|
|
[Home] [Help] [Databases] [WorldLII] [Feedback] |
|
Singapore Law Reform Commission |
OCTOBER 2002
SINGAPORE
The CLRFC recommends the introduction of the limited partnership (modelled after the UK Limited Partnerships Act 1907) and the limited liability partnership modelled after Title 6, Chapter 15 Subchapter X (Limited Liability Partnerships) of the Delaware Code with a conversion by registration process.
The CLRFC recommends that the Trust Companies Act (Cap. 336) be reviewed and updated to ensure our rules are in line with international developments and trends.
The CLRFC recommends that further consideration be given to the introduction of Protected Cell Companies for insurance, securitisation and funds.
As the current exempt private company concept is adequate for the needs of small business, the CLRFC takes the view that it is unnecessary either to prescribe a separate regime for or provide a statutory definition for “small business” in Singapore.
The CLRFC recommends the deletion of Section 18(1)(c) and Section 18(1)(d) of the Companies Act. This would allow private companies to raise capital through private and exempted offerings without uncertainty or the need to convert to public companies unless they exceed the remaining criteria in Section 18(1) of the Companies Act.
The CLRFC recommends the adoption of the UK regime, which empowers the
Registrar of Companies and Businesses to direct a change of name on its own
initiative or upon receipt of valid complaints that are filed within 12 months of incorporation.
The CLRFC recommends the consolidation of the current set of forms required for incorporation into one form that is electronically submitted to the Registry of Companies and Businesses.
The CLRFC recommends dispensing with the need for a director to give his consent in writing and for the form to be signed before a defined professional. The director would indicate his consent electronically by using his CPF PAL-PIN or RCB PIN, which would serve as a secure and unique verification of his identity. For directors who elect to go through professional agents, it shall be the duty of these agents to verify and confirm the identities, qualifications and consent of these persons.
The CLRFC recommends allowing company secretaries to signify their consent to the Registry of Companies and Businesses electronically. The company secretary would use his CPF PAL-PIN or RCB PIN as a secure and unique verification of his identity. For companies that are incorporated by professional agents, it shall be the duty of the agents to verify and confirm the identities, qualifications and consents of the company secretaries.
The CLRFC recommends the abolition of the ultra vires doctrine. A company should be statutorily conferred with all the powers of a natural person. However, the ultra vires doctrine would be retained for the limited purpose of preserving the rights of internal redress by members against the directors, where the company’s constitution places limits on a company’s capacity and powers. It is proposed that Singapore adopt, with appropriate modifications, Sections 7 and 8 of the New Zealand Law Commission’s Company Law Reform and Restatement Draft Companies Act. We also recommend the replacement of the Memorandum and Articles of Association with a default constitution, modelled after the proposed constitution that would be adopted in the UK.
The CLRFC recommends that all private companies incorporated in Singapore be required to have at least one shareholder and one director who is ordinarily resident in Singapore. The shareholder and director can be the same person.
The CLRFC recommends that all private companies be required to give at least 14 days’ notice for all meetings, including those called to propose special resolutions. The CLRFC recommends the retention of the existing 28 days’ notice requirement for meetings called in order to propose resolutions requiring special notifications for all companies.
The CLRFC recommends that written resolutions in private companies may be passed with 75% and 50% majorities of those eligible to vote for special and ordinary resolutions respectively. In addition, legislation should be enacted to allow written resolutions to be passed through various forms of electronic communication. As a safeguard, the CLRFC further recommends that a minimum threshold of shareholders (representing at least 5% of the outstanding ordinary shares) can, by written notice, demand that a general meeting be convened.
The CLRFC recommends no change to the rule under Section 161 of the Companies Act that requires shareholders’ authorisation for directors to allot shares.
The CLRFC affirms and restates the importance of corporate secretarial functions, and recommends that all companies continue to be required by law to appoint company secretaries. However, the CLRFC recommends that private companies be exempted from the statutory prescription to appoint professionally qualified company secretaries.
The CLRFC recommends the retention of the requirement for companies to continue to maintain proper accounting and other records which will sufficiently explain their transactions and financial position. In addition, the law will continue to require all companies to prepare true and fair financial statements.
The CLRFC recommends that listed companies should be required to produce an
Operating and Financial Review, the contents of which would be prescribed by
the Council on Corporate Disclosure and Governance and the Singapore Exchange. The CLRFC further recommends that for all unlisted companies, the statutory requirement for the directors’ report [as prescribed by Sections 201(5) and 201(6) of the Companies Act] should be repealed and replaced with a requirement to submit a modified form of the Operating and Financial Review. This modified form of the Operating and Financial Review would include directors’ statements relating to the true and fair view of the accounts and the company’s ability to meet its debts as and when they fall due.
The CLRFC recommends that exempt private companies with annual turnover below S$5 million and dormant companies be exempted from preparing or filing audited accounts. The turnover threshold can be raised over time. The CLRFC further recommends that shareholders representing at least 5% of the outstanding ordinary shares be entitled to require such companies to prepare audited accounts. The Registrar of Companies and Businesses should also be empowered to require a company to submit audited accounts.
The CLRFC recommends that exempt private companies file a declaration of solvency every year. The declaration would be signed by one director who is authorised to do so for and on behalf of the whole Board, failing which a set of unaudited accounts must be filed.
The CLRFC recommends that Singapore move towards an entirely electronic filing system, which would include the maintenance of publicly accessible corporate registers.
The CLRFC recommends the retention of the existing time frames for all companies, which have either been struck-off the register or wound-up, to submit their reinstatement applications.
The CLRFC recommends that the existing boundaries between public and private offerings be replaced by an approach which requires a full prospectus for all offerings of securities, unless the offering is an exempted offering. A comprehensive list of exemptions or “safe harbours”, which comprises the
existing universe of exempted offerings as well as private offerings, should be provided. The Minister or the Monetary Authority of Singapore should be empowered to prescribe further exemptions for other forms of capital raising which merit exemption. The CLRFC further recommends that there should be no prescribed prospectus content and registration requirements for offerings of securities that fall within the list of exemptions or “safe harbours”.
The CLRFC recommends the abolition of the abridged prospectus and its replacement with a common standard filing, which would be required for rights and other similar offerings regulated by a statement of material facts.
The CLRFC recommends that all the exemptions relating to offers of shares and debentures be extended to collective investment schemes, without additional prescription, save for investments where clearly identifiable public interests justify additional prescription.
The CLRFC recommends that Section 273(1)(a) of the Securities and Futures Act be extended to exempt offer documents made in connection with a takeover offer which is in compliance with the applicable laws of the country of incorporation of the target company.
The CLRFC recommends that Section 273(1)(b) of the Securities and Futures Act be extended to exempt the following issues of covered warrants from prospectus requirements:
(a) primary issues of listed covered warrants over securities listed on the Singapore Exchange. The CLRFC recommends that the Singapore Exchange should be the agency to prescribe the disclosure requirements for listed covered warrants.
(b) issues of listed covered warrants where the underlying securities are previously issued and listed on recognised international exchanges. The CLRFC recommends that the Singapore Exchange should be the agency to determine the disclosure requirements and appropriate access arrangements for Singapore investors of information relating to the underlying securities.
The CLRFC further recommends that issue and trading of unlisted covered warrants by regulated financial institutions should continue to be unregulated by statute.
The CLRFC recommends that the exemption under Section 273(1)(c) of the Securities and Futures Act be extended to offers of securities by a company to bona fide employees or former employees of the company or a company in the same group or the wife, husband, widow, widower or child or stepchild under the age of 18 of such employee or former employee.
The CLRFC recommends repealing Section 256 of the Securities and Futures Act. Rights issues by listed issuers would have to comply with Section 277 of the Securities and Futures Act and a statement of material facts must be issued.
The CLRFC recommends that the existing exemptions in Section 274 and Section
275 of the Securities and Futures Act be retained. The current requirement to lodge the information memoranda and Form 3 with the Monetary Authority of Singapore should be dispensed with.
The CLRFC recommends that offers exempted under Section 273(3) of the Securities and Futures Act should not be required to file a notice to invoke the exemption. The CLRFC further recommends repealing Sections 280(2) – (5) of the Securities and Futures Act. Issuers invoking the exemption under Section 273(3) of the Securities and Futures Act need not maintain a register of such issues.
The CLRFC recommends the introduction of a private placement exemption for offers to up to 20 pre-identified offerees to raise unlimited funds without any statutorily prescribed prospectus content or filing, and without resale restrictions. The Minister should be empowered to raise the threshold number of pre-identified offerees when appropriate.
The CLRFC recommends the introduction of a small offering exemption for offers of up to S$5 million (computed based on the funds raised) in 12 months to offerees who have:
(a) previous contact with the person making the offer; or
(b) some professional or other connection with the person making the offer; or
(c) indicated that they are interested in offers of that kind through some statements of actions.
Resale restrictions should be imposed for six months after the allotment or purchase of securities made pursuant to the small offering exemption to confine such resales to persons who have similar relationships with the offeror. Any offering materials must include a statement on the front cover of the offering materials to notify offerees that the shares or debentures are being offered pursuant to the small offering exemption.
The CLRFC recommends the repeal of Section 244 of the Securities and Futures Act and the clarification in Section 4A of the Banking Act that corporate debt issues which comply with or are exempted under the Securities and Futures Act do not constitute deposit taking. In addition, the CLRFC recommends that the Securities and Futures Act should clarify that deposits with banks are not
“debentures” for the purposes of Part XIII of the Securities and Futures Act. RECOMMENDATION 2.13
The CLRFC recommends removing the statutory requirements pertaining to the appointment of trustees and prescribed covenants for public offerings of debentures. The requirements on the appointment of trustees, the duties of the trustees and the contents of the trust deed would be prescribed by Singapore Exchange Securities Trading Limited. The Securities and Futures Act should continue to address the liabilities of trustees where they are appointed. In addition, the Securities and Futures Act should be extended to confer the rights on the Monetary Authority of Singapore, the Singapore Exchange Securities Trading Limited and debenture holders to apply to the court to compel a trustee to perform his duties as set out in the trust deed. The CLRFC further proposes retaining Section 267 of the Securities and Futures Act, which would allow a trustee to apply to the court for directions.
The CLRFC recommends a reconsideration of the efficacy of enacting the
IOSCO’s Disclosure Standards into statutory form in the Securities and Futures
(Offers of Investments) (Shares and Debentures) Regulations 2002. Alternatively, the Monetary Authority of Singapore could consider issuing practice guidelines which will provide class adaptations and waivers to cater for small and medium size listings and public offerings.
The CLRFC recommends the retention of the prospectus registration process, but to streamline the process such that directors need not sign and file Form 45 along with the prospectus registration.
The CLRFC recommends that subsequent sales of shares or debentures (both listed and unlisted), which are first acquired pursuant to the Sections 274 and 275 exemptions in the Securities and Futures Act, should be permitted at any time after six months from the date of initial acquisition. During the six-month restriction period, the shares or debentures can only be sold to institutional investors and sophisticated investors.
The CLRFC recommends the secondary trading of collective investment schemes, which are initially acquired pursuant to an exemption under the Securities and Futures Act to institutional and sophisticated investors, be permitted.
The CLRFC recommends the abolition of the concepts of par value and authorised share capital. The amounts standing to the credit of the share premium account should be made available to provide the premium payable on redemption of debentures or redeemable preference shares issued, to write off preliminary expenses of the company incurred before, and to write off expenses incurred, payments made or discounts allowed on or before the abolition of par value.
