Singapore’s M&A activity in 2019 totalled USD35.3 billion, which is a 125.6% increase from a year ago (Mergermarket), despite a decrease in deal count from 2018.
On the whole, cross-border deal activity, inbound M&A activity and outbound M&A activity for the third quarter of 2019 were higher than those for the same period in 2018.
Singapore continues to be a “safe haven” for international investors, recording the highest amount of bank deposits since 2016 in October 2019.
Privatisation trends observed in previous years have continued. Companies such as international operator of offshore support vessels PACC Offshore Services Holdings, hospital operator Health Management International, property firm San Teh and dual-listed Fortune Reit were seeking to de-list from the Singapore Exchange (SGX).
Total securities market turnover value on SGX rose to SGD26.4 billion in November, increasing by 22% month-on-month and 22% year-on-year.
However, even with the continuing privatisation trend, Singapore’s IPO market grew four times in funds by the latter part of 2019. This was boosted by four Reits – Prime, Lendlease, Eagle Hospitality and ARA Hospitality.
The real estate sector continued to have a strong IPO and M&A track record. As at September 2019, the real estate sector accounted for 49.8% of M&A activity and totalled USD44 billion. Prime US Reit, the largest listing in Singapore, raised USD612 million. Temasek Holdings, Singapore’s state investor was identified as a key M&A player from both the buying and selling side in two major real estate and infrastructure-related deals.
This was followed by the financial sector with 19.2% market share and USD16.9 billion in deal value. Deals targeting the high technology sector had a 6.5% market share worth USD5.7 billion.
Asset or Share Acquisition
Generally, the acquisition of a company in Singapore can be effected by way of a share acquisition or the acquisition of the business or assets of the company.
An asset or share acquisition is commonly effected by entering into a sale and purchase agreement. Before executing the agreement, parties may enter into a letter of intent or term sheet, which will typically set out the agreed key terms of the transaction. Such a preliminary document may be expressed as non-legally binding, except for certain obligations such as confidentiality or exclusivity.
The primary techniques to acquire a company’s shares in Singapore include:
General offers for shares in a Singapore public company are regulated under the Takeover Code. General offers take the form of mandatory offers, voluntary offers or partial offers.
Under the Takeover Code, a bidder is required to make a mandatory offer for all the shares in a Singapore public company where the acquisition of shares by the bidder results in the shareholdings of the bidder and any parties acting in concert with it exceeding certain thresholds. The mandatory offer rules under the Takeover Code apply when:
Voluntary and Partial Offers
An offer that does not trigger the mandatory rules under the Takeover Code is a voluntary offer governed by Rule 15 of the Takeover Code. A voluntary offer must be conditional on the bidder and its concert parties acquiring more than 50% of the target company. A higher percentage acceptance threshold may be stipulated, subject to the consent of the Securities Industry Council (SIC).
A bidder makes a partial offer by making a voluntary offer for a portion of the target company’s shares. All partial offers must be approved by the SIC, and it will generally grant consent for partial offers that do not result in the bidder and its concert parties holding more than 30% of the target company’s voting rights.
Scheme of Arrangement
A scheme of arrangement under the Companies Act, Section 210 is a legislative procedure that allows a company to be restructured. A scheme is typically organised as a transfer of shares from the shareholders of the target company to the acquirer, and in consideration of the share transfer the acquirer pays cash or issues new shares in the acquiring company to the shareholders of the target company. An alternative scheme is where the target company cancels its existing shares and issues new shares in the target company to the acquirer.
To pass a scheme of arrangement, the scheme must be approved by the requisite statutorily prescribed majority at the scheme meeting and must be sanctioned by the High Court. A scheme that has been successfully passed will be binding on all shareholders of the target company.
A scheme of amalgamation under the Companies Act, Section 215A-J is a legislative procedure that allows two or more Singapore-incorporated companies to amalgamate and continue as one company. The amalgamated company may be one of the amalgamating companies or a new company, and all property, rights, privileges, liabilities and obligations of each of the amalgamating companies will be transferred to the amalgamated company. The amalgamation may be carried out without a court order, subject to certain conditions being satisfied, including obtaining the requisite shareholder approvals and the provision of solvency statements by the directors of the amalgamating companies.
The primary regulators of M&A activity in Singapore are:
There is no general restriction on the amount of shares that a foreign entity may own in a company incorporated in Singapore. However, there may be restrictions that limit or require prior regulatory approval for control or share ownership in companies in certain regulated industries that are perceived to be critical to national interests, such as banking, insurance, broadcasting, defence and newspaper publishing.
Business combinations in Singapore are subject to the Competition Act, which contains, among others, the following provisions:
As the merger notification regime in Singapore under the Competition Act is voluntary, parties to a merger are not obliged to notify the CCCS of their proposed or completed business combinations. However, parties to a merger situation may do so where, following a self-assessment, they have concerns that the merger or anticipated merger has led to or may lead to a substantial lessening of competition in a Singapore market.
Whereas the CCCS can investigate mergers on its own initiative, it is unlikely to intervene in a merger situation that only involves small companies, ie, where the turnover in Singapore in the financial year preceding the transaction of each of the parties is below SGD5 million and the combined worldwide turnover in the financial year preceding the transaction of all of the parties is below SGD50 million.
Generally, the CCCS is also unlikely to investigate in a merger situation, unless the merged entity will have a market share of:
Where the acquisition is structured as a transfer of the business undertaking of the target company, the automatic employment transfer provisions under Section 18A of the Employment Act (Cap 91) may be applicable in respect of employees who are covered under the Employment Act at the time of the business transfer (EA employees). In particular, Section 18A provides for:
Where the business transfer involves a transfer of foreign employees, the acquirer should consider if new work-pass applications would be required for the incoming foreign employees or if the transfer of foreign employees would affect work-pass quotas.
Where the acquisition is structured as a transfer of shares, the employees of the target company will continue to be employed by the target company and will be unlikely to be affected by the transfer of shares.
