Singapore's overall M&A activity in 2018 reached a volume of 688 deals valued at approximately US$99 billion.2
Due to the small size of Singapore's domestic energy sector, most of the energy M&A deals in Singapore tend to be cross-border in nature. Some notable energy M&A deals in 2018 included:
- the acquisition of a US-based electric utility company by a consortium led by a Singapore-incorporated company;
- the acquisition of a Singapore-headquartered company that carries on the business of electricity generation in the Philippines; and
- the acquisition of a majority stake in a Singapore-headquartered company that carries on the business of generating geothermal energy in Indonesia.
As a general overview, Singapore's domestic energy sector is characterised by open market competition. Since 1998, the electricity industry has been progressively liberalised and restructured so as to, among other things, separate the generation, transmission and retail of electricity at the ownership level, and to open up the generation and retail markets to commercial players. Similar changes have also taken place in the gas industry, which is closely tied to the electricity industry owing to the fact that 95 per cent of electricity in Singapore is generated using natural gas.
Singapore does not have any known oil or natural gas reserves.
ii YEAR IN REVIEW
In 2018 and 2019, the Electricity Act3 and the Gas Act4 (which are the principal statutes in Singapore regulating the electricity industry and gas industry, respectively) were amended to, among other things, enable more effective regulation of the gas and electricity markets, enhance the security and reliability of gas and electricity supply, protect critical infrastructure and enhance competitiveness in Singapore's energy market.
Section III sets out a brief overview of the Electricity Act and the Gas Act, in particular regarding restrictions on the ownership of equity interests in certain designated licensees under such statutes.
iii LEGAL AND REGULATORY FRAMEWORK
The Singapore legal system is based on the common law system, in which legislation, regulatory rules and case law exist side by side. In relation to M&A transactions in general, the key statutes are the Companies Act,5 which sets out general corporate legislation (including provisions that allow for compulsory acquisitions, schemes of arrangement and amalgamations in relation to incorporated companies) and the Securities and Futures Act,6 which sets out legislation pertaining to, inter alia, offers of securities.
Save as aforesaid, private M&A transactions are largely unregulated by statute, and parties are generally free to negotiate the terms and conditions of sales and purchases. On the other hand, the conducting of takeovers of public companies incorporated in Singapore (or entities that have a primary listing on the Singapore Exchange Securities Trading Limited) is governed by the Singapore Code on Takeovers and Mergers (Takeover Code). While the Takeover Code does not have the force of law, it forms an essential part of the M&A regime in Singapore, and market participants are expected to act in compliance with the Takeover Code.
With regard to M&A transactions in the energy sector, the Electricity Act and the Gas Act impose certain restrictions and requirements relating to changes in the ownership of equity interests in certain designated licensees in those industries.
As a general overview, the Electricity Act and the Gas Act prohibit persons from engaging in specified activities (e.g., the generation, transmission or retail of electricity, or the conveyance, shipping or retail of gas) unless they have obtained an electricity licence or gas licence (as the case may be) to do so from the Energy Market Authority of Singapore (EMA). Licences may set out various conditions that licensees are required to comply with.
The Electricity Act and the Gas Act impose certain restrictions (shareholding restrictions) on the ownership of equity interests in certain designated licensees. Briefly:
- a designated licensee is required to notify the EMA in writing if any person acquires an equity interest in the designated licensee, whether through a series of transactions over a period of time or otherwise, that would result in that person holding 5 per cent or more but less than 12 per cent of the total equity interest in the designated licensee;
- no person shall, whether through a series of transactions over a period of time or otherwise, and whether alone or together with his or her associates (as defined in the relevant statute), hold 12 per cent or more of the total equity interest in the designated licensee or be in a position to control 12 per cent or more of the voting power in the designated licensee, or hold 30 per cent or more of the total equity interest in the designated licensee or be in a position to control 30 per cent or more of the voting power in the designated licensee, in each case except with the prior written approval of the EMA; and
- no person shall, whether through a series of transactions over a period of time or otherwise, become an indirect controller (as defined in the relevant statute) of a designated licensee, except with the prior written approval of the EMA.
iv CROSS-BORDER TRANSACTIONS AND FOREIGN INVESTMENT
Due to the limited size of Singapore's domestic energy sector, cross-border energy M&A activity and energy foreign investment in Singapore tend to be of the outbound variety. Examples of outbound energy M&A activity and energy foreign investment include the acquisition of a US-based electric utility company by a consortium led by a Singapore-incorporated company (as mentioned in Section I) and the proposed acquisition of a majority equity interest in a supplier of thermal power in China.
