I OVERVIEW OF M&A ACTIVITY
2015 was a stellar year for M&A in Singapore, with a total deal value of US$101.2 billion, representing an almost 100 per cent increase over the US$50.7 billion recorded in 2014.2 The deal momentum continues to be fuelled largely by acquisitive corporates and private equity seeking opportunities outside Singapore, with outbound deals accounting for approximately 80 per cent of the total transacted value, followed by domestic deals accounting for 8 per cent of the total deal value. Inbound deals accounted for only 7 per cent of the overall deal value.
The deal flow is consistent with the slowdown in the Singapore economy, which grew 2.1 per cent in 2015, down from 2.9 per cent in 2014.3
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The Singapore legal system is based on the common law system, where legislation, regulatory rules and case law exist side by side. In relation to M&A transactions, the key statutes that would apply are:
- a the Companies Act, which sets out general corporate legislation, including provisions that allow for compulsory acquisition, schemes of arrangement and amalgamations in relation to Singapore incorporated companies; and
- b the Securities and Futures Act, which sets out legislation pertaining to, inter alia, regulations relating to offers of securities, prohibitions against insider dealing, notifications relating to acquisitions of substantial interests and penalties for misrepresentations to investors.
In addition to the above, ownership in certain sectors, such as banking, financial services, telecommunications and broadcasting, may be subject to ownership restrictions set out in specific legislation. Approval from the relevant regulatory bodies may be required in such instances.
The Singapore Code on Takeovers and Mergers (Takeover Code) sets out the principles and rules governing the conduct of takeovers of public companies incorporated in Singapore or entities which have a primary listing on the Singapore Exchange Securities Trading Limited (SGX). The Takeover Code is administered by the Securities Industry Council (SIC) of Singapore, and while the Code does not have the force of law, it forms an essential part of the M&A regime in Singapore. Market participants are expected to act in compliance with the Code.
Entities listed on the SGX are also subject to the listing rules of the SGX, which prescribe, inter alia, the thresholds when shareholder approval is required where a listed entity undertakes an M&A transaction.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
i Amendments to the Companies Act
Following an extensive review, key amendments were made to the Companies Act. The first phase of legislative changes came into effect on 1 July 2015, and the second came into effect on 3 January 2016. Here we set out some of the key changes that impact M&A in Singapore.
The prohibition on the provision of financial assistance for Singapore-incorporated companies has been abolished for all private companies (other than private companies that are subsidiaries of public companies) with effect from 1 July 2015. Public companies and their subsidiaries will also be able to whitewash the grant of financial assistance where the board is of the view that the financial assistance will result in no material prejudice to shareholders or creditors. This revamp of the financial assistance regime will allow parties to have greater flexibility in structuring transactions.
Solvency statement for amalgamations
Directors of amalgamating companies will only be required to opine on the solvency of the amalgamating and amalgamated company as at the time of amalgamation, instead of being required to confirm the solvency for a 12-month period following amalgamation. This amendment was made after taking into account the fact that directors of amalgamating companies would, understandably, be reluctant to provide a forward-looking statement of solvency for an amalgamated company when the board of the amalgamated company could adopt a different business strategy.
This amendment addresses one of the gating items in structuring an amalgamation under Singapore law and is expected to make amalgamations a more viable deal structure in Singapore M&A.
Schemes of arrangement
The Companies Act requires a scheme of arrangement to be approved by a majority in number of shareholders representing not less than 75 per cent in value of the shareholders present and voting at the meeting. The Companies Act has been amended to clarify that the approval threshold may be varied if the court orders otherwise. The amendment allows the court to prevent the potential abuse of the scheme of arrangement provisions through share splitting.
The compulsory acquisition regime in the Companies Act now extends to units of shares and convertibles issued by a Singapore company. In addition, offerors who are not corporate entities now have similar compulsory acquisition rights once the requisite acceptance threshold has been achieved.
ii Takeover Code
Under the Takeover Code, an offeror that acquires shares that requires it to announce a mandatory general offer or revise its offer must make such announcement within 30 minutes of incurring such obligation. In July 2015, the SIC issued a practice statement to clarify that the 30-minute grace period was to allow an offeror to handle the administrative aspects of making an announcement, and that the offeror should not undertake further trading in the shares during the intervening period.