It should be noted that the EA was recently amended. As of 1 April 2019, the EA was extended to generally cover all employees. Managers and executives earning more than SGD4,500 who were previously not covered under the EA are now subject to the provisions of the EA, including Section 18A.
There is currently no regulatory body in Singapore that undertakes a national security review of acquisitions. However, regulatory approvals may be required for control or share ownership in companies in certain regulated industries that are perceived to be critical to national interests, eg, banking, insurance, broadcasting, defence and newspaper publishing.
One of the more significant legal developments relating to M&A is the amendment of the SGX Mainboard Listing Rules (Listing Manual) in June 2018 to permit the listing of companies with dual-class share structures on the SGX Mainboard. The Takeover Code was subsequently amended with effect from 25 January 2019 to clarify its application to companies with dual-class share structures.
Additionally, changes to the delisting rules, which bars the offeror and parties acting in concert from voting on voluntary delistings and requires the exit offers to be reasonable and fair has given minority investors greater power to determine the outcome of the vote.
Two of the key amendments to the Takeover Code are (as amended with effect from 25 January 2019):
It is not uncommon for bidders to build up some shareholding stake in a company prior to launching an offer. A 10% ownership stake in the target company could be used to prevent a rival bidder from a compulsory acquisition of the minority stake in the company. A bidder may also seek to obtain a 25% ownership stake to effectively veto a rival scheme of arrangement or amalgamation.
Bidders seeking to build a significant stake in a target company generally need to comply with the following:
A bidder may concurrently seek to obtain contractual undertakings from existing shareholders to accept its proposed offers or to vote in favour of their scheme. Such irrevocable undertakings may potentially be aggregated as part of the bidder’s ownership stake in the target company, which may potentially trigger the mandatory offer rules under the Takeover Code (among other requirements).
Under the Securities and Futures Act, a party who acquires an interest in 5% or more of the voting shares (a "substantial shareholder") in a company incorporated and listed in Singapore is required to notify the company of its interest in writing within two working days of becoming aware that it is or had been (if it ceased to be one) a substantial shareholder.
In addition, the substantial shareholder is required to notify the company in writing if there are subsequent discrete 1% changes in the substantial shareholder’s interests or if he or she ceases to be a substantial shareholder, within two working days after he or she becomes aware of the change. The substantial shareholder disclosure requirements also apply to corporations that are incorporated overseas, but with a primary listing on approved exchanges in Singapore.
From a competition law perspective, merger parties may voluntarily notify CCCS of their merger or anticipated merger if, after conducting a self-assessment, they have concerns that the merger or anticipated merger has led to or may lead to a substantial lessening of competition in a Singapore market.
It is open to a company to introduce more (but not less) stringent reporting thresholds, eg, in its constitution. Apart from the general restrictions that may be applicable to stakebuilding (see 4.1 Principal Stakebuilding Strategies), the acquirer should be mindful of statutory limits or regulatory approvals required for having control or share ownership in companies in certain regulated industries, such as banking, insurance, broadcasting, defence and newspaper publishing.
Dealings in derivatives are allowed, and are generally subject to the same restrictions as dealings in capital markets products (which include shares) under the Securities and Futures Act.
Under the Takeover Code, a person who has acquired or written any option or derivative that causes him or her to have a long economic exposure, whether absolute or conditional, to changes in the price of securities, will normally be treated as having acquired those securities for the purposes of the mandatory offer rules.
Where the acquirer triggers the mandatory offer requirement under the Takeover Code as a result of acquiring such options or derivatives (among others), the acquirer must consult the SIC to determine if a mandatory offer is required, and, if so, the terms of the offer to be made.
Dealings in derivatives in respect of certain securities of the target company subject to the Takeover Code during the offer period must be publicly disclosed. Full details of the dealings in derivatives should be provided so that the nature of the dealings can be fully understood. This should include, at least, the number of reference securities to which they relate (where relevant), the maturity date or if applicable, the closing-out date and the reference price.
Separately, under the Securities and Futures Act and the Securities and Futures (Reporting of Derivatives Contracts) Regulations 2013, a specified person who is a party to a specified derivatives contract (which includes a derivatives contract the value of which is determined by reference to the value of underlying stock or shares, among others) is required to report certain prescribed information to a licensed trade repository or licensed foreign trade repository in respect of the derivatives contract.
There are no specific filing/reporting obligations for derivatives under competition laws in Singapore.
For public M&A transactions subject to the Takeover Code, an offer document, which should be despatched no later than 21 days after the offer announcement, should disclose the bidder’s plans relating to the target company and its employees, including:
For public M&A transactions subject to the Takeover Code, before the board of the target company is approached, the responsibility for making an announcement will normally rest with the bidder or potential bidder. However, once an approach has been made to the board of the target company, the primary responsibility for making an announcement will typically rest with the target company’s board.
The target company’s board is required to make an announcement in any of the following circumstances:
Furthermore, a company listed on the SGX must announce any information known to it or any of its subsidiaries or associated companies which is necessary to avoid the establishment of a false market in its securities or would be likely to materially affect the price or value of its securities as prescribed under the Listing Manual. However, the announcement need not be made if:
According to the Corporate Disclosure Policy under the Listing Manual, a frank and explicit announcement is required if rumours indicate that material information has been leaked. If rumours are false or inaccurate, they should be promptly denied or clarified.
As mentioned in 5.1 Requirement to Disclose a Deal, for public M&A transactions that are subject to the Takeover Code, the responsibility for making an announcement on the potential deal will normally rest with the bidder or potential bidder, before the board of the target company is approached.
In terms of timing, the bidder or potential bidder must make an announcement:
Where an approach has been made to the board of the target company, the board must make an announcement following the occurrence of any of the circumstances as set out in 5.1 Requirement to Disclose a Deal.