Singapore law does not specifically seek to regulate or restrict foreign involvement in its energy markets. In addition, parties are generally free to choose the governing law and jurisdiction for their transactions.
Funding of projects in the Singapore energy market can take various forms, with the key debt funding methods being corporate financing and project financing. The option chosen depends on factors such as the creditworthiness of the borrower or the sponsors, and the bankability and nature of the project involved.
Corporate financing (where the lenders look primarily to the balance sheet of the sponsors rather than the project) tends to be more frequently adopted by financially strong sponsors or for lower-risk or smaller-value projects, as pricing for these loans would typically be lower compared to project financing. The loan documentation will also be relatively more straightforward and allow more flexibility for a sponsor to manage its business.
Apart from corporate financing, there appears to have been a recent increase in the uptake of project financing in the renewable energy market, following growing interest by lenders in project financing in the Asia-Pacific region. The focus in a project's financing shifts towards the bankability of the project, as lenders will rely on the cash flows of a project as the primary source of repayment. Recent financings for solar energy projects have also been granted on a portfolio basis, where instead of the traditional approach of funding one major project, loan drawdowns are made based on the number of offtake projects secured in the borrower's portfolio from time to time.
The recent shift away from traditional fossil fuel sources towards renewable energy has led to an increasing number of distressed companies in the energy sector due to lowering oil and gas prices. If the distress is largely attributable to the operational mismanagement of a company, the lenders are more likely to pull their investments and cut their losses. However, if the distress can be attributed to an industry-wide downturn, lenders may be more inclined to give some latitude to a borrower by restructuring the loans instead of accelerating their repayment. Pricing may be increased to cater for the additional risk undertaken by the lenders. The lenders would also be incentivised to ensure that the loan documentation is more robust and involves greater restrictions on the borrower, such as limits on expenditure, cash flow waterfall mechanisms, mandatory cash sweeps and tighter financial covenants. Security may also be obtained over a project's assets to protect the lenders' position as secured creditors in the event of insolvency. Such restrictions and requirements may have been foregone in the past when the market conditions were more favourable to borrowers.
Having financially strong and committed sponsors also plays a significant role in enabling a distressed company to deal with challenging market conditions. Not only will sponsors be able to keep companies afloat by injecting additional equity into projects, companies would benefit from lenders' increased confidence in sponsors' ability and willingness to ride out a crisis. On the flipside, this means that smaller players or those without a committed sponsor are more likely to pull out of the market during a downturn, leading to a consolidation of industry.
vi DUE DILIGENCE
It is common for a purchaser in an M&A transaction in Singapore (including an energy M&A transaction) to require due diligence to be conducted on the target prior to making an offer.
There are several aspects to due diligence, including legal due diligence, business due diligence and financial due diligence. Some of the key purposes of legal due diligence include:
- confirming the seller's or target's title to the assets proposed to be acquired;
- facilitating a determination of what contractual protections in the form of warranties and indemnities are required; and
- identifying prohibitions on the proposed transaction set out in the target's material and identified contracts, and the relevant waivers, consents, or both, that are therefore required.
For an energy M&A transaction in Singapore, legal due diligence is usually carried out to determine, inter alia, whether a target has the requisite regulatory licences (e.g., the licences issued by the EMA under the Electricity Act or the Gas Act) and regulatory contracts to carry on its businesses, whether the target is in compliance with the terms of its existing regulatory licences and regulatory contracts, and whether the target is subject to shareholding restrictions.
As is the case for a regular M&A transaction, legal due diligence should also be conducted on a target's material contracts to determine if consent is required for a change in control (in the case of a share sale) or novation or assignment of identified contracts to the purchaser (in the case of a business sale). Further, given the nature of revenue streams within the energy sector, it may be necessary to conduct due diligence on a target's material contracts to determine the stability of the target's revenue flows and the bankability of the target's projects.
vii PURCHASE AGREEMENTS AND DOCUMENTATION
As is the case in many other jurisdictions, the most contentious and heavily negotiated portions of a purchase agreement in an M&A transaction (including an energy M&A transaction) invariably concern the representations and warranties provided by the vendor. There is generally little protection under Singapore law for a purchaser in an M&A transaction, and the purpose of representations and warranties is to provide a purchaser with some express contractual protection. Representations and warranties apportion the risks associated with a particular transaction: to the extent that representations and warranties are given, the vendor accepts liability; to the extent that they are not given, or if they are restricted in their scope, the purchaser accepts the risk.
