I OVERVIEW OF M&A ACTIVITY
Singapore overcame a slow start to 2017 and completed the year with a strong showing, registering a healthy volume of 698 deals valued at approximately US$75.4 billion.2 As in previous years, outbound deals continue to account for the bulk of the deal volume (representing approximately 72 per cent of the total transacted value), with inbound and domestic deals accounting for 15 per cent and 14 per cent of total transacted value respectively. The number of private equity (PE) and venture capital (VC) investments in Singapore in 2017 was also significant, with 125 deals totalling approximately US$22.8 billion.
The Singapore economy delivered a strong performance in 2017, registering growth of 3.5 per cent and thus exceeding the original estimate of 1 to 3 per cent.3
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
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, the key statutes are the Companies Act, 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, 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 (the Takeover Code) sets out the principles and rules governing the conduct of takeovers of public companies incorporated in Singapore or entities that 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 Takeover 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 if a listed entity undertakes an M&A transaction.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
i Amendments to the Companies Act
On 31 March 2017, several key amendments to the Companies Act came into effect, with the aim of improving transparency in Singapore registered corporate entities, and in line with the recommendations of the Financial Action Task Force. Unless exempted, the amendments require Singapore registered companies and partnerships to take steps to determine the identity of persons who have significant interest, control, or both, over these entities, and to maintain a register setting out the particulars of those persons. There is also a corresponding duty on those persons to notify the Singapore registered entities concerned and to provide their particulars. Nominee directors of Singapore registered companies and partnerships will also have to provide details of their nominators. The register will not be available to the public, but must be provided, on request, to the relevant authorities or enforcement agencies.
With effect from 23 May 2017, Singapore has introduced new measures under the Companies Act to enhance the existing corporate rescue and debt restructuring framework. Drawing elements from Chapter 11 of the US Bankruptcy Code, the enhanced regime includes:
- power for the court to grant super priority status to rescue financing made to assist with the restructuring of distressed companies;
- power for the court to approve a creditor scheme even if there are objections from a class of creditors; and
- improved judicial management provisions to extend the power to make a judicial management order in respect of foreign companies and to introduce specific criteria setting out when the courts exercise discretion over foreign debtors.
The enhanced regime is expected to create new opportunities for investment in distressed companies.
Singapore has introduced an inward re-domiciliation regime with effect from 11 October 2017 to allow foreign companies to transfer their place of registration to Singapore without needing to establish a new legal entity. This regime is expected to facilitate the restructuring and transfer of foreign companies to Singapore as their domicile.
ii Takeover Code
The Takeover Code was last amended in March 2016.
As part of the suite of amendments, the SIC 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 imposed for the first time in 2013 in the competing bid for Fraser & Neave.
Under the modified auction procedure, there is a maximum of five rounds of bidding 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:
- neither the target nor 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;
- 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
- 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 clarified 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.
With effect from 1 May 2018, the SIC implemented a new exempt status regime that exempts fund managers and principal traders operating within large multi-service financial institutions who may act as financial advisers on a takeover offer from certain restrictions and obligations under the Takeover Code. The new regime will grant qualifying fund managers and principal traders standing exempt status (subject to certain conditions), renewable annually, thereby removing the need for a ruling to be sought for each specific transaction.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
Government-linked funds continue to play an oversized role in outbound investments originating from Singapore, with GIC Pte Ltd (with its consortium partners) involved in some of the larger value transactions, including the privatisation of Nets A/S and Neustar Inc.
The largest inbound deal to date was announced in 2017, being the privatisation of Global Logistic Properties Limited, a Singapore listed warehouse logistics operator, by a Chinese consortium that included Hillhouse Capital Management and Hopu Investment Management at a deal value of approximately US$15.9 billion. The transaction was completed in January 2018. The logistics sector also attracted Chinese conglomerate HNA Group, which made an offer in 2017 to acquire warehouse and logistics operator CWT Limited, a Singapore listed company, at a transaction value of approximately US$1 billion.4
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
Apart from the logistics sector, which had a strong showing in 2017, real estate and technology provided the main drivers in terms of both deal volume and deal value both in terms of outbound and inbound deals. Notable transactions include Mapletree Investments' acquisition of US student housing assets valued at US$1.6 billion and the sale of Jurong Point Mall to Mercatus Cooperative at approximately S$2.2 billion. Real estate is expected to continue to have a strong showing in the first half of 2018, as the first quarter of the year has already realised a slew of en bloc sales of residential land valued collectively at S$5.83 billion.
Singapore continues to be the largest contributor to PE and VC investments in South East Asia. The technology sector remains a key driver of M&A activity, with the ride-hailing app Grab raising another round of funding in 2017 and undertaking a buyout of Uber's business in South East Asia in the first half of 2018.
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, either alone or in combination with bank financing.