The CLRFC recommends introducing an alternative capital reduction process which does not require court sanction. The alternative capital reduction process would require shareholders’ special resolution approval as well as a declaration of solvency. Where a company’s accounts are not audited, the directors would be required to make a statutory declaration of solvency. Where a company’s accounts are audited, the solvency declaration, if not made by a statutory declaration, should be confirmed by external auditors. For public companies, the alternative capital reduction process would further require publication of a notice
(in advance of the proposed capital reduction) in a national newspaper and making available for public inspection the shareholders’ resolution and solvency statement and be susceptible to creditor challenge in court.
The CLRFC recommends that the Council on Corporate Disclosure and Governance review the accounting standards and rules to limit distributions to be made only out of accumulated realised gains minus accumulated realised losses in the light of international developments moving away from the concept of
“realised profits”.
The CLRFC recommends the further liberalisation of our financial assistance restrictions to allow financial assistance to be provided in the following circumstances:
(a) where less than 10% of the company's paid-up capital is involved;
(b) where it is approved by a unanimous resolution of shareholders;
(c) under specific exemptions for financial institutions and approved employee share schemes; and
(d) for representations, warranties and indemnities by an issuer or a vendor in the context of a public offering.
For purposes of (a) and (b), where a company’s accounts are not audited, the directors would be required to make a statutory declaration of solvency. Where a company’s accounts are audited, the solvency declaration, if not made by a statutory declaration, should be confirmed by external auditors.
The CLRFC recommends that share buy-backs should continue to be funded out of distributable profits or where supported by a declaration of solvency. RECOMMENDATION 2.23
The CLRFC recommends allowing repurchased and redeemed shares to be held in treasury without the need for the company to obtain shareholders’ approval on how the repurchased and redeemed shares would be treated after the share buy- back. Their voting and other rights of the repurchased and redeemed shares would be suspended so long as they are held in treasury. Companies should be permitted to use treasury shares to meet their obligations under employee share option schemes, transfer to third parties to fund acquisitions or to raise cash.
The CLRFC recommends allowing companies to enter into contingent contracts to buy-back their shares, where such entry is approved in a special resolution by the companies’ shareholders.
The CLRFC recommends the retention of the statutory prescription of one-share- one-vote for public companies. All private companies, including subsidiaries of public companies, should be permitted to issue different classes of equity shares with multiple, limited or no voting rights.
The CLRFC recommends the repeal of the separate definitions of “director” and
“shadow director” in Sections 149(8) and 149A of the Companies Act.
The CLRFC recommends that Section 201B of the Companies Act relating to audit committees of listed companies be migrated to the Securities and Futures Act.
The CLRFC recommends that the Singapore Institute of Directors, in consultation with the Singapore Exchange, conduct more extensive and systematic training and accreditation for directors in Singapore.
The CLRFC recommends the retention of Section 153 of the Companies Act, which requires directors of public companies and subsidiaries of public companies to seek annual reappointment if they are of or above the age of 70 years. The CLRFC also recommends that the re-election requirements be amended to provide for such appointment by way of an ordinary resolution as opposed to a special resolution.
The CLRFC recommends that a copy of the Court order or the Official Assignee’s written permission to undischarged bankrupts to serve as directors or be involved in the management of companies under Section 148(3) of the Companies Act be filed with the Registry of Companies and Businesses.
The CLRFC recommends the adoption of UK’s statutory restatement of the general principles for directors, subject to adaptation to suit Singapore’s context.
The CLRFC recommends that directors be accorded protection for reasonable reliance on advice and information from professionals and experts along the lines of the Section 107 of the New Zealand draft legislation.
The CLRFC recommends that a summary account of directors’ duties and liabilities be inscribed on the director’s consent to act.
The CLRFC recommends extending the scope of Section 156 of the Companies Act beyond “contracts” to include “transactions”. The definition of “family” in Section 156(8) of the Companies Act should be aligned to the definition provided in Section 163(5) of the Companies Act.
The CLRFC recommends no change to Section 168 of the Companies Act and affirms the requirement for single item disclosure for shareholder approval of the provision or improvement of emoluments to directors under Section 169 of the Companies Act.
The CLRFC recommends that Section 162(1)(b) of the Companies Act be amended to clarify that the housing loan permitted thereunder be confined to the home occupied or to be occupied by the director, and should not be extended to housing loans for multiple homes or for investment.
The CLRFC recommends recognising the position of nominee directors by permitting them to disclose information to their nominating shareholder, provided it does not put the interests of the company in jeopardy and that such disclosure is minuted in the relevant board minutes.
The CLRFC recommends that Section 172 of the Companies Act be updated to incorporate the extended coverage offered in Section 310 of the UK Companies Act 1985. The Committee further recommends replacing Section 391 of the Companies Act with Section
727 of the UK Companies Act 1985 and that the definition of “liability” in the context of
Section 391 of the Companies Act be redrafted to include a liability to account for profits made.
The CLRFC recommends an overall review of the Companies Act with a view to eliminating criminal sanctions for such areas where civil or regulatory sanctions are sufficient. The CLRFC further recommends that the UK codification of civil remedies, when released, be adopted in Singapore subject to adaptation.
The CLRFC recommends a statutory restatement of the distribution of powers between directors and general meeting along the lines of Section 198A of the Australian Corporations Act 2001.
The CLRFC recommends the adoption of the recommendation in the UK Steering Committee’s Final Report to statutorily impose limits on majority rule in the context of alterations of the articles of association or alteration of class rights. The CLRFC also recommends that shareholder resolutions to ratify or condone wrongs be effective, provided that the votes of members with an interest or subject to the substantial influence by a person with an interest in the wrong have been discounted.
The CLRFC recommends adopting Sections 366A and 379A of the UK Companies Act 1985, which allow private companies to elect by unanimous agreement to dispense with the holding of annual general meetings. For purposes of clarification, the CLRFC further recommends the deletion of the expression “or agreements” in Section 186(1)(b) of the Companies Act.
The CLRFC recommends that the Singapore Exchange should be the agency to prescribe rules and procedures governing the use of web-casts and dial-ins for the disclosure of information. The CLRFC further recommends that the Companies Act be amended to provide for the electronic distribution of statutory reports to shareholders and for hardcopies to be available to shareholders who require them.
The CLRFC recommends adopting the recommendation of the UK Steering Committee that the contractual character of the constitution be retained – i.e. all obligations imposed by the constitution should be enforceable by individual members both against the company
and other members, unless the contrary was provided in the constitution or unless the breach in question was trivial or the remedy fruitless.
The CLRFC recommends the introduction of an omnibus Insolvency Act and subsidiary legislation that are applicable to both companies and individuals. The omnibus legislation would set out the common principles and procedures and consolidate and update all core areas including voluntary arrangements, judicial management, receivers and managers, voluntary and court winding up, liquidators, preferential debts, secured and unsecured debts, disclaimer, malpractices and insolvency practitioners modelled after the UK Insolvency Act
1986.
The CLRFC recommends the introduction of company voluntary arrangements, modelled after the UK Insolvency Act 1986, in the proposed omnibus insolvency legislation.
The CLRFC recommends establishing a common qualification for all insolvency practitioners e.g. receivers, administrative receivers, liquidators and judicial managers. The range of qualified persons should be extended to finance and other professionals. The CLRFC further recommends establishing in due course an Insolvency Practitioners Association, which would be responsible for accreditation of insolvency practitioners, continuing education and setting of professional standards.
The CLRFC recommends that the guiding principles identified by the UK Steering Committee be adopted in Singapore. The CLRFC further recommends a calibrated range of sanctions, which includes criminal, civil and regulatory sanctions, as well as professional sanctions and censure. A regular review process involving regulators, as well as market and industry players, should be institutionalised to track, evaluate and respond to market and regulatory developments in the major economies.
The CLRFC recommends that the statutory treatment of book-entry securities should be extended to the following range of securities:
(a) Listed equity securities issued by non-Singapore incorporated corporations and securities issued by supra-nationals and states;
(b) Listed debt and derivative securities issued by Singapore and non-Singapore incorporated issuers other than debt and derivative securities of Singapore- incorporated companies who have Central Depository (Pte) Limited named in its register of members;
(c) Unlisted securities by Singapore and non-Singapore issuers;
(d) Dematerialised securities; and
(e) Interests in collective investment schemes.
With respect to securities issued by Singapore corporations, the same treatment may be accorded. With respect to securities issued by non-Singapore corporations, it should be provided that insofar as Singapore law is relevant such depositor shall be treated as if he were a member of the corporation or registered holder of the relevant securities.
The CLRFC recommends that the Companies Act and/or Securities and Futures Act respectively should expressly define the depositors’ collective ownership of the Central Depository (Pte) Limited’s (“CDP”) trust assets, so that each depositor is only entitled to a pro rata share in the pool of securities or proceeds arising from such assets held in trust by CDP. The CLRFC further recommends that statutory provisions should be introduced to enhance the protection of securities in the sub-accounts of a depository agent upon the insolvency of the Depository Agent, by providing for pro rata entitlements to the pool of securities held by the depository agent.
The CLRFC recommends that Section 366(2)(j) of the Companies Act be extended to share transfers and share registration services of all corporations, both listed and unlisted.
The CLRFC recommends that the timeline for reporting of substantial shareholders, changes and cessation in Sections 82(2)(b), 83(2) and 84(2) of the Companies Act respectively, as well as the timeline for reporting of shareholdings by directors in Section
165 of the Companies Act be extended to 2 market days. In addition, reporting of changes prescribed by Section 83 of the Companies Act should be required when the shareholding exceeds discrete 1% thresholds above the minimum 5% threshold, e.g. when the shareholding crosses 6%, 7% etc. Such reporting should include details of all transactions
(both purchases and sales) that took place between the last report and the current report.
The CLRFC recommends that scrip lending intermediaries, whose securities are transferred to and out of its securities account in connection with a scrip lending transaction within two market days, be exempted from Division 4 of Part IV of the Companies Act.
The CLRFC recommends that Section 215 of the Companies Act be amended to exclude the following types of shares for the purpose of computing the 90% acceptance threshold:
(a) shares held by the offeror company;
(b) shares held by a nominee of the offeror company;
(c) shares held by a holding company, subsidiary or fellow subsidiary of the offeror company or a nominee of such holding company, subsidiary or fellow subsidiary;
(d) shares held by a body corporate in which the offeror company is substantially interested; and
(e) shares held by any person, who is, or is a nominee of, a party of any agreement with the offeror for the acquisition of, or an interest in, the shares which are the subject of the take-over offer.
The CLRFC recommends the introduction of a more effective and efficient statutory form of merger/ amalgamation process to be modelled after Section 188
– Section 194A of the New Zealand Law Commission Company Law Reform: Transition and Revision Report No. 16.
The CLRFC recommends the repeal of Division 1 of Part XI of the Companies Act.