The Takeover Code was also amended on 25 March 2016 following a consultation that took place in July 2015.
As part of the recent suite of amendments, the SIC has codified an auction procedure that will resolve competitive situations in a takeover offer that exist as at the last day on which each offeror may unilaterally revise its offer. Save for a few modifications, the auction procedure is largely similar to the process previously imposed for the first time in 2013 in the competing bid for Fraser & Neave.
Under the modified auction procedure, there will be a maximum of five rounds of bidding taking place over five consecutive days. Competing offerors can now introduce new forms of consideration (i.e., other than cash) during the auction process. In addition, the SIC will no longer impose a requirement that the final bid to be made by each competing offeror on the last day of the auction must be either an odd or an even price. This key change means that there is now a possibility that there may not be a clear superior bid at the end of the auction. This is in keeping with the rationale that the intent of the auction process is simply to provide an orderly mechanism by which both offerors can reach their final price, and to prevent the offer period from carrying on indefinitely.
As with the previous process, until the conclusion of the auction procedure:
- a neither the target or the offerors, nor any of their respective concert parties, may, without the prior consent of the SIC, make any public statement in relation to or that could reasonably be expected to affect the orderly operation of the auction procedure (including in relation to any revised offer announced by an offeror), or in relation to the terms of either offers;
- b neither the offeror nor any of their respective concert parties may deal in the relevant securities of the company, or take any steps to procure, amend or renew any irrevocable commitment or letter of intent in relation to the respective offers; and
- c following the auction procedure, neither the offeror nor any of their respective concert parties may, during the offer period, acquire any interest in the relevant securities of the company on better terms than those of its offer.
To encourage more proactive boards in takeover offers, the amended Takeover Code also clarifies that the solicitation of a competing offer or the running of a sale process for a company would not amount to the frustration of an existing offer. In addition, the amendments clarify that an offeree board may consider sharing management projects and forecasts with an independent financial adviser for the purposes of finalising its recommendation.
The other changes to the Takeover Code relate largely to the administrative aspects of an offer or to codifying existing practice, including codifying provisions to align the timetables of offerors in competitive situations, modifying the timeline for the payment of shares tendered in acceptance of an offer to seven business days (from the previous 10-calendar day timeline), and requiring material information occurring during the course of the offer (including any change to information announced previously) to be announced promptly.
The SGX introduced an enhanced disciplinary framework in its listing rules with effect from 7 October 2015. The SGX has established a Listings Disciplinary Committee and a Listings Appeals Committee, which will hear cases involving more serious breaches of the listing rules, and has strengthened the range of sanctions it can impose on issuers, directors, executive officers, issue managers and financial advisers on reverse takeovers.