There is no standard process on carrying out due diligence under Singapore laws, and the level of information and documents provided will depend on the nature of the transaction and the relevant parties. In general, for public M&A transactions, the scope of the legal due diligence process is likely to be affected as follows:
In view of the above legal restrictions, the bidder often will have to rely on publicly available information. This includes:
For private M&A transactions, the scope of due diligence tends to be broader as the target company would not be subject to restrictions that apply to public companies. Depending on time or budgetary constraints, the due diligence may include the following relating to the target company:
In general, exclusivity agreements and similar arrangements are often requested, but standstill agreements are not as common. However, in negotiating for exclusivity arrangements, the target company should note its duty under the Takeover Code not to take any action that could frustrate a bona fide offer or deny its shareholders an opportunity to decide on its merits.
Under the Takeover Code, standstill agreements between a company, or the directors of a company, and a shareholder which restrict the shareholder/directors from either offering for, or accepting an offer for, the shares of the company or from increasing or reducing shareholdings, may result in the parties acting in concert.
The terms and conditions of any public takeover will be contained in the bidder’s offer announcement and offer document or in the target company’s scheme document (where a scheme of arrangement or amalgamation is used). Under the Takeover Code, the offer document must set out clearly:
Assuming there is no competing offer, the acquisition of a public company would typically take around six months from the public announcement of the offer by the bidder to the completion of the acquisition of the target company’s shares under the Takeover Code.
For share acquisitions of a private company, the transaction process may take around three to six months to complete, although the time required would, ultimately, depend on a multitude of factors, such as whether there are any competing proposals, the size of the target company, the transaction structure, the complexity of the transaction and the extent of due diligence conducted on the target company. For the acquisition of assets, the transaction process could be longer, owing to the need for additional third party consents to be obtained for the assets transfer.
The mandatory offer thresholds under the Takeover Code apply to public companies, and these are triggered when:
Parties may request that SIC waive this requirement when the acquisition of voting rights arises as a result of the issue of new securities as consideration for an acquisition or a cash injection or in fulfilment of obligations under an agreement to underwrite the issue of new securities. A grant of waiver will be subject to:
In relation to the new rule allowing dual-class share structures, under the Takeover Code, when there is a conversion of multiple voting shares to ordinary voting shares ("Conversion") or a reduction in the voting rights attached to each multiple voting share ("Reduction"), any resulting increase in the percentage of voting rights held by a shareholder and persons acting in concert with him or her will be treated as an acquisition and the shareholder or group of shareholders acting in concert could become obliged to make an offer. However, SIC will not normally require an offer if the shareholder
For takeovers and mergers involving private companies, consideration more commonly takes the form of cash. Selection of the form of consideration depends on factors such as the availability of financing to the buyer and the tax implications of the payment method.
For public companies, consideration for a general offer can take the form of cash, securities (typically the bidder’s shares) or a combination of the two. However, under the Takeover Code, where the mandatory offer thresholds are triggered, the consideration must be in cash or be accompanied by a cash alternative at not less than the highest price paid by the bidder or any person acting in concert with it for voting rights of the target company during the offer period and within six months prior to its commencement. When voting rights have been acquired for a consideration other than cash, the offer must nevertheless be in cash or be accompanied by a cash alternative of at least equal value, which must be determined by an independent valuation.
Furthermore, except with the SIC’s consent, a cash offer is required where:
For public takeovers all general offers are subject to a minimum level of acceptance. For mandatory and voluntary offers, the offer must be conditional upon the bidder receiving acceptances in respect of voting rights in the target company, which, together with voting rights acquired or agreed to be acquired before or during the offer, will result in the bidder and any party acting in concert with it holding more than 50% of the voting rights. Separate approval thresholds apply for partial offers.
In relation to mandatory offers, bidders cannot impose any other condition or a higher level of acceptance (above 50%).
In relation to voluntary offers, bidders may other conditions, provided that fulfilment of such conditions does not depend on the bidder’s subjective interpretation or judgement, or lie in the bidder’s hands. Normal conditions such as shareholder approval for the issue of new shares and the SGX’s approval for listing may be attached without reference to the SIC. The SIC should be consulted where other conditions would be attached. A condition requiring a level of acceptance higher than 50% needs to be approved by the SIC, and the bidder would need to demonstrate that it is acting in good faith in imposing a higher level of acceptance.
All general offers must be conditional upon the bidder receiving acceptances in respect of voting rights in the target company, which, together with voting rights acquired or agreed to be acquired before or during the offer, will result in the bidder and any party acting in concert with it holding more than 50% of the voting rights (see 6.4 Common Conditions for a Takeover Offer).
Voluntary offers that are conditional on a level of acceptance higher than 50% must be approved by the SIC, and the bidder would need to demonstrate that it is acting in good faith in imposing the higher level of acceptance. Where the bidder is seeking to privatise the target company, a 90% minimum acceptance condition is common, as it allows the bidder to avail itself of the compulsory acquisition procedure under the Companies Act.
In relation to partial offers, the SIC will normally consent to a partial offer that does not result in the bidder and persons acting in concert with it holding shares with 30% or more of the voting rights in the target company, and provided that the bidder complies with the conditions set out under the Takeover Code. The SIC will not consent to any partial offer that results in the bidder and persons acting in concert with the bidder, holding shares with not less than 30% but not more than 50% of the voting rights of the target company.
For private takeovers and mergers, it is common for business combinations to be conditional on the bidder obtaining financing where cash consideration is involved.
For public takeovers and mergers, it is generally not permitted for business combinations to be conditional on the bidder obtaining financing. Where the offer is for cash, or involves an element of cash, the offer announcement as well as the offer document should include an unconditional confirmation by the financial adviser or by another appropriate third party that the bidder has sufficient resources available to satisfy full acceptance of the offer.
It is generally open to bidders to propose deal security measures. Where the Takeover Code applies, the target company should note its duty under the Code not to undertake any deal security measures that could frustrate a bona fide offer or deny its shareholders an opportunity to decide on its merits.