COMPANY LEGISLATION
AND REGULATORY FRAMEWORK COMMITTEE REPORT
The Company Legislation and Regulatory Framework Committee (“CLRFC”) was appointed by the Ministry of Finance, the Attorney-General’s Chambers and the Monetary Authority of Singapore in December 1999. The terms of reference were “to undertake a comprehensive and coherent review of our company law and regulatory framework and recommend a modern company law and regulatory framework for Singapore which accords with global standards and which will promote a competitive economy”. The CLRFC members are:
Chairman: Dr Philip Pillai, Shook Lin & Bok
Members: Mr. Frank Blue, Caltex Services Pte Ltd [until 2001] Mr. Gerard Ee, Ernst & Young
Mr. Ian MacLean, F&N Group [until September 2002] Mrs Arfat Selvam, ASG Law Corporation
Mr. Sin Boon Ann, Drew & Napier LLC
Associate Professor Hans Tjio, National University of Singapore
Mr. Lucien Wong, Allen & Gledhill
Ms Yap Huan Lan, Singapore Exchange [until 2001] Mr. Charles Lim, Attorney-General’s Chambers
Mr. Ng Heng Fatt, Monetary Authority of Singapore
Ms Juthika Ramanathan, Registry of Companies and Businesses
SCOPE OF REVIEW
1 Approaches of the CLRFC
1.1 In conducting its review, the CLRFC has considered the following:
(a) Global impact of US corporations and market instruments
Current and future economic and business developments in the US have overreaching influences on global business. The presence of US operating multinationals and increasingly the new economy in which Singapore and Asian start ups are structured, with financial mechanisms and instruments common in the US market, have an impact on Singapore as a global business centre. In order to enhance Singapore’s competitiveness as a global business centre, we should ensure that our company law is flexible enough to cope with such mechanisms and instruments.
(b) Singapore’s UK Companies Act model – the heritage
Singapore’s Companies Act (Cap 50) is structurally based on the UK Companies Act 1948, which is the primary model for non-US common law countries including Australia, Malaysia, Hong Kong and New Zealand. The Delaware Corporations Code is the other primary model of US corporations. As a global business centre, Singapore’s company law should continue to be modeled on one of the two globally recognisable common law models.
(c) Continuation of UK Companies Act model
Since investors, regulators and the relevant professions of law, accountancy and corporate services have worked with a time tested structure and the concepts that underpin the UK model for four decades, the CLRFC has elected to retain and modernise this model rather than to adopt a new model based on the Delaware Corporations Code model. The CLRFC is also mindful that the Delaware model is premised on extensive regulatory machinery including the Securities and Exchange Commission and contingency and class legal actions.
(d) Adapting and modernising UK Companies Act model
In the UK, an extensive process of review of the fundamentals of company law in a modern economy has been undertaken by the Company Law Review Steering Group: Modern Company Law for a Competitive Economy. As the UK Steering Group has a wealth of resources and has also tapped the collective experience of all major sectors engaged in company legislation in the UK, we adopted these reports as a baseline for our review and proposed reform of Singapore company law. Our base model documents are the UK Company Law Review Steering Group, Modern Company Law for a Competitive Economy Final Report, June 2001 and the UK White Paper on Modernising Company Law, July 2002.
The CLRFC has also taken into account the extensive company law reforms which have been proposed and/or enacted under the Australian Company Law Economic Reform Programme, the New Zealand Company Law Reform and Restatement, and the Canadian Business Corporations Act.
1.2 We have sought to adopt the modern UK model as our basic framework, excise elements which are European Union driven, insert revisions that reflect Singapore’s particular requirements, introduce refinements from other jurisdictions and render our structure amenable to the adoption of US models in the areas of accounting standards, financial reporting and investor protection in the framework of a disclosure based regulatory environment. We have also sought to simplify our incorporation and continuing compliance obligations to achieve efficiencies and cost reduction. In addition, we have reiterated the continuing public value of current and reliable public records and registers in providing timely, reliable and accessible business information which is critical for an international business centre.
1.3 The CLRFC has taken into account the Reports of two other Committees appointed by the Ministry of Finance, the Attorney-General’s Chambers and the Monetary Authority of Singapore: the Corporate Governance Committee chaired by Mr. Koh Boon Hwee and the Disclosure and Accounting Standards Committee chaired by Mr. Ng Boon Yew, insofar as these reports impact on the statutory provisions of the Companies Act. We have accordingly proposed consequential revisions to the statutory framework in order to accommodate their recommendations.
1.4 We had hoped, on the premise that the extensive review in the UK had been completed, that this Report could be accompanied by draft legislation modelled on the UK draft. The UK government issued the UK White Paper on Modernising Company Law in July 2002. The White Paper comprises selected draft clauses of the new Companies Bill and additional issues for further consultation. In view of the ongoing consultation in UK, we would recommend a two-phase implementation process.
♦ In Phase 1, we envisage implementing most of the recommendations which focus on streamlining and excision, as well as recommendations relating to the Securities and Futures Act (“SFA”). This will leave intact the remainder of the Companies Act, which remains a coherent and consistent piece of legislation.
♦ In Phase 2, we would recommend that an entirely new Companies Act be drafted, modelled on the UK draft companies legislation as adapted by the principles set out in paragraph 1.2 and the recommendations of our Report. This will ensure that the new Singapore Companies Act is a coherent and consistent piece of legislation in both style and content rather than a skeletal framework engrafted with provisions drawn from different models with inherently distinct drafting styles and content. This will serve the additional purpose of enabling us to draw on the extensive case law that will emerge in the UK to continue to shape Singapore company law in the light of international practices and developments.
FINAL REPORT
2.1 The CLRFC issued a public consultation paper on 22 October 2001 to gather comments on the areas that the Committee had identified for review. The Committee received comments from a total of 105 respondents. The CLRFC issued its draft report for a second round of public consultation from 9 May 02 to 31 July 02 and received feedback from 104 respondents. The Committee also conducted a discussion forum on
25 June 02 with 57 representatives from businesses, professional bodies and the academia. The Committee would like to take this opportunity to express its appreciation to all the respondents for their valued comments. A list of the respondents to the first and second public consultation is attached at Appendix I.
2.2 We would also like to place on record the contributions of the following who have unstintingly participated and provided helpful industry insights which have shaped our recommendations:
♦ Assistant Professor Michael Ewing-Chow of the Faculty of Law, National
University of Singapore
♦ Issues relating to capital raising and capital maintenance: Mr. Ng Boon Yew, Mr. Soon Boon Siong of UOB Asia Ltd, Mr. Sum Soon Lim, Mr. Richard Teng, Ms Tracey Woon of Merrill Lynch (Singapore) Ltd and Ms Karen Tiah of Allen
& Gledhill
♦ Issues relating to accounts and audit: Mr. Quek See Tiat of
PriceWaterhouseCoopers
♦ Issues relating to insolvency: Mr. Sarjit Singh of Insolvency & Public Trustee Office, Mr. Nicky Tan, Mr. Lee Eng Beng of Rajah & Tann, Mr. Sarjit Singh Gill, S.C. and Mr. Vinodh Coomaraswamy of Shook Lin & Bok
♦ Mr. Alan Cameron of Australia, Mr. David Graham of Morgan Stanley Dean Witter (Asia) of Hong Kong, Mr. Richard Sykes QC of UK and Mr. Rob Everett of Merrill Lynch (Hong Kong) for their valuable comments on the CLRFC’s draft report.
♦ Editing and research: Ms Faith Gan, Manager, Professional Development and
Knowhow, Shook Lin & Bok
♦ Dean Tan Cheng Han of the Faculty of Law, National University of Singapore who provided “sanctuary” – office and computer facilities at the University – to the Chairman of CLRFC to write this report.
2.3 The Committee has given due consideration to all feedback received in finalising this report. The CLRFC’s final report comprises the following five chapters:
♦ Chapter 1: Business Vehicles and Small Business (21 recommendations)
The CLRFC has reviewed the adequacy and completeness of the vehicles available under Singapore law for the conduct of domestic and international business. In addition, the CLRFC also reviewed the particular needs of small business in the context of the Companies Act, in particular, whether Singapore should have a separate legislative regime for small businesses or whether it would be preferable to continue to have a base model that is applicable to all companies, with overlays for companies that can raise capital from the public. Finally, with a view to streamlining and reducing compliance costs without sacrificing the integrity of information filed for public access, we
have extensively reviewed the incorporation, maintenance and dissolution processes for all companies (with special regard to small businesses).
♦ Chapter 2: Capital Raising, Capital Maintenance and Company Charges (25
recommendations)
The CLRFC has reviewed the Companies Act and the Securities and Futures Act in relation to capital raising, capital maintenance and company charges. For capital raising, the CLRFC recommends the replacement of the ill-defined boundaries of public and private offerings with a comprehensive list of safe harbour prospectus exemptions. The CLRFC also recommends a common statutory regime for both public equity issues and public bond issues and consequently the repeal of statutory trustee and trustee covenants. We recommend that the safe harbour prospectus exemptions be extended to collective investment schemes save for where a countervailing public interest is evident.
The CLRFC recommends the elimination of the par value and authorised capital concepts. We recommend the simplification of capital reduction by dispensing with court approval and by requiring only supporting shareholders’ approval and a directors’ declaration of solvency. We recommend that companies, supported by a directors’ declaration of solvency, be able to provide financial assistance in the following additional circumstances: (i) where less than 10% of the company’s paid-up capital is involved, (ii) where there has been unanimous shareholders’ approval, (iii) by financial institutions and for the purposes of approved employee share schemes, and (iv) for representations, warranties and indemnities by an issuer or vendor in the context of a public offering.
The CLRFC recommends that share buy-backs be permitted to be retained as treasury shares rather than to be cancelled and that treasury shares may be used by a company (i) to meet its obligations under employee share option schemes, (ii) to be issued to third parties to fund acquisitions, or (iii) to be sold to raise cash. We recommend also that companies be permitted to enter contingent contracts to buy-back their shares.
♦ Chapter 3: Corporate Governance (19 recommendations)
The CLRFC has reviewed and made recommendations to refine our current regulation of directors. In particular, we recommend the adoption of the UK’s statutory restatement of the general principles for directors, when it is released, subject to adaptation to suit our local context. Other areas of review include definition of “directors”, directors’ qualifications, directors’ duties, corporate governance, conflict of interests, shareholders’ rights and general meetings and resolutions.
♦ Chapter 4: Corporate Insolvency (3 recommendations)
The CLRFC has reviewed the current Singapore corporate insolvency regime in the light of the US, UK, Australian and New Zealand and Singapore experience. We would recommend that Singapore adopt an omnibus insolvency regime for personal and corporate insolvency, thereby consolidating the discrete treatment now accorded under the Bankruptcy Act and the Companies Act respectively. We would recommend the broadening of the range of insolvency practitioners to enable other qualifying financial and other professionals to be credentialed for insolvency practice and for the development of a professional organisation which will train and accredit insolvency practitioners for Singapore and the region. We would recommend the introduction of voluntary arrangements.
♦ Chapter 5: Boundaries and Concluding Recommendations (9
recommendations)
The CLRFC recommends that the timelines for disclosure of substantial shareholdings and directors’ shareholdings be extended from 2 calendar days to 2 market days. To facilitate more efficient mergers, we recommend that Singapore introduce a corporate merger/ amalgamation process modelled after Section 188 – Section 194A of the New Zealand Law Commission Company Law Reform: Transition and Revision Report No. 16. We recommend that Section 215 of the Companies Act be amended to reflect the types of holdings that are to be excluded from the computation of the 90%- acceptances threshold, as has been enacted in the UK. We recommend that the book-entry trading system governed by the Companies Act be extended to facilitate scripless trading in a wider range of securities.