Representations and warranties should be tailored to each transaction. That said, the following representations and warranties may be of particular importance in an energy M&A transaction:
- in the case of a share sale, that the vendor shall ensure that any and all regulatory approvals required in respect of the transfer of shares (e.g., approvals in respect of the shareholding restrictions) are obtained. It is also typical for such approval to be included as a condition precedent to completion under the purchase agreement;
- that entry into the transaction will not result in the forfeit or repayment of any investment grant, loan subsidy or financial aid received by the target (e.g., grants, subsidies or financial aid relating to renewable energy);
- that all assets included in the target's financial statements (in the case of a business sale) and the shares to be sold (in the case of a share sale) are legally and beneficially owned by the target, and are free from encumbrances;
- that the plant, machinery and other equipment owned or used by the target (e.g., electric lines, gas fittings) are in reasonable working order and have been regularly and properly maintained, and are not dangerous, obsolete, inefficient or surplus to requirements;
- that the property, rights and assets owned, leased or otherwise used by the target comprise all the property, rights and assets necessary or convenient for the carrying on of the business of the target in the manner in which it is currently conducted;
- that all assets of the target that are capable of being insured have at all material times been and are insured against risks normally insured against by companies carrying on similar business or owning assets of a similar nature;
- that the target has at all material times been and continues to be adequately covered against accident, physical loss or damage, third-party liability, environmental liability and other risks normally covered by insurance by companies carrying on similar business;
- that all licences, consents, authorisations, orders, warrants, confirmations, permissions, certificates, approvals, registrations and authorities (licences) necessary for carrying on the target's business (e.g., an electricity licence or gas licence issued by the EMA) have been obtained and are in full force and effect, and have been and are being complied with;
- that there is no investigation, enquiry or proceeding outstanding or anticipated that is likely to result in the suspension, cancellation, modification or revocation of any licence, and that generally there are no claims, investigations or legal actions commenced, pending or threatened against the target; and
- that the target is duly incorporated, and is conducting and has conducted its business in compliance with the applicable laws and regulations (including environmental laws and regulations), and is not in breach of any such laws or regulations.
viii KEY REGULATORY ISSUES
The Electricity Act and the Gas Act set out sector-specific provisions governing competition in the electricity and gas sector in Singapore, respectively. In particular, under the Acts, agreements, decisions or concerted practices that have as their object or effect the prevention, restriction or distortion of competition in any wholesale electricity market or retail electricity market in Singapore, or in any gas market in Singapore, are generally prohibited. These include agreements, decisions or concerted practices that provide for the acquisition, directly or indirectly, of shares in or the assets of an electricity licensee or gas licensee (as the case may be).
As mentioned above, the Electricity Act and the Gas Act set out certain restrictions in respect of the acquisition of equity interests in certain designated electricity licensees and designated gas licensees. For more information, see Section III for a discussion about shareholding restrictions.
Where such sectoral-specific provisions do not apply, the Competition Act7 prohibits mergers that have resulted in, or may be expected to result in, a substantial lessening of competition within any market of goods or services in Singapore. A party who is unsure whether a proposed acquisition is prohibited by the Competition Act may apply to the Competition and Consumer Commission of Singapore for a decision on whether the acquisition, if carried into effect, will infringe the provisions of the Competition Act.
ii Environmental protection
There are no environmental laws or regulations that apply specifically in the context of energy M&A transactions.
However, depending on the specific activities carried on by the target in question, certain environmental laws may be relevant. These include, among others, the Environmental Protection and Management Act,8 the Environmental Public Health Act,9 the Carbon Pricing Act10 and the Radiation Act.11 Such environmental laws impose a range of obligations relating to, among other things, pollution and hazardous waste control, radiation control, public health and carbon pricing.
As mentioned above, a purchaser in an energy M&A transaction may wish to obtain a warranty that the target is conducting, and has conducted, its business in compliance with all applicable environmental laws.
There are no employment laws or regulations that apply specifically in the context of energy M&A transactions in Singapore.
In the context of M&A transactions in general, it should be highlighted that Section 18A of the Employment Act12 provides that where an undertaking (which includes any trade or business) is transferred from one person to another, the employment of the transferor's employees who are covered under the Employment Act are automatically transferred to the transferee. In this regard, the Employment Act generally covers all employees in Singapore (covered employees) save for seafarers, domestic workers, statutory board employees and civil servants.