Two commonly used measures are exclusivity agreements and break fees. Exclusivity agreements hinder the target company’s board from proposing alternative bids to shareholders, by precluding it from actively shopping for or responding to other bidders during a certain period of time.
A bidder may negotiate break fees (imposed on the target company) or reverse break fees (imposed on a bidder), although these are less commonly used in acquisitions involving private companies. Break fees may not be enforceable if they constitute a penalty, as opposed to liquidated damages (ie, a genuine pre-estimate of loss). Further, directors would need to ensure that agreeing to break fees would be in line with the fiduciary duties they owe to the company (eg, to act in a bona fide manner in the company’s best interests).
In acquisitions involving a target company to which the Takeover Code applies, the SIC should be consulted at the earliest opportunity in all cases where a break fee or any similar arrangement is proposed. Further, the rules under the Takeover Code governing break fees must be complied with, eg:
Apart from its shareholding, additional governance rights such as board seats that a bidder may seek in respect of a target company generally need to be set out in the target company’s constitution.
Shareholders are generally allowed to vote by proxy, subject to the restrictions under the Companies Act.
Unless the constitution otherwise provides,
The Companies Act, Section 215 provides a mechanism for the compulsory acquisition of shares. Where a bidder makes an offer that is approved within four months by shareholders holding not less than 90% of the shares that are the subject of the offer (excluding shares issued after the date of the offer and treasury shares), the bidder may within two months thereafter give notice in the prescribed manner to dissenting shareholders to acquire their shares.
Additionally, where the target company’s constitution provides for drag-along rights, minority shareholders may be required to accept the offer along with the exiting shareholders.
Bidders may request for irrevocable undertakings from principal shareholders of the target company to accept the offer. These undertakings are usually given immediately before the offer is made, and it is common for them to provide an out for shareholders if a better offer is made.
For acquisitions of a target company to which the Takeover Code applies, information about the commitments (including in what circumstances, if any, they will cease to be binding, eg, if a higher offer is made) must be set out in the offer announcement and offer document. Relevant documents evidencing such commitments must also be made available for inspection.
For acquisitions of a target company to which the Takeover Code applies, once an approach has been made to the board, the primary responsibility for making an announcement typically rests with the board.
The target company’s board is required to make an announcement in any of the following circumstances:
In some cases, under the Takeover Code, the bidder will be required to make an announcement of his or her intention to make an offer, before approaching the target company’s board, eg, where the target company is the subject of rumour or speculation about a possible offer, or there is undue movement in the target company’s share price or a significant increase in the volume of share turnover.
For transactions to which the Takeover Code applies, the relevant disclosures under the Takeover Code must be made if the mandatory offer thresholds are triggered as a result of the issue of shares.
Where the issue of shares is made to a company listed on the SGX, the SGX Listing Rules mandates disclosures to the shareholders.
For public M&A transactions, under the Takeover Code, the offer document must contain financial information about the bidder, including the following:
The offer document should also state whether or not there has been, within the bidder’s knowledge, any material change in the target company’s financial position or prospects since the date of the last balance sheet laid before the target company in a general meeting and, if so, the particulars of any such change.
For transactions to which the Takeover Code applies, all offer announcements and offer documents must be made available publicly.
The offer document must include information such as:
Directors have certain duties both at common law and under the Companies Act. These duties are generally owed to the company, and not to its shareholders or other stakeholders. The duties of directors include the fiduciary duties to act in a bona fide manner in the best interests of the company, to avoid a conflict of interest, to act for proper purposes and to act with care, skill and diligence.
In the case of M&A transactions to which the Takeover Code applies, the board has certain responsibilities under the Code, including:
For companies listed on the SGX, the constitution of the company would provide that directors may not vote on matters in which they have a personal material interest.
It is increasingly common, especially in the case of management buyouts, for boards of directors to establish special or ad-hoc committees of independent directors so as to address issues of potential conflicts of interests and to ensure that the interests of shareholders are addressed fairly.
Whilst the board of directors may delegate the day-to-day conduct of an offer to a committee of directors or individual directors, the board as a whole remains responsible for ensuring that proper arrangements are in place to enable it to monitor the conduct so that each director may fulfil his or her responsibilities under the Takeover Code.
The Singapore courts are generally slow to interfere in commercial decisions taken by directors and generally acknowledge that they should not, with the advantage of hindsight, substitute those decisions with their own, where those decisions were made by directors in the honest and reasonable belief that they were taken in the company’s best interests.
Legal, financial and tax advisers are typically engaged to advise on the transaction structure and valuation, and more generally to manage the transaction.
In the case of M&A transactions to which the Takeover Code applies, the target company’s board must obtain competent independent advice on all offers, except partial offers that could not result in the bidder and persons acting in concert with it holding shares carrying 30% or more of the voting rights of the target company.
The substance of the advice must be made known to its shareholders and this is typically done as part of the target company’s board’s circular to shareholders indicating its recommendation for or against acceptance of the offer. Where the offer is a management buy-out or similar transaction, or is being made by or with the co-operation of the existing controlling shareholder or group of shareholders, the target company’s board should appoint an independent adviser as soon as possible after it becomes aware that an offer may be made.
Where the offer being made is a reverse takeover and the bidder is incorporated in Singapore, or when the board faces a material conflict of interests, it must obtain competent independent advice on the offer. The substance of the advice must also be made known to its shareholders.
There are reported cases in recent years involving conflicts of interests in the context of takeovers and mergers. For instance, in 2017, the SGX reprimanded Singapore Post Limited (SingPost) for its non-compliance with the SGX Listing Rules, including its failure to accurately disclose that its then director had an interest in SingPost’s subsidiary, which had entered into an agreement to purchase all the shares in FS Mackenzie Limited (FSM Acquisition). The then director was the non-executive chairman and a 34.5% shareholder of the arranger for the FSM Acquisition.
