends will be made by the board of directors – minority has interest in this to prevent the
distribution policy from being used to divert profits to the majority discriminatively. Hence:
o JV parties can agree that the JVC shall distribute not less than a stated percentage of its available distributable
profits for any year. An auditor’s certification is usually required.
o If the minority is concerned that insufficient funds may be retained to assist the development of the JV, the
formula could provide for a certain proportion of profits to be retained each year in the business of the JVC to
fund future projects.
 Minority may be concerned that (even with a dividend policy established) that there may be improper leakage of profits
to the majority.
o Requirement could be imposed that the subsequent year’s dividend policy should be included as part of the
annual business plan or budget and that the minority party should have rights of approval over the annual
adoption of that plan.
o Where there is a distribution policy, if the minority is concerned with improper leakage of profits to majority by
other means there could be:
 A requirement that the consent of the minority is necessary for any management or services to be
entered between the JVC and the majority shareholders.
 A requirement that the terms of any remunerations payable to directors appointed by the majority
shareholders are also subject to prior approval of the minority party.

RIGHT TO INFORMATION

 Right to information to ensure that it has adequate access to information regarding the JVC’s affairs.
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  As a shareholder, there may be limited rights to information (due to the law, or asymmetry of information, or otherwise),
hence the shareholder will want to know more.
o This usually takes the form of directorship representation.
o But the minority can also be protected by an obligation for the board of the JVC to circulate monthly unaudited
management accounts to shareholders (including the minority).
o The minority can also ask for an express right of access to inspect accounting records (visitation rights).
o General obligation to keep the minority informed about business developments.
 An express right usually includes a situation where the director nominated by the particular shareholder can give his
appointing shareholder such information regarding the JVC’s affairs as he thinks fits.

OTHER PROTECTIVE UNDERTAKINGS

 Other protective undertakings – in some cases, the majority may want to use the JVC as a tool for tax planning, and
minority will allow this so long as it does not hurt future growth.
o Minority may ask for proper insurance.
o JVC prepares and maintains proper books of account.
o Conducts business in accordance with applicable laws.
o Concludes appropriate non-competition covenants, confidentiality agreements and employment contracts with
key employees.

CLAIMS AGAINST THE MAJORITY PARTY

 Claims against majority party to establish safeguards to enable the JVC to assert claims against the majority shareholder
or others if they’re in breach of their obligations to the JVC.
o Minority needs to ensure that the right of claim against the JVC cannot be blocked by the majority by providing
that the responsibility for pursuing any such claim against the majority party is delegated to a committee of the
JVC board which excludes the appointees of the majority shareholder or is delegated to the minority shareholder
as agent of the JV.
o Contractually provide that the majority shareholder shall not vote or interfere with such claims, but without
prejudice to its rights as the defendant to resist such claims.
 Note: Legislative provision of statutory derivative action.

EXIT STRATEGY

 Exit strategy to ensure that it has the ability to the JVC without being trapped – minority is usually in a weak position if it
wishes to exit from the JV, and can find itself locked into the JVC without an exit route.
 Some exit strategy include:
o Transfer – minority stake will not usually be marketable. However, a right to sell will usually be reserved,
including that [1] the minority is free to transfer its shares to any 3rd party after giving the majority a right to buy
the shares, and [2] ensuring that where the pre-emption right is exercisable by the other party at fair value
without discount and [3] removing any right of the directors to refuse to register a transfer to a 3rd party if the
shares are not bough by the majority.
o Put option – forced sale back by minority on the majority.
 However, the reality is that a sale to a 3rd party is unlikely without the positive cooperation from the
majority party in finding a suitable alternative partner.
o Redeemable shares – rights must be carefully drafted to allow the shareholder to ask for redemption by the
majority party at any time at the stated price.
 However, these must be issued at the outset since the rights of existing shares cannot be altered. Shares
can only be redeemed out of distributable profits (which may also be a problem). Shareholders may
wish to veto a transaction which would reduce the level of distributable reserves and therefore, make
redemption more difficult.
 In the UK, redeemable shares are usually convertible shares (at an agreed time or price) into full equity
shares in order for the redeemable shareholders to benefit from any gain that may result from any sale
or public offering of the JV.
o Buy back by JVC itself – rare because of the financial assistance prohibitions and problems.
o Rights of “drag along” (i.e. to require other parties to join in a sale to a 3 rd party), or “tag along” (i.e. a right to
join in any sale to a 3rd party made by another JVC party or at the very least, make an offer for the minority
shares).
 Note: The party wanting to sell will want to “drag along” everybody, because the incoming party would
not want to have an outsider remaining in the JVC.

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  Note: The party who may be stuck in the JVC will want a “tag along” to prevent him remaining in the
JVC with the outsider.