The term transfer includes the disposition of a business as a going concern and a transfer effected by a sale, amalgamation, merger, reconstruction or operation of the law. Section 18A, therefore, would not apply where there is a sale of only certain assets of a business. The distinction is sometimes one of degree, but in most cases it will be a question of fact as to whether a transfer of an undertaking, rather than a mere asset sale, is involved. Where Section 18A of the Employment Act applies, certain statutory novation and consultation procedures apply. For example:
- there will be an automatic transfer with no break in the continuity of employment, and the terms and conditions of service of the covered employees transferred shall be the same as those enjoyed by them immediately prior to the transfer;
- the transferor is obliged to notify the covered employees being transferred and the trade union of the covered employees (if any) of the transfer as soon as it is reasonable and before the transfer takes place, to enable consultations to take place between the transferor and such employees, and between the transferor and the trade union (if any); and
- on completion of the transfer of the business, all the transferor's rights, powers, duties and liabilities under or in connection with the employment contracts of its covered employees are transferred to the transferee, and any act done or omitted before the transfer by the transferor in respect of such contracts shall be deemed to have been done or omitted by the transferee.
In the case of employees falling outside the scope of the Employment Act (non-covered employees), the automatic statutory novation and consultation procedures under Section 18A of the Employment Act do not apply. If any non-covered employees are to be transferred to the transferee as part of the transfer of a business, the transferor will have to terminate the employment of such non-covered employees in accordance with the termination provisions in their employment contracts, and the transferee will have to offer new employment to the non-covered employees on such terms as the transferee and such employees may agree. Note that the non-covered employees cannot be compelled to accept any such offer. The transfer of non-covered employees is, therefore, entirely a matter of contract under Singapore law.
There are no tax laws or regulations that apply specifically in the context of energy M&A transactions in Singapore.
With regard to M&A transactions in general, we would highlight that under the Stamp Duties Act,13 stamp duty is payable on a transfer of shares in a Singapore company or a transfer of real property (which would include leasehold property) in Singapore.
In respect of a transfer of shares in a Singapore private company pursuant to a share sale, stamp duty is generally payable on the relevant instrument of the transfer of the shares (i.e., a share transfer form) at a rate of 0.2 per cent of the consideration paid for the transfer of the shares or the net asset value of such shares, whichever is the higher (assuming that the company has been incorporated for more than 18 months).
In respect of a transfer of real property pursuant to a business sale, stamp duty is payable on the contract or agreement for the sale of the real property or the instrument of the transfer of the real property, whichever is executed first, generally at a rate of 3 per cent of the purchase price or the market value of the property, whichever is the higher. The seller's stamp duty and any additional buyer's stamp duty may also be payable in respect of the acquisition of certain industrial or residential properties.
Apart from stamp duty issues, there are a number of other tax considerations that have to be taken into account when entering into an M&A transaction in Singapore. These include, but are not limited to:
- whether unused deductibles may be utilised following a transaction;
- whether existing tax incentives continue to be applicable following the transaction;
- whether any balancing charges or allowances are applicable; and
- whether any goods and services tax is payable in respect of the M&A transaction.
Potential purchasers should seek specialist tax advice prior to entering into any M&A transaction in Singapore.
v Real estate
There are no real estate laws or regulations that apply specifically in the context of energy M&A transactions in Singapore.
With regard to M&A transactions in general, it should be highlighted that stamp duty is payable on a transfer of real property (which would include leasehold property) in Singapore. See the discussion in the foregoing subsection on stamp duty for more information.
vi Anti-money laundering and anti-corruption
There are no anti-money laundering or anti-corruption laws or regulations that apply specifically in the context of energy M&A transactions in Singapore.
By way of background, the principal anti-money laundering legislation in Singapore is the Corruption, Drug Trafficking and other Serious Crimes (Confiscation of Benefits) Act (CDSA),14 and the primary anti-corruption legislation is the Prevention of Corruption Act (PCA).15 The CDSA criminalises the laundering of proceeds generated by two main categories of predicate offences (drug dealing and criminal conduct), while the PCA prohibits any and all corrupt activities concerning public and private sector employees and officers.
vii Energy regulation
There is no single statute or regulation that governs the energy sector as a whole. Instead, the energy sector is regulated by a number of different statutes. These include, among others:
- the Electricity Act, which serves to regulate the electricity industry;
- the Gas Act, which serves to regulate the gas industry;
- the Energy Conservation Act,16 which serves to mandate energy efficiency requirements and energy management practices to promote energy conservation; and
- the Carbon Pricing Act,17 which provides for the payment of a tax in relation to greenhouse gas emissions.