COMPANY LEGISLATION
AND REGULATORY FRAMEWORK COMMITTEE REPORT
1 INTRODUCTION
1.1 In this Chapter, in line with the principles set out in the Introduction to this Report, we have reviewed the adequacy and comprehensiveness of the vehicles available under Singapore law for the conduct of domestic and international business.
1.2 In addition, we have also considered the particular needs of small business in the context of the Companies Act (“CA”), in particular, whether Singapore should have a separate legislative regime for small businesses or whether it would be preferable to continue to have a base model that is applicable to all companies, with overlays for companies that can raise capital from the public.
1.3 Thirdly, with a view to streamlining and reducing compliance costs without sacrificing the integrity of information filed for public access, we have extensively reviewed the incorporation, maintenance and dissolution processes for all companies (with special regard to small businesses).
1.4 The Consultation Documents and Final Report of the UK Steering Group[1] issued by the UK Company Law Review Steering Group (“UK Steering Committee”), as well as the UK White Paper on Modernising Company Law have been adopted as our point of reference. In addition, we referred to relevant legislation in other jurisdictions such as the US, Australia, New Zealand, Canada and Hong Kong.
2. FULL MENU OF VEHICLES FOR BUSINESS IN SINGAPORE
LIMITED PARTNERSHIPS (“LP”) AND LIMITED LIABILITY PARTNERSHIPS
(“LLP”)
2.1 A review of the full range of vehicles available for the conduct of business in other jurisdictions reveals that Singapore currently lacks the limited partnership (“LP”) and limited liability partnership (“LLP”) vehicles. LLPs are often used as business, professional and investment vehicles whereas, for US tax purposes, LPs are used for private equity and fund investment businesses. As an investment vehicle, it accords passive investors with limited liability, privacy (as the accounts are not publicly filed) and tax transparency (as the partnership is not treated as a distinct tax entity from the partners).
2.2 The UK Limited Partnerships Act 1907[2] (“UK LP Act”) provides for the registration of limited partnerships which “consist of one or more persons called general partners, who shall be liable for all debts and obligations of the firm, and one or more persons to be called limited partners, who shall at the time of entering into such partnership contribute thereto a sum or sums as capital or property valued at a stated amount, and
who shall not be liable for the debts and obligations of the firm beyond the amount so contributed”[3]. Limited partners may not take part in the management of the firm and have no power to bind the firm. Limited partnerships enjoy lower registration and continuing compliance obligations, whilst allowing some partners the benefit of limited liability. They could be suitable for small family businesses and start-ups. The UK has recently initiated a review and update of the UK LP Act in the form of a Joint Consultation Paper of the Law Commission and Scottish Law Commission[4].
2.3 We note that it is important to ensure that LPs will be tax transparent (i.e. that income and capital gains flow through the partnership untaxed) under Singapore tax law and that US tax treatment will not be less favourable compared to the other centres favoured by US tax domiciled private equity investors.
2.4 The UK has enacted the Limited Liability Partnerships Act 2000[5], which allows businesses and professionals to incorporate with limited liability whilst being organised as partnerships. Safeguards are provided for those dealing with this new form of business structure. The LLP is a separate legal entity and all the partners have limited liability. The UK LLPs are available not only to professionals but also to other businesses. LLPs are owned and managed by members upon terms they have themselves agreed upon; the LLP agreement is not open for public inspection. LLPs are taxed as partnerships. In other respects, LLPs are subject to provisions that are similar to those in the UK Companies Act 1985[6] and the UK Insolvency Act 1994[7]. These include disclosure of information about the firm, particularly its finances, and safeguards for creditors in the case of insolvency.
2.5 The US Delaware Revised Uniform Partnership Act (the “Delaware Code”) accords separate legal entity status to the LLP and limited liability to all the partners. It prescribes a list of statutory fiduciary duties and does not require the public filing of any financial statements. The Delaware Code additionally provides for seamless transition from existing partnerships to LLPs.
2.6 In order to widen the options available for businesses and investments in Singapore, we recommend that legislation be enacted to introduce these two vehicles. With regard to LLPs, the CLRFC endorses feedback from respondents that this structure should not only be limited to professionals but also be available to all businesses.
2.7 We also recommend adopting the US Delaware Code (which appears to be the preferred model) as our base model with such adaptations as would render the Singapore LLP Act to be self-contained.
2.8 In order to ensure an orderly and seamless transition for an existing partnership to convert to an LLP, we recommend that statutory provision be enacted along the lines of Title 6, Chapter 15, s. 15 –1001 of the Delaware Code, to allow existing partnerships to convert to LLPs by filing a statement of qualification; following which the existing partnership is converted to an LLP and full succession to all assets and liabilities is thereby effected by operation of law, including continuity of all tax liabilities and benefits. As LLPs are in substance partnerships with limited liability, they should not be required to file any financial statements with the Regulator.
The CLRFC recommends the introduction of the limited partnership (modelled after the UK Limited Partnerships Act 1907) and the limited liability partnership modelled after Title 6, Chapter 15 Subchapter X (Limited Liability Partnerships) of the Delaware Code with a conversion by registration process.
1.1.1 Other vehicles
2.9 Trust Companies
2.9.1 Whilst this is beyond the direct scope of the CLRFC, we would recommend that a review be undertaken to update our Trust Companies Act (Cap. 336) in the light of the potential growth of global trust activities in Singapore. Our Trust Companies Act was originally enacted in 1926 and has only been revised twice since then
(once in 1970 and again in 1985). With the vast developments in international trust activities and the recent reforms undertaken by other countries, Singapore needs to review and update our legislation to remain competitive and ensure that our rules are current.
1.1.1.1.1 Recommendation 1.2
The CLRFC recommends that the Trust Companies Act (Cap. 336) be reviewed and updated to ensure our rules are in line with international developments and trends.
2.10 Protected Cell Companies
2.10.1 In order to facilitate the business of insurance and funds companies that use the cell structure to segregate asset and liability classes, the feasibility and implications of introducing Protected Cell Companies (“PCC”) also warrant further study. Each cell in a PCC is not a separate legal entity but the accounts of different cells are separate as a matter of law, so that the liabilities of one cell would not flow through to other cells. The PCC structure is used mainly for captive insurance and as special purpose vehicles for insurance securitisation. PCCs (also known as “Segregated Accounts Partnerships”) are found in jurisdictions like the Bermuda and the Cayman Islands. The PCC structure is also available in certain US states e.g. Rhodes Island, Vermont, Illinois and South Carolina. It is also being considered in jurisdictions like New York and Hong Kong. The CLRFC subscribes to the view that it would enhance Singapore’s competitiveness as an international business centre to consider the
introduction of PCCs as another available business vehicle for insurance, securitisation and funds.
RECOMMENDATION 1.3
The CLRFC recommends that further consideration be given to the introduction of Protected Cell Companies for insurance, securitisation and funds.
3. SMALL BUSINESS
3.1 We examined the case for a separate legislative regime for small companies, modelled on the US limited liability company (“LLC”), against the integrated regime of a common structure for all companies. We are in favour of retaining but refining our existing basic model of the exempt private company and adapting it to better meet the needs of small business.
3.2 In terms of presentation of the legislation proper, our view is that it is desirable that our CA be user friendly and easily understood by the business community. We therefore recommend that, as far as possible, the regulation of private companies be simplified and presented in a stand-alone manner. Provisions relating exclusively to public companies should be separately presented whilst those relating to listed companies should be set out in the Securities and Futures Act (Act 42 of 2001) (“SFA”) and the Singapore Exchange Securities Trading Ltd Listing Rules (“SGX Listing Rules”).
1.1.2 Definition
3.3 The CLRFC considered the definition of small business proposed in the UK as well as the various views of respondents to the proposal to retain and modify the concept of the exempt private company.
3.4 In the UK, small business has been defined in s. 247 and s. 249 of the UK Companies Act, by reference to turnover, balance sheet assets and number of employees for the purpose of statutorily prescribing an abbreviated form and content regime and also for the purpose of exemption from distribution and filing of audited accounts.
3.5 S. 4(1), CA defines an exempt private company as a private company that has no shares held directly or indirectly by any corporation and which has not more than 20 members, or any private company that is wholly owned by the Government, which the Minister for Finance, in the national interest, declares by notification in the Gazette to be an exempt private company. Currently, more than 75% of all Singapore-incorporated companies are exempt private companies.
3.6 Exempt private companies are exempted from some regulatory requirements, such as the filing of audited accounts with RCB. An exempt private company, provided it files a declaration of solvency and confirms that audited accounts have been distributed to its shareholders, is not required to file audited accounts with RCB. When it is unable to confirm either of these, it is obliged to file audited accounts (s. 197 and 8th Schedule, CA).
3.7 The CLRFC considered views from respondents that the concept of the exempt private company may have outlived its usefulness. Some respondents argued that exempt private companies, by being exempted from public disclosure and transparency, do not operate on a level playing field with other non-exempt companies. While exempt private companies are exempted from some regulatory requirements, they are subject to certain restrictions e.g. an exempt private company can only have up to 20 shareholders; the company would also lose its exempt private status if a corporate shareholder comes on board.
3.8 Exempt private companies have been widely used as a vehicle for small business. RCB data indicates that more than 80% of exempted private companies have shareholders who are also directors. It is reasonable that such owner-managed/directed companies are exempted from certain regulatory requirements. As for private companies that are wholly-owned by the Government, the Minister will only grant them exempt private company status when it is in the national interest to do so.
3.9 Some respondents were in favour of defining small business on the basis of revenue, type of activities and total assets. References were made to the approaches taken in the UK and Australia, which define small business based on turnover, balance sheet assets and number of employees. The CLRFC prefers to retain the current criteria for defining exempt private companies, as these are easy to understand and, unlike the quantitative definitions in UK and Australia, would not require regular revisions. The additional benefit would be that the Singapore business community is familiar with the current definition.
3.10 In light of the above and our recommendations to streamline compliance and filings for all companies, we see no pressing need in Singapore to either prescribe a separate regime for or provide a statutory definition for small business.
RECOMMENDATION 1.4
As the current exempt private company concept is adequate for the needs of small business, the CLRFC takes the view that it is unnecessary either to prescribe a separate regime for or provide a statutory definition for “small business” in Singapore.
4. SIMPLIFYING AND STREAMLINING THE INCORPORATION PROCESS
4.1 Our current CA draws a distinction between private and public companies, with a higher threshold of statutory requirements for public companies and for public capital raising. We propose the following: (i) to maintain the distinction by providing a simplified incorporation process for private companies with an overlay of statutory prescription for public companies and public capital raising; (ii) to streamline the incorporation process for all companies, simplify the decision making process in private companies and streamline their internal administration; and (iii) to clarify the provisions governing private capital raising and exempted capital raising for both private and public companies. Item (iii) will be discussed in Chapter 2.
4.2 S. 18, CA defines a private company as a company whose memorandum or articles:
(a) restricts the transfer of shares;
(b) limits the number of shareholders to not more than 50;
(c) prohibits any invitation to the public to subscribe for any shares; and
(d) prohibits any invitation to the public to deposit any money with the company. We recommend the deletion of items (c) and (d) in the light of our recommendations in Chapter 2 to regulate public offerings of securities through a regime of public and exempted offerings. The determining criteria for fund raising should be whether the fund raising is being undertaken through public or private means. This will enable private companies to raise capital through private and exempted offerings without uncertainty or the need to convert to public companies unless they exceed the remaining criteria in s. 18(1), CA. Under the proposed arrangement, only public companies would be allowed to raise capital through public means, i.e. where the issue of a prospectus is required.