The clarification announcement released by SingPost attributing the inaccuracy to an administrative oversight led to public commentaries questioning its corporate governance, including the then director’s independence, as well as whether the then director should have disclosed his or her interest to SingPost’s board, abstained from voting and recused him or herself from the discussions on the FSM Acquisition.
It should be noted that, under the Takeover Code, the board of a Singapore-incorporated bidder must obtain competent independent advice when it faces a material conflict of interests and make known the substance of the advice obtained to its shareholders. A conflict of interest will exist where there are significant cross-shareholdings between the bidder and the target company, where there are a number of directors common to both companies, or where a common substantial shareholder in both companies is a director of or has a nominee director in either company.
Furthermore, directors who have an irreconcilable conflict of interests and those who have been exempted by the Council from making recommendations to shareholders on an offer should not join with the remainder of the board in the expression of its views on the offer.
Hostile tender offers are permitted in Singapore. However, they are relatively uncommon due to the concentrated shareholding structure of many Singapore-listed companies.
In a public M&A transaction, directors are prohibited under the Takeover Code from taking any action on the affairs of the offeree company that could effectively result in any bona fide offer being frustrated or the shareholders being denied an opportunity to decide on its merits. This is unless they have shareholder approval to do so, or they do so pursuant to a contract entered into earlier during the negotiation process.
Some of the actions that may constitute frustration are:
However, soliciting a competing offer and running a sale process for the company are not considered to be frustrating actions.
As frustrating actions are not permitted in a public M&A transaction (see 9.2 Directors' Use of Defensive Measures), the defensive measures that the target company’s board may take are generally limited to soliciting competing offers or running a sale process for the company. The board may also attempt to convince the shareholders not to agree to the offer in its circular(s) to the shareholders.
Directors continue to owe fiduciary duties to the company pursuant to the Companies Act. Thus, they should have regard to what is best for the interests of the company and its shareholders, and not their own monetary, personal, familial, or other interests (see 8.1 Principal Directors’ Duties).
In public M&A transactions, the target company’s board is also usually obliged under the Takeover Code to obtain competent independent advice on any offer and the advice must be made known to its shareholders. This is especially so if the offer is a management buyout or other similar transaction being made with the co-operation of the existing controlling shareholder(s), due to the very real risk of a divergence of interests within the company.
While directors may recommend, strongly even, that shareholders reject a takeover offer, and while they are permitted to take defensive measures, they are not permitted to frustrate a bona fide offer outright (see 9.2 Directors' Use of Defensive Measures).
Litigation in connection with M&A deals is not common in Singapore. One notable case involved the Noble Group, where Goldilocks Investment, an 8% minority investor, commenced legal action as part of its strategy to obtain a better deal for investors.
In connection with the protection of minority rights, the Securities Investors’ Association (Singapore) (SIAS), an advocacy charity for investors, which has been active since 1999, has expressly stated that its preferred approach to resolving investors’ rights issues is in the boardroom and not in the courtroom. This is compounded by the fact that many minority investors tend to be "persons-in-the-street" without the resources necessary to finance litigation against relatively well-funded companies. They may also lack access to means such as class action lawsuits or litigation funding.
As litigation concerning M&A transactions is not common in Singapore, there is no established pattern in relation to the stage of a transaction at legal proceedings are commonly brought (see 10.1 Frequency of Litigation).
There has been a rise in shareholder activism in publicly listed companies in 2018 and 2019.
In Singapore, the focus of shareholder activists tends to be on improving corporate governance and the protection of minority investors’ rights. The SIAS is also involved in this field by conducting investor education workshops and helping to monitor the corporate governance of companies.
Some recent notable instances of shareholder activism include:
There are also activist funds active in Singapore that seek to unlock greater value in target companies via shareholder activism. Judah Value Activist Fund, based in Singapore, announced in August 2018 that it was in the process of building a position in a local bank before crafting an open letter suggesting operational improvements.
Another activist fund, Quarz Capital Management, has made open requests to several firms, such as CSE Global and Sunningdale Tech, requesting a range of actions from cash discipline to dividend distribution.
There have been reported instances of shareholder activists seeking to encourage companies to enter into M&A transactions as a means to unlocking shareholder value, eg, in May 2017, activist fund Quarz Capital Management requested HG Metal Manufacturing to divest its stake in a competitor, BRC Asia. While HG Metal did not acquiesce on that occasion, it did subsequently divest its stake later that year.
Activists may be more likely to act when they think that there will be positive effects on the company's bottom-line. Retail shareholder activists seem to be more interested in encouraging better corporate governance to protect their investments.
It is fairly uncommon for activists to seek to interfere with the completion of announced transactions in Singapore. However, there has been at least one reported instance of activist intervention in an announced deal, when Goldilocks Investment sought injunctions to prevent the Noble Group AGM from approving a deal (see 10.1 Frequency of Litigation).
In other cases, activists have sought board explanations for transactions that they believe to be questionable, eg, the board of Datapulse Technology was strongly challenged by shareholders on the company’s acquisitions of other firms at a recent AGM.
Overview of M&A Activity in Singapore and the Region
As South East Asia’s major financial hub, Singapore’s M&A activity is typically measured by both domestic and regional activity in South East Asia (SEA).
M&A activity in SEA increased by almost one-third in value in 2019 as compared to 2018, reaching its second highest annual level since 2001. In Singapore, M&A activity in 2019 totalled approximately USD35.3 billion (with a total deal count of 134), up approximately 125.6% from a year ago, according to a Mergermarket report.
The start of 2020 sees an unprecedented challenge in the form of the COVID-19 outbreak. Global markets have slumped, tracking heavy losses on Wall Street as the COVID-19 pandemic triggered a sharp global economic downturn. In Singapore, the stock market has fallen to a ten-year low as of mid-March 2020, following the global rout that saw the US stock market recording their biggest one-day loss since the 1987 stock market crash.
