The Energy Mergers & Acquisitions Review: Singapore
Singapore's overall M&A activity in 2019 reached a volume of 630 deals valued at approximately US$72 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 2019 included:
- the acquisition of an economic interest in a US-based oil and natural gas pipeline company by a consortium involving a Singapore-incorporated company; and
- the acquisition of a UK-based company that owns and operates gas infrastructure by a joint venture involving a Singapore-incorporated company.
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.
Year in review
In November 2019, the Energy Market Authority of Singapore (EMA) invited interested parties to submit a non-binding expression of interest (EOI) to build, own and operate an offshore liquefied natural gas (LNG) terminal in Singapore. This offshore LNG terminal would be in addition to Singapore's existing onshore LNG terminal (which has a peak regasification capacity of 11 million tonnes per annum). EMA has indicated that it will take into account the EOIs submitted to determine whether and when to launch a request-for-proposal to select the first offshore LNG terminal operator. In July 2020, the EMA launched a Request for Proposal to appoint up to two new LNG term importers for Singapore.
Separately, the EMA has in 2020 continued to explore avenues for increasing Singapore's adoption of renewable and sustainable energy solutions. These include, but are not limited to, partnering with industry stakeholders to co-create energy storage system solutions to support the growth of solar deployment, the adoption of additional public charging standards to support the development of electric vehicle charging infrastructure in Singapore, as well as the issuance of additional grants and funding to support research and development of low-carbon energy technologies.
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,3 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,4 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 Act5 and the Gas Act6 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 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.
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 an economic interest in a US-based oil and natural gas pipeline company by a consortium involving 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. A notable renewable energy project financing in 2020 is a S$40 million loan facility provided by DBS Bank Ltd to Sembcorp Industries, for the construction of a 60 megawatt-peak (MWp) floating solar photovoltaic (PV) system on Tengeh Reservoir. The project was awarded by the Public Utilities Board of Singapore, and the completed PV system will be Singapore's first single large-scale floating solar PV system, as well as one of the world's largest inland floating solar PV systems.
In recent years, traditional non-recourse project financings (whereby the lenders will have recourse only to the cash flows of the project) appear to be less popular, with lenders favouring a more diversified approach, in which other non-project collateral or sponsor support are also used to mitigate financing risk. As many large-scale projects in Singapore have already been implemented, project financings now also tend to either have cross-border elements or be of a smaller scale.
With the increased attention on projects in the Asia-Pacific region, there is a push within Singapore to move towards a greater standardisation in project finance documentation. This was first raised by Singapore's then Finance Minister, Heng Swee Keat, during a meeting between the Association of Southeast Asian Nations (ASEAN) finance ministers in 2018. In October 2019, the Minister in the Prime Minister's Office, Indranee Rajah, announced that Singapore aims to standardise 50 per cent of the terms in project finance documents in 2020. The key objectives of the standardisation exercise are to make infrastructure projects more bankable and investable, thereby attracting private sector capital. Standardised provisions will help reduce the time expenditure and costs of documentation, as well as promote a common understanding among industry participants once a baseline that can be applied broadly across project transactions can be established. This would, in the long term, minimise disputes and facilitate smooth execution of the projects. As the remaining 50 per cent of the provisions will remain customisable, the standardisation exercise will give flexibility for parties to focus on areas that are specific or bespoke to the transaction in question.
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.
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 this 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.
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 Act,10 the Radiation Act11 and the Resource Sustainability Act.12 These environmental laws impose a range of obligations relating to, among other things, pollution and hazardous waste control, radiation control, public health, carbon pricing and electronic waste management.
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 Act13 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 have their employment 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. The non-covered employees cannot be compelled to accept any such offer. The transfer of the employment 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,14 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),15 and the primary anti-corruption legislation is the Prevention of Corruption Act (PCA).16 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,17 which serves to mandate energy efficiency requirements and energy management practices to promote energy conservation; and
- the Carbon Pricing Act,18 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.
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 because of the confidentiality of proceedings, especially where there is a preference to appoint an arbitrator with sectoral-specific knowledge.
The adoption of solar power in Singapore has been increasing at a steady rate. In April 2020, the EMA announced that Singapore had achieved the EMA's 2020 solar deployment target of 350MWp (megawatt-peak) in the first quarter of 2020. The EMA has now set a new target of at least 2GWp (gigawatt-peak) of solar deployment by 2030.
Some of the key initiatives that contributed towards achieving Singapore's solar deployment goals include SolarNova, a government-led programme launched by the Economic Development Board of Singapore (EDB) and the Housing Development Board (HDB) that aims to accelerate solar deployment in Singapore through promoting and aggregating solar demand across government agencies. The HDB launched its fifth solar leasing tender under the SolarNova programme in December 2019. Under this tender, solar photovoltaic panels producing 60MWp will be installed at 1,154 HDB blocks and 46 government sites by the first quarter of 2023.
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. As mentioned in Section V, the PUB awarded a tender for the building of a 60MWp floating photovoltaic system at a reservoir in February 2020, which is intended to be operational 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.
As mentioned in Section II, the EMA has continued to explore avenues for increasing Singapore's adoption of renewable and sustainable energy solutions. These include, but are not limited to, partnering with industry stakeholders to co-create energy storage system solutions to support the growth of solar deployment, the adoption of additional public charging standards to support the development of electric vehicle charging infrastructure in Singapore, as well as the issuance of additional grants and funding to support research and development of low-carbon energy technologies.
Singapore is also exploring the import of 100MW of electricity from Peninsular Malaysia under a two-year trial, with a view to tapping on regional power grids for cleaner energy resources.
1 Mark Quek, Yeo Boon Kiat and Aloysius Ng are partners and Wong Jie Ning and Dillon Tan are senior associates at Allen & Gledhill LLP.
2 Deal information varies depending on the publication. The information here is based on data compiled by Duff & Phelps.
3 Companies Act (Chapter 50 of Singapore).
4 Securities and Futures Act (Chapter 289 of Singapore).
5 Electricity Act (Chapter 89A of Singapore).
6 Gas Act (Chapter 116A 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 Resource Sustainability Act 2019 (No. 29 of 2019 of Singapore).
13 Employment Act (Chapter 50 of Singapore).
14 Stamp Duties Act (Chapter 312 of Singapore).
15 Corruption, Drug Trafficking and other Serious Crimes (Confiscation of Benefits) Act (Chapter 65A).
16 Prevention of Corruption Act (Chapter 241 of Singapore).
17 Energy Conservation Act (Chapter 92C of Singapore).
18 Carbon Pricing Act (No. 23 of 2018).