RECOMMENDATION 1.5
The CLRFC recommends the deletion of Section 18(1)(c) and Section 18(1)(d) of the Companies Act. This would allow private companies to raise capital through private and exempted offerings without uncertainty or the need to convert to public companies unless they exceed the remaining criteria in Section 18(1) of the Companies Act.
Streamlining of incorporation process
4.3 The following streamlining measures have been recommended in order to reduce the costs of incorporation and facilitate same-day incorporations. These recommendations have been incorporated in the recent round of amendments to the Companies Act in July 2002.
4.4 Similar Name Review
4.4.1 In order to facilitate same-day incorporation in Singapore, we recommend dispensing with the prior screening of similar names and the adoption of the UK regime, which empowers the Registrar to direct a change of name on its own initiative or upon receipt of valid complaints that are filed within 12 months of incorporation, without affecting the rights of affected persons having recourse to the courts at any time to procure the change of similar names. The process of rejecting identical, undesirable names and restricted names should remain unchanged. Owners of registered names, trade or service marks and trade names will continue to have recourse to the courts to protect their intellectual property rights.
4.4.2 We recommend the retention of the optional name reservation process where available names may be reserved upon application for a limited time period.
4.4.3 Arising from our recommendations, the distinctive registration number of Singapore-incorporated companies would become a useful identifier. S. 144, CA should be amended to require all companies to include their RCB registration numbers on all business letters, statements of account, invoices, official notes and publications, as well as in the name display at their registered office.
4.4.4 We also recommend the introduction of an electronic search facility that would make available all incorporated and reserved names, with a sub-index of currently reserved and new company names over a rolling 12- month period, for the following reasons: (i) to help applicants avoid choosing names that are too similar to existing names; and (ii) to enable existing companies to readily review recently incorporated and reserved names and lodge prompt administrative or court challenges against these names. Should this not be immediately feasible, we would
recommend an interim facility of currently reserved and new company names over a rolling 12-month period. The current declaration process, which links the name registration to trade and service mark registration, should be retained.
The CLRFC recommends the adoption of the UK regime, which empowers the Registrar of Companies and Businesses to direct a change of name on its own initiative or upon receipt of valid complaints that are filed within 12 months of incorporation.
Consolidation of Information to be filed
4.5 We have reviewed the filing documents currently prescribed for incorporation and recommend consolidation of the forms in order to eliminate duplication.
4.6 Creation of a consolidated form for incorporation
4.6.1 With the launch of RCB's electronic filing system, the documents required for incorporation will be streamlined. We recommend the consolidation of the current set of forms required for incorporation (i.e. Forms
6, 7, 24, 44, 45 and 49) into one transactional form, which includes the following information:
• Details of all persons named as proposed directors and subscribers i.e. names, addresses, identifications and nationalities;
• Share capital structure;
• Registered office address and opening hours;
• Type of entity formed; and
• A declaration that the identities of the officers and shareholders of the company are true and correct, and also all the relevant provisions of the CA and Regulations have been complied with. The requirement under s. 19(2), CA for a statutory declaration of compliance has been removed.
The CLRFC recommends the consolidation of the current set of forms required for incorporation into one form that is electronically submitted to the Registry of Companies and Businesses.
4.7 Consent to act as director and statement of non-disqualification
4.7.1 S. 146(1), CA requires a person named as a director or proposed director in the memorandum or articles of a company or in the register of directors or in a prospectus or statement in lieu of prospectus to lodge a consent to act in writing. The consent to act must be signed before a defined professional. The consent to act ensures that directors are appointed with their written consent, as the CA imposes regulatory and fiduciary duties on directors, who represent the only individuals ultimately responsible for
compliance. It is in the public interest that there be evidence of a director’s consent to act, in order to avoid subsequent disputes relating to the appointment or resignation of particular directors.
4.7.2 With the implementation of the electronic filing system by the RCB in January 2002, the director would indicate his consent to act electronically by using his CPF PAL-PIN or RCB PIN, which serves as a secure and unique verification of his identity. For directors who use professional agents, it continues to remain the duty of these agents to verify and confirm the identities and qualifications of these persons. The professional agent must additionally confirm that the person has given his consent to be a director.
The CLRFC recommends dispensing with the need for a director to give his consent in writing and for the form to be signed before a defined professional. The director would indicate his consent electronically by using his CPF PAL-PIN or RCB PIN, which would serve as a secure and unique verification of his identity. For directors who elect to go through professional agents, it shall be the duty of these agents to verify and confirm the identities, qualifications and consent of these persons.
4.8 Consent to act as company secretary
4.8.1 S. 171(1B), CA requires the company secretary to file his consent to act as company secretary with the RCB. With the implementation of electronic filing, we recommend that a company secretary give his consent electronically using his CPF PAL-PIN or RCB PIN as a secure and unique verification of his identity. For companies that are incorporated by professional agents, it remains the duty of the agents to verify and confirm the identities and qualifications of the company secretaries and their consent to act.
The CLRFC recommends allowing company secretaries to signify their consent to the Registry of Companies and Businesses electronically. The company secretary would use his CPF PAL-PIN or RCB PIN as a secure and unique verification of his identity. For companies that are incorporated by professional agents, it shall be the duty of the agents to verify and confirm the identities, qualifications and consents of the company secretaries.
5. CORPORATE PERSONALITY, MEMORANDUM AND ARTICLES OF ASSOCIATION/MODEL CONSTITUTION
1.1.3 Corporate personality
5.1 The application of the ultra vires doctrine has been ameliorated in Singapore by the enactment of s. 25, CA. It continues to have application to executory transactions
which may be set aside at the instance of aggrieved shareholders. It also has an impact on the authority of directors to bind the company as their principal.
5.2 Currently, a company sets out extensive object clauses in order to ensure that it can undertake all possible transactions. The CLRFC is of the view that the setting out of such object clauses serves no continuing value or public interest. We recommend the total abolition of the doctrine of ultra vires. A company should be statutorily conferred with all the powers of a natural person. Whilst third parties are thus protected, we recommend the retention of the ultra vires doctrine where the constitution of the company places limits on a company’s capacity and powers, by preserving the rights of internal redress by members against the directors.
5.3 We recommend adopting, with appropriate modifications, the original New Zealand Law Commission Company Law Reform and Restatement Report No 9[8], 1989, s. 7 and s. 8, which was not finally enacted. We find value in the approach as it clearly confers on companies all the legal capacity of natural persons.
“ 7. Separate personality
A company is a person in its own right separate from its shareholders, and continues in existence until it is removed from the New Zealand register in accordance with this Act.
8. Capacity and powers
(1) Subject to its constitution, a company
(a) has the capacity, rights, powers and privileges of a natural person, and
(b) without limiting paragraph (a), may do anything which it is permitted or required to do by its constitution or by any enactment or rule of law.
(2) No act of a company, including any transfer of property to or by a company, is invalid by reason only that the act or transfer is contrary to its constitution or this Act, but this subsection does not limit sections 126 [Injunctions to restrain action],
127 [Derivative actions], 131 [Personal action by shareholder against directors],
132 [Personal action by shareholder against company], and 135 [Prejudiced shareholders].”
5.4 We note that consequential amendments to the Legal Profession Act (Cap. 161), Accountants Act (Cap. 2) and other legislation regulating the professions which can be incorporated as companies would be necessary, to ensure that these incorporated professions confine their activities to those permitted under their respective legislation.
Constitutional Documents – Memorandum & Articles of Association
5.5 S. 19, CA requires every company to have its memorandum and its articles of association, if it has any, to be lodged with the RCB.
5.6 S. 22, CA prescribes the following minimum information for the memorandum:
° Company name
° Object Clauses
° Names, addresses and occupations of the subscribers
° Amount of share capital with which the company proposes to be registered and division of shares in a fixed amount
° Liability of members
° Names of first directors [alternatively to be stated in articles, s. 145, CA]
° That the subscribers are desirous of being formed into a company and agree to take up shares
5.7 S. 35(1), CA provides that companies limited by shares may lodge articles, but need not do so. If a company does not lodge any articles, s. 36, CA provides that the articles contained in the Fourth Schedule, Table A, CA would be adopted by default. Many Singapore-incorporated companies have lodged articles that are identical to the articles in Table A.
5.8 We recommend that the memorandum and articles of association be eliminated and replaced by a single model constitution which will form the default model constitution. Those who incorporate may register customised or modified constitutions upon incorporation. The company may make post-incorporation modifications to its constitution.
5.9 The model constitution would exclude statutory content prescription and should be user friendly for small business. The drafts generated in the UK Steering Committee Final Report 2001, Chapter 17 propose a default constitution that is organised along the lines of setting out the powers of directors to manage the company and their own proceedings; share capital, dividends and bonus issues, notices and indemnity and the procedures for the general meeting. In the UK White Paper on Modernising Company Law, the UK government accepted the recommendation for the law to provide a model default constitution for companies of each type (except for an unlimited company with no share capital). Companies would be free to adopt it in whole or in part or to adopt a constitution of their own.[9]
5.10 We recommend the adoption of the UK Steering Committee’s recommendation of a model constitution for private companies, which provides a set of default rules which are workable and suitable for most companies.
RECOMMENDATION 1.10
The CLRFC recommends the abolition of the ultra vires doctrine. A company should be statutorily conferred with all the powers of a natural person. However,
the ultra vires doctrine would be retained for the limited purpose of preserving the rights of internal redress by members against the directors, where the company’s constitution places limits on a company’s capacity and powers. It is proposed that Singapore adopt, with appropriate modifications, Sections 7 and 8 of the New Zealand Law Commission’s Company Law Reform and Restatement Draft Companies Act. We also recommend the replacement of the Memorandum and Articles of Association with a default constitution, modelled after the proposed constitution that would be adopted in the UK.
6 SIMPLIFICATION OF MAINTENANCE FOR PRIVATE COMPANIES
6.1 We propose to maintain a common regime for all companies. However, as private companies would remain the principal corporate vehicle for small business and start-ups, we propose to simplify the requirements for such companies.
6.2 One shareholder/one director companies
6.2.1 There is no continuing policy reason to require private companies to have a minimum of two shareholders and two directors. Allowing private companies to be incorporated with a minimum of one shareholder and one director would also reduce incorporation and maintenance costs. The UK, Australia and New Zealand require private companies to have at least one director.[10] For public companies, the UK and Australia currently prescribe a minimum of two and three directors respectively, whilst New Zealand requires at least one director. The UK is amending its law to make it possible for a single person to form both public and private companies[11].
6.2.2 We recommend that all private companies incorporated in Singapore be required to have at least one shareholder and one director who is ordinarily resident in Singapore. The single shareholder and director can be one and the same. In line with the UK approach, the sole director of a one-director company should not concurrently be its company secretary. We also recommend the retention of the existing requirement under s. 145, CA for public companies, i.e. a public company must have at least 2 shareholders and 2 directors, at least one of whom shall be ordinarily resident in Singapore.
6.2.3 As a safeguard, the CLRFC further recommends statutory conferment of powers upon the Court and the RCB to compel shareholders to appoint a director at any time where a company has ceased to have at least one ordinarily resident director.
6.2.4 We earlier recommended adapting s. 42, CA to provide that the remaining shareholders acquire personal liability, without limit, for the debts and obligations incurred by the company for the duration of the time when there is no director. Following
the public consultation, the CLRFC agrees that this may be unduly onerous particularly for international shareholders.