The SGX has also removed the requirement for issuers and controlling shareholders to make a confidential notification to the SGX of discussions or negotiations that its board of directors are aware of that are likely to result in the takeover of, reverse takeover of or a very substantial acquisition by that issuer. While the requirement was previously imposed to facilitate the SGX’s monitoring of trading activities in the relevant counters, the changes were made following market feedback over concerns that such notifications could result in transactions having to be notified at a very preliminary stage, and that this could both compromise the confidentiality of the transaction and have a potentially chilling effect on M&A. The SGX continues to require issuers and parties involved in a transaction to maintain a list of persons who are privy to the transaction prior to its announcement in order to facilitate the surveillance and enforcement functions of the SGX.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
Outbound deals accounted for a significant percentage of the increased activity in 2015, with government-linked funds accounting for almost one-third of the M&A deal value. Some of the significant transactions involving government-linked funds were as follows: GIC Pte Ltd joining with The Carlyle Group and other co-investors to acquire Veritas Software Corp for US$8 billion in one of the largest deals by value in Singapore M&A in 2015; Temasek Holdings (Private) Limited partnering with private equity firm MBK Partners to acquire Homeplus, the South Korean arm of Tesco; and GIC Pte Ltd’s acquisition, as part of a consortium of investors, of Dutch car lease company LeasePlan Corp NV.4
In terms of inbound transactions, 2015 also saw several strategic acquisitions by foreign corporates. These include acquisitions to acquire majority control, such as the general offer for (and subsequent privatisation of) Stats ChipPac Ltd by Jiangsu Changjiang Electronics Co, Ltd, and the general offer for Neptune Orient Lines Limited by French shipping giant CMA CGM. There were also strategic acquisitions for a minority stake, such as Mitsubishi Corp’s acquisition of a 20 per cent stake in SGX-listed Olam International Ltd for US$1.08 billion,5 and Alibaba Group increasing its stake in SGX-listed SingPost Limited following on from its initial investment in 2014.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
The technology sector represented the largest contributor to deal value, with a share of 51 per cent of transacted M&A value in 2015 for Singapore. The technology and internet sector was popular with both strategics and private equity funds. Notable transactions were GrabTaxi Holdings’s fundraising, which included investors such as China Investment Corporation; an investment into PropertyGuru from private equity funds TPG Capital, Emtek Group and Square Peg Capital; and Alibaba Group’s acquisition of a controlling stake in e-commerce platform Lazada, which is headquartered in Singapore.6
The real estate sector remained a perennial favourite for the Singapore M&A scene, and was the largest contributor in terms of deal volume. Significant transactions included the privatisation of Keppel Land by its listed parent Keppel Corporation; the acquisition of AXA Tower from BlackRock by a consortium led by SGX-listed Perennial Real Estate Holdings Limited for S$1.2 billion; and the recently announced sale of Asia Square Tower by BlackRock to sovereign wealth fund Qatar Investment Authority for S$3.4 billion.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
The financing structures of M&A transactions in Singapore remain fairly traditional, with the majority being funded by internal resources, whether alone or in combination with bank financing.
Where an offer is made in cash (or has a cash alternative) and such offer is governed under the Takeover Code, the offeror is required to obtain confirmation from a financial institution that it has sufficient cash resources to satisfy full acceptance of the offer. Such confirmation is required to be given at the time a firm intention to make the offer is announced. Where external financing is used for a takeover, the terms of the financing must satisfy the funds requirements of the financial institution providing the cash confirmation.
VII EMPLOYMENT LAW
In Singapore, an acquisition by way of a transfer of shares, as opposed to a transfer of a business undertaking, does not typically affect the employees of the acquiring company or the target company. An employee of the target company will continue to be employed by the target company. Where the transaction is structured as a transfer of business undertaking, the Employment Act provides that all employees of the target that fall under the Employment Act as at the date of the transfer will automatically become employees of the acquirer under the same terms and conditions as their employment under the target company. Employees who fall under the Employment Act are employees who are not employed in an executive or managerial position (excluding seafarers and domestic workers), and executive and managerial employees who earn a basic monthly salary of up to S$4,500. The transfer of employees who do not fall under the Employment Act is a matter to be agreed upon between the acquirer, the vendor and the relevant employees.
Where a collective agreement is in place between a transferor and its unionised employees, the collective agreement will remain in force between the transferee and the employees for a period of not less than 18 months following the transfer or the date on which the collective agreement expires (whichever is the later).
There is no statutory requirement under Singapore law requiring an employer to pay retrenchment benefits.
VIII TAX LAW
Stamp duty is payable on transfers of shares at a rate of 0.2 per cent on the higher of the consideration paid or the net asset value. This is typically borne by the purchaser, unless otherwise agreed. Transfers of interests for restructuring purposes (including transfers of assets between associated companies and upon the reconstruction and amalgamation of companies) may qualify for stamp duty relief, subject to the satisfaction of certain conditions.
Transfers of immoveable property are subject to stamp duty, and this is generally borne by the buyer. In addition, sellers of residential property within four years of their acquisition will also have to bear a seller stamp duty. As part of a suite of additional cooling measures for the property market, a seller stamp duty is imposed on sales of industrial property within three years of their acquisition. Foreign buyers of residential properties are also subject to an additional buyer stamp duty of 15 per cent. It is not clear when (if at all) these cooling measures will be lifted.