The COVID-19 pandemic has dampened the growth prospects of China, which in turn will have a knock-on impact on global economies, through lower outbound tourism from China, disruption to supply chains and overall lower consumption across all sectors, especially tourism, aviation and retail.
Whilst this appears to have slowed the momentum in SEA M&A activity, dented valuations amid the virus spread and economic downturn may in fact offer M&A opportunities for those with the cash and liquidity.
Key Trends in the M&A Space
Singapore saw significant private equity and venture capital deal activity in 2019 as buyout deals increased, and technology remained the most active sector in 2019.
The ballooning venture capital market in SEA (aggregate deals surpassed USD10 billion in value for the first time in 2018 according to the Global Venture Capital Perspectives report by Preqin and Vertex) coupled with unprecedented levels of private equity "dry powder" saw the emergence of a trend where big gun private equity names moved into early-stage investing. For example, KKR backed aCommerce, a Bangkok-based start-up, TPG invested in Singapore property website PropertyGuru, and Singapore’s sovereign wealth fund, Temasek Holdings, bought stakes in fashion supply chain platform Zilingo.
Singapore’s start-up eco-system is now flourishing with over 220 venture capital deals per year worth close to USD4.2 billion, and more than 150 global venture capital funds, incubators, and accelerators based in Singapore, as stated in the 2019 Budget Speech by Singapore's Finance Minister.
Private equity and venture capital funding fuelling M&A activity in the SEA region is expected to continue and grow.
Significant M&A transactions
Temasek Holdings led the way for significant M&A transactions in Singapore in 2019. In June 2019, Temasek Holdings completed the sale of Ascendas-Singbridge to CapitaLand Ltd at an enterprise value of approximately SGD10.9 billion, resulting in the creation of one of Asia's largest diversified real estate groups with assets worth over SGD123 billion under management. Less than a week after, the merger of Ascott Residence Trust and Ascendas Hospitality Trust was announced in July 2019 (further details below).
In October 2019, Temasek Holdings announced the proposed acquisition of an additional 30.55% stake in Keppel Corporation for approximately SGD4.1 billion to acquire majority control by way of a partial offer. The partial offer is currently ongoing and is subject to the fulfilment of certain pre-conditions, including domestic and foreign regulatory approvals being obtained. Both deals by Temasek Holdings are registered as the third and fourth largest M&A transactions in Asia-Pacific (APAC) excluding Japan in 2019 by Mergermarket.
Temasek Holdings’ partial offer for Keppel Corporation comes amid consolidation in South Korea’s and China’s shipbuilding and marine sector in the last few years and has sparked industry watchers to speculate and comment of a possible consolidation of Singapore's offshore and marine industry.
Cross-border transactions which made the headlines last year include the largest private real estate deal in history to date involving the USD18.7 billion acquisition by Blackstone Group LP of a portfolio of US industrial assets from GLP, the Singapore-based logistics provider which was privatised and delisted from the Singapore Exchange Securities Trading Limited (SGX-ST) in 2017.
Closer to home, Japanese bank Mitsubishi UFG Financial Group Inc, TIS Inc. and certain other Japanese investors grabbed headlines for their USD850 million investment in Singapore-based ride-hailing company, Grab. The latest funding into Grab is likely to be a welcome investment given Grab's recent foray into digital banking (further details below).
REITs/business trusts consolidation
The merger of ESR-REIT and Viva Industrial Trust in 2018 opened the floodgates and the trend continued in 2019 with a good number of sizable mergers among Singapore-listed real estate investment trusts (REITs)/real-estate trusts.
The year 2019 started with the merger of OUE Commercial REIT and OUE Hospitality Trust to create one of Singapore's ten biggest REITs, followed by the merger of Ascott Residence Trust and Ascendas Hospitality Trust announced in July 2019 (and which completed in December 2019) to create the largest hospitality trust in APAC. The year ended with the announcement of the merger of Frasers Logistics & Industrial Trust and Frasers Commercial Trust.
The wave of consolidation of Singapore’s REITs/business trusts is expected to continue in 2020 with the first being the proposed merger of CapitaLand Commercial Trust and CapitaLand Mall Trust, announced on 22 January 2020, which, if completed, is expected to give rise to the largest REIT in Singapore and the third largest REIT in the APAC region.
In the inaugural Global Fintech Index City Rankings 2020 report, Singapore came in fourth in the global index and emerged as the fintech leader of APAC. Fintech investments in Singapore more than doubled to USD861 million in 2019 as compared to 2018 (with a total deal count of 108 v 71 in 2018), and Singapore is now the fifth largest fintech market by funds in APAC based on a report by the Singapore Business Times. The majority of the total funds raised (approximately 39%) went into payment start-ups, followed by insurtechs (approximately 25%), and fintechs in the business of lending came in third (approximately 13%).
The year 2019 saw many of the top deals in Singapore fintech history, including the USD100 million raised by cloud-based software company Deskera in an extended Series A funding round concluded in May 2019, approximately USD90 million each raised by FinAccel Pte Ltd, a credit provider to Indonesian online shoppers and Singapore Life, a wealth tech and life insurance provider, and the USD80 million bagged by GoBear, a financial supermarket platform.
Pre-COVID-19, fintech investments were highly anticipated in M&A in 2020 as financial institutions will be looking for much larger deal sizes and partnerships in joint ventures into these spaces.
(2) Digital Banking Licences
In June 2019, the Monetary Authority of Singapore (MAS) announced that it would issue up to five new digital bank licences, which is in addition to the digital banks that the Singapore banking groups may also establish under the existing internet banking framework. The move, which extends digital bank licences to non-bank players, received strong interest from the market with a total of 21 applications received.
Seven applications were for the up to two digital full bank licences, which allow for the provision of a wide range of financial services and can serve both retail and corporate customers, and 14 applications were for the up to three digital wholesale bank licences, which allow for services to small and medium-sized enterprises (SMEs) and other non-retail segments in Singapore.