BOARD, GOVERNANCE, AND CONTROL

COMMON ISSUES

 [1] Role of alliance governing body – what is its role, procedures, and what will be its decision-making authority?
o Contractual alliance – depends entirely on contract and the circumstance of the particular JV.
o Equity joint venture – more formal and developed management structure.
o Either way, needs to determine whether the governing body is only supervisory and coordinating, or a real
management role with the authority to make decisions.
 [2] Control – will 1 party essentially be in control, or will it be shared?
o Usually, control follows equity ownership.
 However, parties may consider that equal voting and control rights will create a stronger basis for
venture by encouraging consensus and shared management responsibility.
 Shareholder equality can be created through non-voting shares and board equality (by providing that
both parties can have the same number of directors even if economic contribution is different).
o Majority ownership or board voting rights may not always be effectively if board is in another’s control.
 Other forms of exercising control:
 Appointment of key alliance management.
 Contractual arrangement.
 Relationship with the parent company.
 HR programmes and systems.
 Informal mechanism.
 [3] Composition of the board of directors – appointment, independent directors, etc.
o Rights are normally reflected in the legal documents either by:
 [1] A right for a shareholder X to nominate a certain number of directors coupled with an undertaking
by shareholder Y to support the appointment or removal of the other party’s nomination; or
 [2] A right of appointment for the particular shareholder which is entrenched in the AOA as a class right
attaching to the shareholders’ shares in the JV.
o Where it is noted that the shareholders can change any time (in the case of a multi-party JV), there is no right of
appointment of directors to a particular party or shareholder – the rights of appointment should apply if the
shareholders hold not less than X% of shares in the JVC.
o Note: Also must consider the quorum of the board meetings – very important!
 [4] Supervision by JVC parents.
o Representation on the board of the JVC.
o Reserved matters are subject to approval at shareholder level and not determined by the JVC board alone.
o Appropriate reporting mechanisms.
o Internal governance discipline.
o Note: Reporting relationship between the JVC and parent companies – the balance is to be struck between
supervision and monitoring by the parents vs. autonomy of the JVC.
 Issues include:
 What will be the reporting line?
 What regular information should be circulated?
 How are the budgets prepared?
 Is the parent entitled to exercise direct rights to interview the JVC executives and inspect
records?
 [5] Operational management.
o This is the level at which the benefits and synergies of the alliance must be created.
 In some ventures, it may be appropriate for the board of the JVC to be directly responsible for
operational management and for the executive team to be directors and with the shareholders
exercising a supervisory role.
 Appointment of executives – operational management team should not reflect proportionate
ownership, but should reflect effective management experience in the relevant area. There could be
different ways to split up this management power. One party could have:
 Appointment by board on a case to case basis.
 Appointment to particular posts.
 Functional responsibility.
 Management contract.
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  Appointment by chief executive.
 Note: The other party may ask for a veto over appointment, or may push out 2 candidates for
the minority to choose.
 Delegation of authority – the question is how much authority to delegate to the day-to-day executive
in a JVC?
 Business issues requiring speed should be left for the executive management, whereas
significant financial investment decisions should be left to the board of directors.
 Also, certain legal factors can affect the question of executive authority.
 [6] Minority protection – refer to above.
 [7] Deadlock and dispute resolution – deadlock breaker, or other dispute resolution procedures.
o The problem with equality is deadlock.
 Note: Statutorily, under s 254(1)(i), Companies Act, parties may be able to apply for a just and equitable
winding-up when there is a deadlock without contractual mechanisms to unstuck the parties.
 Factors that objectively show when it is “just and equitable” to wind-up include:
o Irretrievable breakdown – this is usually the reason to resolve procedural deadlocks.
o Loss of substratum – i.e. where JVC can no longer achieve its objectives.
o Mechanisms enabling the JVC to continue.
 Additional vote.
 Chairman can have casting vote in deadlock situation – appointment of chairman may rotate.
 Alternates – constitution should clarify whether the director can appoint an alternate to attend
and vote in his place.
 Independent directors’ swing vote.
 Appointment of such directors have no specific allegiance to either party.
 2-tier board structure – there can be a supervisory board and a management board.
 Supervisory board represents owners and employees.
 Management board comprises of key executives.
 C.f. a 2 company structure – holding and subsidiary company.
 Problem with these 2 is the need to clarify which matter is under whose jurisdiction.
 Internal escalation.
 Dispute review panel.
 Reference to mediation or expert determination.
o Mechanisms to “divorce” – refer to below.
 [8] Duties of directors to JVC.
o Generally, directors in a JVC assume all duties of directors in a company.
 E.g. fiduciary duties – duty includes having the independent judgement to promote the success of the
company for the benefit of its members as a whole (the fact that he was appointed by a particular
shareholder is irrelevant).
 Biala Pty Ltd v Mallina Holdings Ltd (1994)
o HELD: In a continuing JV, the relationship between the parties were founded on
mutual trust and confidence of each in the skill, knowledge and integrity of the other.
o Hence, directors from each party owed duties to each other:
 To refrain from pursuing/obtaining/retaining collateral advantage without
the knowledge and informed consent of the other.
 To have utmost faith.
 To disclose relevant information.
o Insolvency – upon insolvency, directors have additional duties (e.g. to take into account interests of creditors).
o Indemnity to directors of JVC – directors may seek indemnity to cover potential liabilities in the performance of
his duties as a safeguard. However, most jurisdictions impose restrictions on the ability of the company to
indemnify its own directors (prohibited except for very limited circumstances).
o Shadow directors – as liable as normal directors.