The CLRFC recommends that all private companies incorporated in Singapore be required to have at least one shareholder and one director who is ordinarily resident in Singapore. The shareholder and director can be the same person.
6.3 Notice period for shareholder meetings
6.3.1 Currently, under s. 177(2), CA, at least 14 days' notice must be given for meetings other than a meeting to pass a special resolution. The exceptions to this general rule are:
° S. 184, CA which requires 21 days' notice for special resolutions[12];
and
° S. 185, CA which requires 28 days' notice
for ordinary resolutions requiring special notifications.[13]
The company’s articles of association cannot override these statutorily prescribed notice periods.
6.3.2 S. 177(3), CA and s. 184(2), CA allow for the passing of ordinary and special resolutions at general meetings called at a shorter than prescribed notice period. This is useful for urgent actions. However, this can only be invoked by companies where 95% of those entitled to attend and vote agree to the shorter notice. In the case of annual general meetings, all members entitled to attend and vote must sign the consent for shorter notice. For special resolutions, s. 184(2), CA requires that the consent to shorter notice must be signed by a majority in number of shareholders having the right to attend and vote thereat, being a majority which together holds not less than 95% in nominal value of the shares of a company.
6.3.3 We recommend that all private companies be required to give at least 14 days’ notice for all meetings, including those called to propose special resolutions. The CLRFC is of the view that this reduction from 21 to 14 days for notice to propose special resolutions is reasonable in view of modern methods of communication which will not adversely impact the shareholder decision making process. The UK government
recently announced its support for the UK Steering Committee’s proposal to reduce the notice period for special resolutions from the current 21 days to 14 days[14].
6.3.4 However, we do not recommend the attenuation of the 28 days' requirement under s. 185, CA for resolutions requiring special notifications, which usually relate to the removal of auditors. We take the view that it continues to be important to allow the auditors sufficient time in such events to prepare their defence. S. 185, CA should therefore continue to apply to both private and public companies.
The CLRFC recommends that all private companies be required to give at least 14 days’ notice for all meetings, including those called to propose special resolutions. The CLRFC recommends the retention of the existing 28 days’ notice requirement for meetings called in order to propose resolutions requiring special notifications for all companies.
6.4 Written resolutions
6.4.1 There is currently no codification of the law of written resolutions. It has been held that the informal assent of all members of a company would have the effect of binding the company even if a special or other resolution or alteration of the articles is thereby effected (see Cane v Jones[15]). It is uncertain whether Cane v Jones has full application in Singapore in the light of s. 184, CA, which requires that 21 days’ written notice, specifying the intention to propose the special resolution, be given.
6.4.2 The assent of all members of a company, if expressed in a resolution in writing signed by or on behalf of all the members of the company who, at the date of the resolution would be entitled to vote at such a meeting, is often undertaken as paper meetings in small companies.
6.4.3 The UK Steering Committee Final Report[16] recommends that legislation should expressly state that any decision which the company has power to make, may be made without observing any of the formalities of the Act or the Company’s constitution where the members unanimously agree. We note that the UK Government has expressed reservations that the codification of the “unanimous consent rule” in legislation may achieve the unintended effect of rigidity and restriction. We would await final developments in the UK.
6.4.4 With regard to written resolutions where unanimity is not possible, legislation should expressly allow private companies' members to make decisions without the burden of the requirement to hold a general meeting. The UK Steering Committee Final Report recommends that written resolutions may be effected in private companies without the need for unanimity. Instead, written resolutions may be passed with 75%
and 50% majorities of those eligible to vote for special and ordinary resolutions respectively.17 We endorse this approach. In addition, in order to obtain prompt shareholder resolutions, legislation should also allow written resolutions to be passed through various forms of electronic communication. Similar to the approach in UK, the CLRFC recommends that electronic communication is to be used only where the resolution can be received in legible form, or a form which can be converted by the recipient into legible form.
6.4.5 In order to circumvent the use of written resolutions as a device to deprive dissenting shareholders of the opportunity to be heard in a shareholders’ meeting and to put questions to the board and management, we accordingly recommend a safeguard, which is to entitle a minimum threshold of shareholders (representing at least
5% of the outstanding ordinary shares), who can by written notice, demand that a general meeting be convened.
6.4.6 In public and listed companies, the rights of public shareholders to attend, speak and debate on resolutions is an expression of shareholder democracy and accountability which is not to be attenuated.
The CLRFC recommends that written resolutions in private companies may be passed with 75% and 50% majorities of those eligible to vote for special and ordinary resolutions respectively. In addition, legislation should be enacted to allow written resolutions to be passed through various forms of electronic communication. As a safeguard, the CLRFC further recommends that a minimum threshold of shareholders (representing at least 5% of the outstanding ordinary shares) can, by written notice, demand that a general meeting be convened.
6.5 Shareholder authorisation for allotment of shares
6.5.1 S. 161, CA requires shareholders’ authorisation for directors to allot shares, unless the directors have been specifically authorised to do so by the shareholders or by the company's articles.
6.5.2 When the Companies (Amendment) Bill was read in 1974 with respect to this provision, the rationale for s. 161, CA was primarily to protect the interests of shareholders against dilution and to allow them to be apprised of the reasons for capital enlargement.18 The approval of the shareholders need not be sought for each issue of shares as the CA permits renewable blanket annual approvals. We considered the positions in Australia and New Zealand, all of which do not statutorily prescribe the need for shareholder approval for the issue of new shares, thus leaving it to be determined by each company’s articles of association. We note that for listed companies, the SGX Listing Rules would continue to require shareholder approval or mandates for share issues which will provide continuing protection against dilution for minority shareholders.
6.5.3 We do not however recommend any change to the Singapore position as we are not aware of any change in conditions which detract from the policy reasons underpinning the introduction of the requirement for shareholder approval for the issue of new shares in 1974.
The CLRFC recommends no change to the rule under Section 161 of the Companies Act that requires shareholders’ authorisation for directors to allot shares.
6.6 PROFESSIONALLY QUALIFIED COMPANY SECRETARIES
6.6.1 S. 171, CA requires all companies to appoint a company secretary. In addition, s.
171(1A), CA prescribes the minimum professional qualifications of persons eligible to be appointed company secretaries. S. 171(5), CA prohibits a director from concurrently performing the services of a company secretary where the CA or the articles require an act to be done by a director and the secretary e.g. affixing the seal. In the UK, a director can concurrently be the company secretary unless he is the sole director of a one- director company[19].
6.6.2 The CLRFC affirms and restates the continuing public interest in the accuracy of public registers and filings. It is an integral part of our business environment that there exist publicly available and reliable information relating to companies, their capital structure, directors and shareholders. This is true for all companies. It is of continued importance therefore that the corporate records that are statutorily required be competently maintained.
6.6.3 The existing requirement in Singapore is more onerous than that in the other leading jurisdictions. The UK no longer imposes a statutory requirement for company secretaries of private companies to be professionally qualified. Public companies in the UK are still required to appoint professionally qualified company secretaries. The UK Steering Committee has proposed the total elimination of the need for private companies to appoint a company secretary provided the functions are performed[20]. In the UK White Paper on Modernising Company Law, the UK government agreed with the UK Steering Committee’s recommendation to remove the requirement for private companies to appoint company secretaries[21]. The UK government reiterated that “the requirement represents a regulatory burden on small private companies” and “while a company secretary can, for many companies, perform a highly valuable function, the specific role is not essential to good corporate governance”. In Hong Kong, both public
and private companies are not required to appoint professionally qualified company secretaries. In Australia, proprietary companies (similar to private companies) are not required to appoint company secretaries.
6.6.4 The CLRFC agrees with the public respondents that for a start, it would be good for each company to continue to have an appointed person whose responsibility is to ensure that the statutory registers and records are properly maintained. In this regard, we take the view that the requirement for all companies to appoint company secretaries be retained. However, with regard to private companies, in line with the UK, Australia and Hong Kong, we take the view that the law should not prescribe the qualifications of the company secretary.
6.6.5 We note further that with the proposed simplification of incorporation and compliance for private companies, there is a strong case to allow private companies to decide whether they want to undertake these responsibilities internally or appoint a professionally qualified company secretary.
6.6.6 The CLRFC has carefully considered expressed concerns that the preparation and filing of corporate records by non-professionally qualified persons could lead to improper and incomplete maintenance of statutory registers and filings, which would impair the accuracy and integrity of public information. Other views were expressed that the company secretary’s role is not limited to the maintenance of statutory registers and filings and that as an independent third party, the company secretary is more likely to be impartial in protecting the interests of the company as a whole. Having deliberated over the issues at length, and taking into account all the above, the CLRFC recommends, in line with the UK, Australia and Hong Kong, that private companies should be exempted from the requirement to appoint company secretaries from amongst legally prescribed categories.
6.6.7 The effect of this recommendation would be to reduce the maintenance costs for small business, as employees or directors of private companies would be able to perform company secretarial functions. Some private companies may make business decisions (as opposed to being obliged by law) to retain professionally qualified company secretaries. According to a survey from the Association of Small and Medium Enterprises (“ASME”), more than half of the companies surveyed indicated that they would continue to engage professionally qualified company secretaries, even if the law does not compel them to do so. In order to ensure that residual power exists to compel the maintenance of proper statutory records, we further recommend that the Registrar be empowered to order private companies to appoint professionally qualified company secretaries, where the Registrar is satisfied that such private company has failed to adequately maintain the corporate records in the manner prescribed by the CA.
The CLRFC affirms and restates the importance of corporate secretarial functions, and recommends that all companies continue to be required by law to appoint company secretaries. However, the CLRFC recommends that private companies be exempted from the statutory prescription to appoint professionally qualified company secretaries.
6.7 Accounting records
6.7.1 Companies are statutorily obliged to maintain proper accounting and other records which will sufficiently explain their transactions and financial position. The accounting records should enable true and fair profit and loss accounts and balance sheets to be prepared and audited.22 We recommend the retention of the following core elements relating to the accounts of companies:
a) to retain filing of accounting and other records as are necessary to explain the transactions and financial position of the company, but to review and simplify the form and content of such accounts and returns. (s. 199(1), CA)
b) to prepare individual and group accounts (s. 201A, CA)
c) to require all companies, with the exception of solvent exempt private companies, to file their accounts with RCB (s. 201, CA)
d) to require all companies to distribute accounts to their members (s. 203(1), CA)
e) to retain the annual reporting cycle ( s. 175, CA and s. 197, CA)
6.7.2 As the law will still require companies, including exempt private companies, to keep proper accounting records and prepare true and fair financial statements, the CLRFC believes that many companies would continue to engage professional book-keepers to ensure they satisfy the statutory requirements. According to a survey by ASME, 75% of the companies surveyed indicated that they would hire accounting firms as book-keepers, provided the fees are reasonable.
The CLRFC recommends the retention of the requirement for companies to continue to maintain proper accounting and other records which will sufficiently explain their transactions and financial position. In addition, the law will continue to require all companies to prepare true and fair financial statements.