The digital full bank licences will be granted in stages and licensees must eventually have a minimum paid-up capital of SGD1.5 billion, must be based in Singapore, and controlled by Singaporeans. Licensees for the digital wholesale bank licences must have a minimum SGD100 million in paid-up capital and can be majority owned by foreign entities.
The digital full bank licence applicants include a solo application from the internet group SEA, a Grab-Singtel consortium, a consortium led by Razer comprising Sheng Siong Holdings, FWD, LinkSure Global, Insignia Venture Partners and Carro, and a consortium led by V3 Goup and EZ-Link comprising Far East Organisation, Singapore Business Federation, Sumitomo Insurance and Heliconia Capital Management (a Temasek Holdings subsidiary). The digital wholesale licence applicants include Ant Financial (Alibaba Group's fintech arm), Arival, a consortium comprising iFast Corporation, Yillion Group and Hande Group, a consortium led by AMTD comprising Xiaomi, SP Group and Funding Societies.
MAS is expected to announce the results of the application in June 2020 and successful applicants are expected to commence operations by the middle of 2021.
Given the well documented and protracted challenges facing the oil and gas (O&G) industry as well as strong headwinds in 2019 resulting from, for example the US-China trade wars, many had expected a strong wave of restructuring and insolvencies facing South East Asian companies in vulnerable sectors. To date, compared to post-Asian Financial Crisis, this has not materialised to the same scale and extent but restructuring and distressed M&A opportunities remain on the radar of many market analysts who remain expectant of a stronger trend.
A number of restructuring deals have already emerged involving companies in the O&G sector including, for example Swiber Holdings Limited and Kris Energy Limited, both listed on the SGX-ST. Water treatment firm, Hyflux Ltd, once an SGX-ST darling and one of Singapore’s most successful business stories, filed for creditor protection in mid 2018 and the many twists and turns involving its restructuring efforts have hogged the headlines in 2019.
The COVID-19 pandemic has also put a strain on businesses, with many companies utilising their credit lines to conserve cash and pay for their ongoing expenses as consumer demand comes to a halt with travel restrictions imposed and social distancing policies in place at the time of writing. Those companies with liquidity problems due to exhausted credit lines, or in default due to breaches of financial covenants under their existing financing documentation, are likely to look to restructure and/or seek new investors.
As such, many market observers also believe the grim market environment amid the COVID-19 pandemic might be a good time for opportunistic cash rich buyers such as private equity firms to acquire amidst dented valuations, as well as for strategic buyers to expand through well-timed and well-valued acquisitions.
Warranty and indemnity insurance
The trend of utilising warranty and indemnity insurance (W&I) to facilitate M&A deals has increased markedly in recent years and this trend has continued in 2019 in the region, including Singapore.
A number of the real estate transactions in Singapore, completed in 2019, involved the use of W&I. We are also increasingly seeing the use of W&I in a competitive auction process by a private equity seller looking to exit, with potential bidders agreeing to buy W&I as part of their bid submissions with a view to providing the seller with a clean exit.
W&I appears to also be a viable option in M&A deals involving founders of family-run businesses who are selling their controlling interest and retaining or rolling over a minority interest. In such circumstances, it might not make commercial sense for the buyer to claim against the founders and instead, such transactions utilise W&I to transfer potential liability from the sellers to the third-party insurer.
The increase in the use of W&I can be attributable to the lower premium rates in lower risk jurisdictions such as Singapore, and the increasing familiarity with the use of W&I by corporates and private equity firms, as well as their respective advisers. Average retention rates for W&I policies placed have also fallen as insurers have become more comfortable with the region.
Developments in Singapore Law affecting M&A Transactions
Changes to the Listing Rules
(1) Voluntary Delisting Regime
De-listings have outnumbered listings on the SGX-ST for the past five years, and the number of listed companies on the SGX-ST has dropped from a peak of 782 companies in 2010 to 741 at the end of 2018.
Changes were introduced to the listing rules of the SGX-ST’s Mainboard as well as the secondary board Catalist (together, the “Listing Rules”) on 11 July 2019 in respect of the voluntary delisting regime, in order to strengthen the protection of minority investors in a public/delisting buyout.
A voluntary delisting now needs to be approved by a majority of at least 75% of the shares held by shareholders of the issuer present and voting, and in order to enhance minority shareholder protection, the offeror and its concert parties are now required to abstain from voting on the delisting resolution. The revised Listing Rules also now require the exit offer to be “fair” in addition to being “reasonable”, in the opinion of an independent financial adviser which is required to be appointed by the issuer under the Listing Rules.
In the past, there was no requirement for the offer to be "fair" but with the latest changes, the price offered to the independent shareholders should be reflective of, if not more than, the value of the securities which they hold. The SGX-ST has also codified the requirement of a cash alternative as the default alternative under the exit offer. In arriving at the new delisting framework regime, the SGX-ST was cognisant of the need to ensure that the exit offers are fair and reasonable so as to better align the interests of the offeror and the independent shareholders.
At the time of writing, the pre-conditional exit offer for the proposed voluntary delisting of CITIC Envirotech Ltd (which was completed in January 2020) was the first and only successful voluntary delisting since the SGX-ST implemented changes to the voluntary delisting regime on 11 July 2019.
(2) Enhanced Continuous Disclosure Requirements
The Listing Rules were further revised on 7 February 2020 to fine tune key disclosure requirements as part of the SGX-ST's continuing efforts to safeguard investors' interests, while at the same time being mindful to not overburden issuers with rules and regulations.
Changes include the adoption of a risk-based approach on quarterly reporting which will replace the current market capitalisation threshold approach.
Changes which may impact on M&A transactions (or the financing thereof) include the expansion of Chapter 10 of the Listing Rules, which used to govern only acquisitions and realisations, to cover the provision of financial assistance by an issuer, save for those in or in connection with the issuer's ordinary business.