EXIT/TERMINATION
 Importance of exit provisions.
o Many JVCs have a relatively short life, and so parties must plan for that eventuality.
o Exit provisions are important because they deal with the interests of the parties in the JVC.

COMMON ISSUES

 [1] Fixed term/joint renewal – is the JVC established for a fixed term with automatic termination unless there’s renewal?
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 o Benefit of simplicity and parties know the position clearly – renewal becomes a joint and positive act.
 [2] Termination for convenience – should each party have the right (simply by notice) to terminate its interest irrespective
of any cause attributable to the other party? If so, what is the exit mechanism:
o For winding-up of the JVC – extreme but sometimes practical final solution.
o For buy-out of the existing party’s shares by other parties – with valuation.
o For buy-out of the existing party’s shares by the JVC itself – subject to strict corporate law prohibitions on
permitted share buyback.
o Implementation of a buy/sell or shoot-out mechanism between the parties.
 [3] Termination for cause – should a party have the right to terminate the JVC in the event of specified circumstance of
“cause”? If so, what are the trigger events to entitle the exercise of such rights?
o Material default by the other party – material breach of an agreed provision.
o Change of control affecting the other party – it fundamentally changes the relationship.
o Insolvency of the other party.
o End of JVC purpose.
o Persistent use of veto rights.
o Failure of the JVC to reach a specified performance target.
 [4] Agreed put or call option – will a party have a direct right or option to “put” its shares in the JVC on the other party
(or “call” for the other party’s shares)?
o “Put” option is a right which entitles Party A to require the Party B to purchase A’s shares in the JVC – appropriate
exit protection if A is a minority shareholder.
o “Call” option is a right which entitles Party A to require Party B to sell B’s shares in the JVC to A – appropriate
where A is a majority party and wishes to have a definitely right to buy-out the minority.
o Main disadvantage is that parties may be forced to buy/sell shares at an inopportune time.
o Price is also a concern – valuation could be done with independent 3rd parties.
 [5] Sale or public offering (IPO) of JVC – should a party have a right to initiate a sale of the JVC as a whole (either through
an IPO, or trade, or other secondary sale?
 [6] Transfer of interest – should a party have a right to sell its shares in the JVC to a 3rd party?
o If so, should the right:
 Be an entitlement exercisable freely without constraint?
 Subject to a right of the other party to join the sale?
 Subject to pre-emption rights in favour of the other party?
 E.g. right of first offer, or right of first refusal.
o Right of first refusal – holder of the right has the power to review all other offers of
the party selling, and can buy the business simply by matching the highest offer. This
can allow the party remaining in the JVC to prevent a newcomer they do not know
from buying a stake in the JVC.
o Right of first offer – holder of the right has the power to make the first offer to the
party selling, and the party selling can accept/reject such offer from the party
remaining in the JVC. If rejected, the party selling can go find a new 3 rd party.
 Subject always to the prior consent of the other party?
 Absolute prohibition on transfer?
o If there is a right, what is the transfer price?
 Price set by selling party.
 Price offered by 3rd party purchaser.
 Price determined by independent valuation – e.g. market value on pro rata basis, fair value, net asset
value, earnings basis (e.g. P/E ratio), discounted cash flow, start-up costs, dividend yield, etc.
 [7] Deadlock – if there is a deadlock, is there a right to trigger specific deadlock resolution mechanism which will terminate
the JVC (e.g. winding-up – which is the fairest).
 [8] Change or transformation – should a party have an express right to call for discussions which may lead to change in
term or scope of the JV? If so, should it be linked to:
o Changes in the market conditions?
o Alleged hardship?
o “Milestone” events in the JVC?

CONSEQUENCES OF EXIT/TERMINATION

 Factors to be considered:
o Non-compete – party exiting should not compete with the business of the JV for a period of time.
o Confidentiality – should survive despite exit.
o Intellectual property rights – whether exiting party will continue to benefit from the licences?
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o Name – whether use of trademark should continue or cease?
o Loans – should loans of exiting party be assumed by the remaining parties?
o Guarantees and indemnities – should these also be assumed by the remaining parties?
o Ancillary contracts – review the effect of exit on these contracts.
o Completion mechanics.
o Deed of adherence.
o Tax.
o Realisation of assets – how does the exiting party reacquire the assets? Pre-agreed option to repurchase,
dividend in specie of a group of assets, or an “auction where each party bids for the assets.

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