6.8 Accounting Standards and Statutory Content Prescriptions
6.8.1 The statutory content prescriptions, s. 201 and 9th Schedule, CA were introduced in an era when accounting standards were evolving. As international and Singapore accounting standards today are well developed and comprehensive, it is timely to remove the statutory content prescriptions and the 9th Schedule from the CA. Instead, companies should be required by law to comply with the prescribed accounting standards. Accounting standards can better reflect changing market conditions and provide international comparability. Accordingly, we recommend that the statutory prescriptions contained in Part VI, CA and the 9th Schedule be recast and the 9th Schedule eliminated in favour of the prescribed accounting standards that will be adopted based on the recommendation of the Disclosure and Accounting Standards Committee. The CLRFC notes that the Companies (Amendment) Act 2002 has repealed the 9th Schedule, CA which is to be replaced by accounting standards prescribed by the Council on Corporate Disclosure and Governance (“CCDG”).
6.8.2 A related question is whether the Directors’ Report prescribed by s. 201(5), CA serves any continuing purpose and whether it should be replaced by an Operating and Financial Review (“OFR”) as proposed by the UK Steering Committee Final Report
[chapters 3 and 8]. In the UK, it has been proposed that an OFR be developed for public listed companies to provide a discussion and analysis of the performance of the business and the main trends and factors underlying the results and financial position and likely to affect performance in the future, so as to enable users to assess the strategies adopted by the business and the potential for successfully achieving them[23]. The OFR would “include information on direction, performance and dynamics (capital projects, risks etc) and on all other aspects which the directors judge necessary to an understanding of the business, such as key business relationships and environmental and social impacts.” 24
6.8.3 We recommend that for all unlisted companies, the statutory requirement for the directors’ report be repealed and replaced with a requirement to submit a modified form of the OFR, the contents of which would be prescribed by the CCDG[25]. We recommend that this modified form of the OFR include directors’ statements relating to the true and fair view of the accounts and the company’s ability to meet its debts as and when they fall due (both as currently expressed in s. 201(15), CA). We also recommend that listed companies should be required to produce an OFR, the contents of which would be prescribed by the CCDG and the SGX.
The CLRFC recommends that listed companies should be required to produce an Operating and Financial Review, the contents of which would be prescribed by the Council on Corporate Disclosure and Governance and the Singapore Exchange. The CLRFC further recommends that for all unlisted companies, the statutory requirement for the directors’ report [as prescribed by Sections 201(5) and 201(6) of the Companies Act] should be repealed and replaced with a requirement to submit a modified form of the Operating and Financial Review. This modified form of the Operating and Financial Review would include directors’ statements relating to the true and fair view of the accounts and the company’s ability to meet its debts as and when they fall due.
6.9 Removal of statutory requirement of audit
6.9.1 S. 201(4), CA requires all accounts placed before the general meeting to be audited and s. 207, CA prescribes the content of the auditor’s report. S. 207(9), CA imposes a statutory duty on the auditor to report to the Registrar, if in the performance of his duties as auditor, he is satisfied that there has been a breach or non-observance
of the CA which has not been and will not be adequately dealt with by his report or by his bringing it to the attention of the directors. Where he has reason to believe that a serious offence involving fraud or other dishonesty is being or has been committed by the officers or employees of a public company or a subsidiary of a public company, he is obliged under s. 207(9A), CA to immediately report the matter to the Minister.
6.9.2 The proposal to remove the statutory requirement of audit has understandably raised much interest from the accounting profession who has quite correctly stated the importance of independent external audit. Some have argued that businesses which do not wish to bear the costs of an external audit should instead be structured as limited liability partnerships. On the other hand, respondents from the business sector support the removal of the statutory requirement for audit, and the leaving of such decisions to market forces. We note the comments from several respondents, including accountants, who support the removal of the statutory requirement of audit for dormant companies.
6.9.3 Having considered the responses, we reiterate that our approach to this issue has not been taken with a view to discounting the value of audit. Rather, we have re- examined the case for a statutory requirement for exempt private companies to have external audit, in light of the fact that leading jurisdictions such as the US, UK and Australia do not impose such a statutory cost on small business, but leave such decisions to be determined by market demands. In addition, we considered the dormant company and noted that neither the UK nor Hong Kong requires dormant companies to have their accounts audited.
6.9.4 S. 250(3) of the UK Companies Act states that a company is dormant during any period in which it has no significant accounting transactions[26] during a financial year. This applies to both public and private companies. The UK does not statutorily require dormant companies to have their accounts audited. We propose that Singapore should adopt the UK definition of a dormant company. The CLRFC is of the view that there is a strong case to remove the statutory requirement of audit for dormant companies in Singapore. This should be done as soon as possible. Such a requirement serves no public purpose and imposes unnecessary costs on dormant companies.
6.9.5 The CLRFC also considered the retention of the statutory requirement of audit for exempt private companies. More than 80% of exempt private companies have shareholders who are also directors, i.e. they are owner-managed. In such companies, the case for statutory audit as a means to protect shareholders’ interest is less strong, if the law provides that a certain percentage of shareholders can demand that an audit be conducted. Other parties who deal with such companies, such as banks and creditors, can continue to require audited accounts. According to the ASME survey, 78% of companies surveyed indicated that they would continue to have their accounts audited,
even if the law does not compel them to do so. The companies expected that banks and finance companies would continue to require audited accounts before extending credit facilities. Many respondents to the ASME survey also expected their shareholders to continue to require audited accounts. We note that exempt private companies include companies that are gazetted by the Minister in the national interest. With respect to these companies, we expect that the government would continue to require such companies to prepare audited accounts.
6.9.6 The CLRFC considered the view that public disclosure would be affected if the statutory requirement of audit for exempt private companies is removed. Currently, an exempt private company does not need to submit its accounts to the RCB if it files a declaration of solvency. The company is only required to send its audited accounts to shareholders. In other words, the public currently does not have access to the accounts of exempt private companies. Hence, we do not think that our proposal will lower the quality of public disclosure and the information that the public can obtain from the RCB.
6.9.7 During the public consultation, several respondents expressed concerns that the CLRFC’s preliminary proposal to remove statutory audit for all exempt private companies would also exempt large companies which ought not to be so exempted. It was suggested that Singapore should adopt the approach in UK and Australia, where only small companies (defined according to criteria such as turnover, assets and number of employees) would qualify for audit exemption. The thresholds for these criteria can be raised over time.
6.9.8 The international trend, however, is in the direction of the removal of statutory audit for all private companies. However, the CLRFC agrees with the respondents that this should not be implemented overnight. A better approach is to introduce the changes in phases. The CLRFC is of the view that as the exempt private company structure has met the needs of small business in Singapore for many years, it would provide a good starting point for implementing the proposal to remove statutory audit.
6.9.9 To address the concern that the universe of exempt private companies includes large companies, the CLRFC recommends removing statutory audit for exempt private companies with annual turnover below S$5 million. This will take effect after the Companies Act is amended. The law should empower the Minister to raise the threshold over time. This approach will exclude the bigger exempt private companies, while allowing the smaller companies, especially start-ups, to benefit from the recommendation. The S$5 million turnover threshold is comparable to the thresholds in the UK and Australia. The CLRFC notes that the Statements of Accounting Standards
(“SAS”) on Cash Flow Statements, i.e. SAS 7, uses S$5 million turnover as one of the criteria for defining small companies that can be exempted from SAS 7.
6.9.10 Whilst the requirement of external audit would be elective for exempt private companies with annual turnover below S$5 million, the statutory obligation to maintain accounting records remains. We recommend that the directors of such companies be required to issue an annual statement, stating that the company has: (i) kept accounting
records that correctly record and explain the transactions and the company’s financial results and position; (ii) kept accounting records in such a manner as would enable true and fair financial statements of the company to be prepared, and (iii) kept its accounting records in such a manner as would enable the accounts of the company to be conveniently and properly audited. Additionally, we recommend that a minimum threshold of shareholders’ consent (representing at least 5% of the outstanding ordinary shares) would be sufficient to compel the company to prepare audited accounts. The law should also empower the Registrar to compel a company to submit audited accounts.
The CLRFC recommends that exempt private companies with annual turnover below S$5 million and dormant companies be exempted from preparing or filing audited accounts. The turnover threshold can be raised over time. The CLRFC further recommends that shareholders representing at least 5% of the outstanding ordinary shares be entitled to require such companies to prepare audited accounts. The Registrar of Companies and Businesses should also be empowered to require a company to submit audited accounts.
6.10 Filing of Annual Return and Accounts for Exempt Private Companies
6.10.1 Currently, an exempt private company is only required to file a set of Annual Return as prescribed under 8th Schedule, CA and a certificate signed by its directors and auditor that the company appeared to have been able to meet its liabilities as and when they fall due.
6.10.2 We hold the view that there remains a continued public interest for the disclosure and filing of abbreviated financial information with respect to exempt private companies. However, we propose to streamline the Annual Return to be filed by exempt private companies. We further recommend that the declaration of solvency to be filed by exempt companies be required to be signed by one director who is authorised to do so for and on behalf of the whole Board. The auditor’s signature would not be required.
6.10.3 Should an exempt private company be unable to file the declaration of solvency, it will be required to file a set of unaudited accounts, which would be prepared in accordance with the format to be prescribed by the CCDG.
The CLRFC recommends that exempt private companies file a declaration of solvency every year. The declaration would be signed by one director who is authorised to do so for and on behalf of the whole Board, failing which a set of unaudited accounts must be filed.
6.11 Electronic Statutory Registers
6.11.1 The CA prescribes that companies must maintain the following registers, which are open to public inspection.
° Register of members [s. 190, CA]
° Register of directors, auditors, managers and secretaries [s. 171 and s. 173, CA]
° Register of directors' shareholding and other interest [s. 164(1) and s. 164(8), CA]
° Register of mortgage and charges [s. 138(2), CA]
° Register of substantial shareholders for companies listed on SGX [s. 88(1), CA]
° Register of debenture holders [s. 93, CA]
6.11.2 These registers would allow any member of public to find out the current particulars of shareholders, substantial shareholders, debenture holders, officers and security against the company’s assets. The public records of the RCB, which would be available through the Internet, provide the added dimension of confidentiality and anonymity for the searcher.
6.11.3 The CLRFC notes that the SEC maintains publicly accessible electronic databases (EDGAR), which enables real time public searches of information filed with the SEC. The CLRFC recommends that Singapore should move towards an entirely electronic filing system, which would include the maintenance of publicly accessible corporate registers. Such a system would ensure that all corporate and securities registers are maintained and open to public inspection in real time which would render unnecessary the statutory requirement for companies to separately maintain publicly accessible registers.
The CLRFC recommends that Singapore move towards an entirely electronic filing system, which would include the maintenance of publicly accessible corporate registers.
7 DISSOLUTION OF COMPANIES
7.1 The most cost-effective method of dissolution of a company which falls within the definition of the “dormant company” is the striking-off process in s. 344, CA. This avenue is open to all companies, private or public.
7.2 Any person aggrieved by the striking-off has 15 years to apply to the court for reinstatement of the company. For companies which have been dissolved through the winding-up process, s. 343, CA provides a two-year time frame for reinstatement applications. The rationale being that where a company has gone through a proper winding up procedure, including procedures for dealing with its assets and liabilities, a shorter period should be available for reversing the process.
7.3 In the UK, companies are currently given more time. A dissolved company is given 2 years to apply for reinstatement, while a struck off company has 20 years to
submit its reinstatement application.[27] The UK Steering Committee has recommended a reinstatement time frame of 6 years[28] after winding up, subject to the courts having a discretion to waive such limitation in special cases, e.g. in personal injury cases where the impact may only be discovered long after the company is dissolved.