Financial assistance includes the lending of money, guaranteeing or providing security for a debt incurred or indemnifying of a guarantor, and the forgiving or releasing of a debt obligation. The provision of financial assistance to an issuer, its subsidiary or associated company are excluded. To reflect this wider scope, the chapter has been amended to "Significant Transactions" as opposed to "Acquisitions and Realisations".
Valuation requirements for transactions under Chapter 10 of the Listing Rules have also been enhanced. The appointment of a competent and independent valuer is now compulsory for a disposal of assets where there is a significant disposal of assets (ie, where any of the relative figures as computed as set out in the chapter exceeds 75%), as such disposal will have a significant impact on the issuer and should therefore be subject to greater scrutiny. If no valuation is available for an acquisition or disposal of assets that is considered as a major transaction under the chapter, the issuer must provide an explanation on why it did not commission a valuation.
Amendments introduced to the Employment Act (Chapter 91 of Singapore), with effect from 1 April 2019, also have significant implications on the M&A front in respect of business transfers.
Section 18A of the Employment Act has been amended to provide that in a transfer of “undertaking”, which includes any trade or business, the contract of service of any employee in the undertaking shall continue to be effective after the transfer.
Prior to the 2019 amendments, all who were employed in a managerial or an executive position with a monthly salary of more than USD4,500 were excluded from the operation of Section 18A. Under the new Employment Act regime, this group is now considered as “employees” for Section 18A purposes.
For parties considering an acquisition through a business sale (as opposed to a share sale), this means that all employment contracts, including those for high-earning management-level employees, will be automatically transferred to the buyer. This could be good news to the buyer, as it helps to expedite the business sale process by removing the need to renegotiate and/or novate the employment contracts for managerial personnel. However, it also takes away the buyer’s freedom to cherry-pick the number and type of executive employees it wants to keep.
Singapore Government measures in 2020
The 2020's Budget Statement, made on 18 February 2020, provided for tax incentives to aid the commercial sector affected by the current near-term economic uncertainty, with sectors directly affected by COVID-19 getting additional support. These five sectors are: tourism, aviation, retail, food services, and point-to-point transport services, with packages ranging from property tax rebates, bridge loans to direct rental waivers. To aid companies with cash flow concerns, a corporate income tax rebate of 25% of tax payable, capped at SGD15,000, will be granted for the year of assessment 2020. However, given the amount capped, this is likely to be of a bigger benefit to the SMEs in Singapore.
(1) Extended M&A Scheme
On the M&A front, the M&A scheme which was introduced in 2010's Budget Statement to encourage companies in Singapore to grow their businesses through mergers and acquisitions was extended to 31 December 2025 in the 2020's Budget Statement. Under the M&A scheme, an M&A allowance will be granted to an acquiring company that acquires the ordinary shares of another company during the period 1 April 2010 to 31 December 2025 (both dates inclusive).
The following benefits are available under the M&A scheme:
This M&A scheme will remain unchanged for acquisitions except for the following: stamp duty relief will not be available for instruments executed on or after 1 April 2020; and for acquisitions on or after 1 April 2020, waivers will no longer be granted for the condition that the acquiring company must be held by an ultimate holding company that is incorporated in and a tax resident of Singapore.
(2) Extension and refinement of non-taxation of companies' gains on disposal of ordinary shares
The Income Tax Act (ITA) exempts companies from tax on gains from the disposal of ordinary shares if the divesting company holds at least 20% shareholding in the target company for at least 24 months prior to the disposal of the shares. The exemption does not apply to gains from the disposal of unlisted shares of a target company that is in the business of trading or holding Singapore immovable properties (unless the target company is in the business of property development).
The exemption scheme which was to lapse has been extended to 31 December 2027. However, for consistency in the tax treatment for property-related businesses, the exemption will not apply to disposals of unlisted shares in a target company that is in the business of trading, holding or developing immovable properties in Singapore or abroad. The tax treatment of such share disposals will be based on the facts and circumstances of the case. These changes are to apply to shares disposed on or after 1 June 2022 and the Inland Revenue Authority of Singapore is expected to provide further details by end-June 2020.
Venture Capital Investment Model Agreements
Deal documentation in the booming venture capital market saw a welcome change when the Singapore Academy of Law and the Singapore Venture Capital and Private Equity Association introduced a set of Venture Capital Investment Model Agreements (VIMA) as a standard form for start-up financing.
The VIMA includes the key documents used in a Series A financing round, such as the Term Sheet, the Non-Disclosure Agreement, the Subscription Agreement and the Shareholders’ Agreement. Notably, the Convertible Agreement Regarding Equity (CARE), the Singapore version of the United States-originated Simple Agreement for Future Equity, is meant to provide a more efficient and cost-effective alternative to traditional convertible bonds. The VIMA was drafted with a view to balance the interests of both the start-up and the investor. and thereby reducing the range of open issues requiring negotiation - an intention which has been tested and confirmed by industry practitioners.
Apart from providing a useful starting point for negotiation and documentation, the Singapore-law-governing VIMA is also intended to complement the greater national efforts of making Singapore the “regional hub” of venture capital investments and related dispute resolution.
Outlook for 2020
Developments in Singapore corporate law in 2019 has kept Singapore abreast with the developments in other jurisdictions, with Singapore maintaining its status as a relevant safe haven for international investors. There continues to be market activity in the first quarter of 2020, mostly from the spill-over of transactions which commenced in the second half of 2019, but deal flow has slowed considerably as investors conserve liquidity and take stock of the impact which the COVID-19 pandemic has on the global economy.
In its latest estimates, at the time of writing, the Ministry of Trade and Industry of Singapore revised its economic growth forecast to "-0.5% to 1.5%", with growth expected to come in at around 0.5%, the mid-point of the forecast range, after news of the COVID-19 outbreak broke in late January 2020.
The impact of COVID-19 is likely to continue into the second half of 2020 and, whilst there may be M&A opportunities, this is expected to be an extremely challenging year in which to successfully complete transactions given the credit crunch and the global “lockdown” restricting travel and deal momentum.