Insofar as income tax on realised gains is concerned, there is no imposition of capital gains tax in Singapore. Therefore, when the shareholders of a target company dispose of their target shares, the question is whether the gain realised (if any) constitute capital gains or trading income, the latter of which is subject to income tax. Whether the gain is treated as capital gains or trading income depends on whether the vendors of the target company are regarded by the Inland Revenue Authority of Singapore as share traders.
IX COMPETITION LAW
Section 54 of the Competition Act prohibits mergers, including the creation of full-function joint ventures, that result, or may be expected to result, in a substantial lessening of competition within any market for goods or services in Singapore (Section 54 Prohibition). Parties to a takeover or merger may apply to the Competition Commission of Singapore (CCS) for a decision on whether the merger, if carried into effect, will infringe the Section 54 Prohibition. The Section 54 Prohibition may apply even where any merger party is located outside Singapore, so long as the merger has an effect on any market in Singapore. Parties to an M&A transaction may apply to the CCS for a decision on whether a merger, if carried into effect, will infringe the Section 54 Prohibition. A merger clearance filing to the CCS is voluntary, but is recommended by the CCS if a merger may potentially result in a substantial lessening of competition in a relevant market.
In this regard, the CCS requires all merger parties to conduct a self-assessment, in accordance with the methodologies in the Guidelines published by the CCS and read with its decided cases, on whether a merger filing is necessary. For the self-assessment to be accepted by the CCS, it must be documented in a form that the CCS would accept as documentary evidence.
Failure to follow the merger control procedures where it would otherwise have been advisable to do so could result in financial penalties of up to 10 per cent of the turnover (for up to three years) of the parties to a transaction, in addition to remedies that may be imposed by the CCS (acting on its own or upon a complaint by a third party) on parties to the transaction, such as a direction for the merger to be unwound or for divestments to be carried out.
The CCS has stated that if a merger results in the indicative quantitative notification thresholds (quantitative thresholds) being crossed, the CCS is likely to give further consideration to the merger before being satisfied that it will not result in a substantial lessening of competition.
The quantitative thresholds are as follows: post-merger, the combined market share of the three largest firms must be at least 70 per cent, and the merged undertaking must have a market share of at least 20 per cent; or a merged undertaking must have a market share of at least 40 per cent.
The test as to the existence of a substantial lessening of competition is qualitative rather than quantitative. The CCS has stated that a substantial lessening of competition could potentially be established ‘even if the merger falls below the quantitative thresholds’. Qualitative factors that the CCS would take into consideration include, but are not limited to, the ease and speed of supply-side substitution, countervailing buyer power, market transparency and cost stability in the market.
Unlike the European and UK merger control rules that rely on jurisdictional turnover figures (which are, by their nature, readily identifiable), the quantitative thresholds rely on market shares. The CCS has emphasised in the Substantive Assessment Guidelines that the calculation of market shares is highly dependent on market definition, and that it will not necessarily accept parties’ identification of the relevant market. Relevant markets must be defined in accordance with the rules set out in the gazetted CCS Guidelines on Market Definition.
The growth forecast of Singapore’s economy for 2016 is at 1 to 3 per cent7 (down from 2 to 4 per cent for 2015). Notwithstanding macroeconomic uncertainties and market volatility, credit remains generally available, and may prove a driving force for M&A as investors seek to close transactions before credit is tightened. While it remains to be seen if M&A activity can match the levels seen in 2015, the market sentiment for M&A continues to remain buoyant in 2016, with acquirers actively seeking value opportunities.
1 Lim Mei and Lee Kee Yeng are partners at Allen & Gledhill LLP.
2 Deal information varies according to various publications. The deal information here is based on data compiled by Duff & Phelps and Dealstreet Asia.
3 Source: Ministry of Trade and Industry, Singapore.
4 See footnote 2.
7 Source: Ministry of Trade and Industry, Singapore.