If an offer is made in cash (or has a cash alternative) and that 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. Confirmation is required to be given at the time a firm intention to make an offer is announced. If 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
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 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 immovable property are subject to stamp duty, and this is generally borne by the buyer. In addition, sellers of residential or industrial property within the prescribed period of their acquisition will also have to bear a seller stamp duty. Foreign or corporate acquirers of residential properties are also subject to an additional buyer stamp duty.
On 11 March 2017, amendments to the Stamp Duties Act were passed, imposing additional conveyance duties on the acquisition and disposal of certain equity interests in property holding entities that have an interest (directly or indirectly through other entities) in residential properties, as if the acquisition or disposal were a conveyance of the underlying interest in those properties. The changes were introduced to ensure parity of treatment in the stamp duty to be paid when a person acquires or disposes of residential property directly rather than acquiring or disposing the equity interests of the property holding entity that has an interest in the property.
Stamp duty on transfers of scrip shares is payable at a rate of 0.2 per cent on the higher of the consideration paid or the net asset value of the shares. This is in addition to the further conveyancing duties that may be levied when the shares transferred constitute a transfer of equity interests in residential property. The new stamp duty position with regard to entities holding residential property is likely to change the structure of investments in residential property in the future.
Insofar as income tax on realised gains is concerned, there is no 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) constitutes 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 and Consumer Commission of Singapore (CCCS) for a decision on whether the merger, if carried into effect, will infringe the Section 54 Prohibition. The Section 54 Prohibition may apply even when 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 CCCS for a decision on whether a merger, if carried into effect, will infringe the Section 54 Prohibition. A merger clearance filing to the CCCS is voluntary, but is recommended by the CCCS if a merger may potentially result in a substantial lessening of competition in a relevant market.
In this regard, the CCCS requires all merger parties to conduct a self-assessment, in accordance with the methodologies outlined in Guidelines published by the CCCS and read with its decided cases, on whether a merger filing is necessary. For the self-assessment to be accepted by the CCCS, it must be documented in a form that the CCCS 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 CCCS (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 CCCS has stated that if a merger results in the indicative quantitative notification thresholds (quantitative thresholds) being crossed, the CCCS 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 CCCS 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 CCCS 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.
The CCCS has exercised its powers to issue provisional decisions to prohibit mergers arising from horizontal and non-horizontal (i.e., vertical and conglomerate) effects, the most recent being on 25 May 2018, when the CCCS issued a provisional decision to block Wilhelmsen Maritime Services AS' proposed acquisition of Drew Marine Group Coöperatief UA and Drew Marine Partners LP's technical solutions, fire, safety and rescue businesses in the marine chemicals sector in Singapore in view of, inter alia, high combined market shares.
On 1 December 2016, the CCCS Guidelines on the Substantive Assessment of Mergers 2016 (Substantive Assessment Guidelines) came into effect. The inclusion of additional forms of supporting evidence required by the CCCS points towards a materially stricter enforcement stance by the CCCS on mergers consistent with trends regarding remedies and commitments, with an increase in complex reviews of mergers and blocked mergers being observed. On 1 April 2018, the CCCS had also taken on the consumer protection function, which includes preventing suppliers from engaging in unfair practices, promoting fair trading practices and enforcing the Consumer Protection (Fair Trading) Act.
During the past 18 months, the CCCS has reviewed nine notified mergers, of which one was cleared only pursuant to Singapore-specific behavioural commitments, and at least four have proceeded to an extended Phase I review or Phase II review.
On 13 April 2018, the CCCS issued its first-ever Notice of Interim Measures Directions in relation to the acquisition of Uber Technologies Inc's (Uber) South East Asian business by Grab Inc (Grab) and Uber's acquisition of a 27.5 per cent stake in Grab. Interim directions imposed on Grab include the maintenance of pre-transaction pricing, product options and commission rates, holding separate certain operational data, the removal of exclusivity obligations for new drivers and the appointment of a monitoring trustee. The CCCS commenced its investigation and issuance of interim measures notwithstanding the parties' announced intention to voluntarily lodge a post-completion merger notification to the CCCS. The CCCS also continues to investigate other unnotified mergers on its own initiative.
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 CCCS 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 CCCS Guidelines on Market Definition.
The growth forecast of Singapore's economy is positive at between 2.5 and 3.5 per cent.5 Geopolitical uncertainty continues to contribute to market volatility and potential concerns about higher borrowing costs may dampen market activity. However, we remain cautiously optimistic, as there continues to be significant market activity in the first half of 2018.
1 Lim Mei and Lee Kee Yeng are partners at Allen & Gledhill.
2 Deal information varies according to various publications. The deal information here is based on data compiled by Duff & Phelp and Mergermarket.
3 Source: Ministry of Trade and Industry, Singapore.
4 See footnote 2.
5 Source: Ministry of Trade and Industry, Singapore.