The key legal considerations that may be relevant in the context of energy M&A transactions are discussed in Section III.
Warranty indemnity insurance is increasingly used in Singapore in M&A transactions (including energy M&A transactions). That said, vendors still typically look to mitigate their risk exposure through contractual limitations on liability. In this respect, a broad range of limitations are usually inserted, notably those relating to time (typically ranging from having no time limits for title breaches, six years for tax warranty breaches and 12 to 24 months for other breaches) and amount (common ones include no cap for title warranties, 100 per cent for tax warranties and anything from 30 to 60 per cent for other warranties). Purchasers are also increasingly resisting high de minimis and basket thresholds.
x DISPUTE RESOLUTION
There are a variety of dispute resolution mechanisms that are typically used in M&A transactions in Singapore (including energy M&A transactions). These include:
- litigation before the Singapore courts, including the Singapore International Commercial Court;
- arbitration under the rules of the Singapore International Arbitration Centre, the International Chamber of Commerce, the International Centre for Dispute Resolution and the United Nations Commission on International Trade Law; and
- other pre-arbitration or pre-litigation steps, including mediation under the Singapore International Mediation Centre and the Singapore Mediation Centre.
The choice of dispute resolution mechanism is a fact-specific inquiry and depends on a combination of factors, including whether the parties prefer that disputes be resolved confidentially, the location of the parties, the complexity of the matter in question and whether it is contemplated that additional parties may need to be joined to any dispute resolution.
An examination of the characteristics and features of each dispute resolution mechanism is beyond the scope of this chapter. That said, it should just be highlighted that in the context of energy M&A transactions, arbitration is fairly commonly chosen as a dispute resolution mechanism due to the confidentiality of proceedings, especially where there is a preference to appoint an arbitrator with sectoral-specific knowledge.
In an effort to increase solar deployment in Singapore and fulfil the government's plans to increase the adoption of solar power, the Economic Development Board of Singapore (EDB) and the Housing Development Board (HDB) launched SolarNova in 2014, a government-led programme that aims to accelerate solar deployment in Singapore through promoting and aggregating solar demand across government agencies. The HDB awarded its fourth solar leasing tender under the SolarNova programme in October 2019. Under this tender, more than 170,000 solar photovoltaic panels will be installed at 1,218 HDB blocks, and 49 government sites by the third quarter of 2022.
The Public Utilities Board (PUB) is also actively implementing the deployment of solar photovoltaic systems on the roofs of water infrastructure and at reservoirs in Singapore. The PUB awarded a tender for the building of two 1.5MWp (megawatt-peak) floating photovoltaic systems at two reservoirs in October 2019, and intends to deploy a 50MWp floating photovoltaic system at another reservoir by 2021. The EDB has also launched a request for information to explore the possibility of a 100MWp floating photovoltaic system for use in the private sector.
In June 2019, the EMA issued a request for an information paper on facilitating the deployment of new and innovative generation technologies, seeking information from industry participants on the following matters: new and innovative solutions that can enhance the generation efficiency of the current fleet and new generation plantings; and measures that can encourage the adoption of such new and innovative solutions to enhance power sector effectiveness.
1 Mark Quek, Yeo Boon Kiat and Aloysius Ng are partners and Wong Jie Ning is a senior associate at Allen & Gledhill LLP.
2 Deal information varies depending on the publication. The information here is based on data compiled by Duff & Phelps.
3 Electricity Act (Chapter 89A of Singapore).
4 Gas Act (Chapter 116A of Singapore).
5 Companies Act (Chapter 50 of Singapore).
6 Securities and Futures Act (Chapter 289 of Singapore).
7 Competition Act (Chapter 50B of Singapore).
8 Environmental Protection and Management Act (Chapter 94A of Singapore).
9 Environmental Public Health Act (Chapter 95 of Singapore).
10 Carbon Pricing Act (Act 23 of 2018).
11 Radiation Act (Chapter 262 of Singapore).
12 Employment Act (Chapter 50 of Singapore).
13 Stamp Duties Act (Chapter 312 of Singapore).
14 Corruption, Drug Trafficking and other Serious Crimes (Confiscation of Benefits) Act (Chapter 65A).
15 Prevention of Corruption Act (Chapter 241 of Singapore).
16 Energy Conservation Act (Chapter 92C of Singapore).
17 Carbon Pricing Act (No. 23 of 2018).