7.4 We have reviewed the time frames required with regard to reinstatement applications with a view to simplifying and streamlining the process and take the position that no change is necessary.
The CLRFC recommends the retention of the existing time frames for all companies, which have either been struck-off the register or wound-up, to submit their reinstatement applications.
COMPANY LEGISLATION
AND REGULATORY FRAMEWORK COMMITTEE REPORT
1. INTRODUCTION
1.1 In this Chapter, we have reviewed Part IV of the CA, as it relates to capital raising, capital maintenance and company charges, as well as the recently enacted SFA as it affects capital raising and collective investment schemes.
1.2 In our review, we have sought to achieve the following objectives:
(a) to streamline and update the CA in the light of superseding accounting standards and practices;
(b) to enable companies to design appropriate capital structures which best suit their needs, provided there is full disclosure;
(c) to promote the further growth and development of the Singapore securities market within a disclosure based regulatory regime, in alignment with prevailing international market standards and practices in New York, London, Tokyo and Hong Kong.
1.3 In addition to the UK Company Law Review Steering Group Final Report and Consultation Documents as well as the UK White Paper on Modernising Company Law, we have taken into account the following:
(a) the SFA, the MAS consultation paper of 21 March 2001, and the Singapore Code on Takeovers and
Mergers;
(b) UK's Companies Act 1985, Financial Services and Markets Act 2000 c.8 ("FSMA 2000"), Financial
Services Act 1986 ("FSA"), the Public Offers of Securities Regulations 1995 No.1537 (as amended)
("POSR");
(c) Australia's Corporations Act 2001 (as amended on 15 July 2001) and proposed CLERP 6 amendments;
(d) Canada's Business Corporations Act 1975; and
(e) New Zealand's Companies Act 1993.
2. CAPITAL RAISING
2.1 "Public, private and exempted offers" and the prospectus regime
2.1.1 The existing imprecision in defining and distinguishing between public from private offerings, coupled with piecemeal exemption amendments, has resulted in practical difficulties for structuring private and exempted offerings which do not require full prospectuses. This is unsatisfactory and clearly in need of reform to facilitate more efficient capital raising in a modern economy.
2.1.2 S. 240, SFA (the equivalent of the previous s. 43, CA) provides that no person shall make an offer to the public of shares or debentures or units of shares or debentures unless a prospectus or a profile statement has been registered with MAS. However, the term "offer to the public" is not clearly defined. The consequence is that what constitutes an "offer to the public" and what by implication are “private offerings”, is dependent on differing legal opinion based on extrapolation of legal principles, case law and the particular characteristics of each offering. S.
240, SFA retains this concept of offers to the public.
2.1.3 In Australia, the distinction between public and private offerings ceased to be significant from 1995 (except possibly where a company's articles of association continue to forbid offers to the public). Although the distinction
is still relevant in the UK and Hong Kong, their respective legislation provides more comprehensive exemptions and thus clarity.
2.1.4 We recommend that all offerings of securities be accompanied by a full prospectus unless the offering is an exempted offering. The legislation should provide a comprehensive list of exemptions or “safe harbours”, which would include the existing universe of exemptions as well as private capital raising. We additionally recommend a sweep-up exemption provision which will empower the Minister or the MAS to prescribe further exemptions for other forms of capital raising which merit exemption. This approach would promote certainty and thus facilitate more efficient capital raising.
2.1.5 We further recommend that all offerings of securities pursuant to an exemption or “safe harbour” should not attract any prescribed prospectus content or registration requirements. What is to be disclosed in each form of exempted or “safe harbour” offering should be left to market requirements. This would additionally enable ‘safe harbour’ offerings of international securities issues to be made in Singapore with minimal compliance costs. It would also lower the cost of capital raising through private offerings and other exempted offerings.
The CLRFC recommends that the existing boundaries between public and private offerings be replaced by an approach which requires a full prospectus for all offerings of securities, unless the offering is an exempted offering. A comprehensive list of exemptions or “safe harbours”, which comprises the existing universe of exempted offerings as well as private offerings, should be provided. The Minister or the Monetary Authority of Singapore should be empowered to prescribe further exemptions for other forms of capital raising which merit exemption. The CLRFC further recommends that there should be no prescribed prospectus content and registration requirements for offerings of securities that fall within the list of exemptions or “safe harbours”.
2.2 Disclosure documents
2.2.1 The current types of prospectuses that are prescribed by law are: a full prospectus, an abridged prospectus, a statement of material facts and a profile statement. The significance and content of each of these are not readily understandable by international and domestic investors. It is timely for us to re-label the types of prospectuses that are required in Singapore. A prospectus is a universally understood expression, as is a profile statement, which refers to an abbreviated prospectus concurrently issued with a full prospectus.
2.2.2 There is a case for the abolition of the abridged prospectus. With the statutory requirement for continuous disclosure in s. 203, SFA, and the expected introduction of quarterly reporting for SGX listed companies from 2003, investors would have publicly accessible information to evaluate fresh offerings by SGX listed offerors. We recommend abolishing the abridged prospectus. This should be replaced by a common standard filing, which would be required for rights and other similar offerings regulated by a statement of material facts. The statement of material facts should, for rights issues, require disclosure on the impact of the rights issue on earnings per share and the net tangible assets of the issuer. In addition, the statement of material facts should be renamed to more accurately describe its significance and content.
RECOMMENDATION 2.2
The CLRFC recommends the abolition of the abridged prospectus and its replacement with a common standard filing, which would be required for rights and other similar offerings regulated by a statement of material facts.
2.3 Exempted Offers
2.3.1 Currently, the exemptions/exclusions for shares/debentures are found in Subdivision (4) of Division 1 of Part XIII, SFA (previously Division 5A of Part IV of the CA) and for collective investment schemes, are found in Subdivision (4) of Division 2 of Part XIII, SFA. We have examined each of the Subdivision (4) of Division 1 of Part XIII, SFA exemptions and would make the following recommendations for improvement. Our recommendations for additional exemptions have been made with a view to facilitating capital raising in Singapore.
1.1.4 To extend Subdivision (4) of Division 1 of Part XIII, SFA to collective investment schemes
2.3.2 We note that s. 303 – s. 305, SFA contemplate the extension of some of the exemptions available to offerings of shares and debentures to collective investment schemes. We recommend that the whole range of exemptions be similarly extended to collective investment schemes, without additional prescription, save for investments where clearly identifiable public interests justify differential treatment. This will clarify the regulatory position and facilitate capital raising through the issue of units in collective investment schemes.
The CLRFC recommends that all the exemptions relating to offers of shares and debentures be extended to collective investment schemes, without additional prescription, save for investments where clearly identifiable public interests justify additional prescription.
To clarify that no Singapore prospectus is required for acquisitions of non-Singapore incorporated corporations with
Singapore resident shareholders
2.3.4 S. 273(1)(a), SFA (previously s. 106B(1)(a), CA) provides that prospectus registration requirements do not apply to an offer or invitation to the public in respect of shares or debentures, or units of shares or debentures, if it is made in connection with a takeover scheme which is in compliance with the relevant takeover provisions. The Singapore Code on Takeovers and Mergers applies only to target companies which are Singapore incorporated listed companies, and unlisted companies with 50 or more shareholders and net tangible assets of S$5 million. This exemption, as currently drafted, would not be accorded to non-Singapore incorporated target companies (with Singapore resident shareholders) which offer shares in consideration of the offer. As the costs of Singapore compliance do not commensurate with the number of Singapore resident shareholders, such offering documents are often not sent to Singapore-resident shareholders. We see no compelling reason to deprive Singapore resident shareholders of non-Singapore incorporated companies from receiving such offer documents. Accordingly, we recommend that s. 273(1)(a), SFA be expanded to exclude such offerors from complying with prospectus requirements. This is similar to the UK position where a takeover of a foreign company involving an issue of shares by the offeror is exempted from their prospectus requirements.
RECOMMENDATION 2.4
The CLRFC recommends that Section 273(1)(a) of the Securities and Futures Act be extended to exempt offer documents made in connection with a takeover offer which is in compliance with the applicable laws of the country of incorporation of the target company.
To further exempt covered warrants listed in Singapore
2.3.5 S. 273(1)(b), SFA (previously s. 106B(1)(b), CA) provides that a prospectus need not be registered for offers of units of shares or debentures where such units of shares or debentures have been previously issued and are of a class that are quoted or listed for quotation on an approved Singapore securities exchange (currently the Singapore Exchange Securities Trading Limited (“SGX”)). This exemption creates some difficulty, as issues of covered warrants would only be exempted under s. 273(1)(b), SFA if the covered warrants themselves are previously issued and listed on SGX. A primary issue of covered warrants would not be included in this exemption.
2.3.6 For covered warrants that are over shares or debentures which were themselves previously issued and listed on SGX, information on the issuer of the shares or debentures would already be out in the market (by virtue of the listed issuer's disclosure obligations in the SGX Listing Manual, and with the added statutory force of such continuous disclosure in s. 203, SFA). We see no reason to require a further issue of a prospectus in respect of the covered warrants themselves. However, we recognise that information on the terms and conditions of the warrants and information on the issuer of the warrants ought to be readily available in the market. To safeguard investors' interests, we recommend that for listed covered warrants, where the underlying securities are listed on SGX
(information would thus be available in the market on the underlying securities), SGX should be the relevant agency to prescribe disclosure information for these covered warrants.
2.3.7 In relation to listed covered warrants where the underlying securities are listed on recognised international exchanges, SGX should also be the relevant agency to prescribe disclosure information. We would assume that the necessary infrastructure does exist in Singapore to provide access to SGX investors on information disclosed to investors through the international exchanges.
2.3.8 We see no benefit in regulating unlisted covered warrants that are traded by regulated financial institutions and would recommend that this market remains unregulated by statute.
RECOMMENDATION 2.5
The CLRFC recommends that Section 273(1)(b) of the Securities and Futures Act be extended to exempt the following issues of covered warrants from prospectus requirements:
(c) primary issues of listed covered warrants over securities listed on the Singapore Exchange. The CLRFC recommends that the Singapore Exchange should be the agency to prescribe the disclosure requirements for listed covered warrants.
(d) issues of listed covered warrants where the underlying securities are previously issued and listed on recognised international exchanges. The CLRFC recommends that the Singapore Exchange should be the agency to
determine the disclosure requirements and appropriate access arrangements for Singapore investors of information relating to the underlying securities.
The CLRFC further recommends that issue and trading of unlisted covered warrants by regulated financial institutions should continue to be unregulated by statute.
1.1.5 To broaden the employee share option scheme exemption
2.3.9 We recommend broadening the scope of the employee share option schemes exemption, that is currently provided by s. 273(1)(c), SFA (previously s. 106B(1)(c), CA), in order to bring it in line with both the UK and Australian positions. In the UK, prospectus requirements do not apply to offers of securities to bona fide employees or former employees of the corporation or a body corporate in the same group or the wife, husband, widow, widower or child or stepchild under the age of 18 of such employee or former employee. In Australia, no disclosure document needs to be issued in respect of offers of securities to an executive officer of the corporation or related corporation or their spouse, parent, child, brother or sister. In addition, no disclosure document needs to be issued in respect of offers of options if no consideration is to be provided for the issue or transfer of the options and for the underlying securities on the exercise of the option. We would recommend adoption of the UK model (para. 16 of Schedule 11 of the FSMA 2000) which specifically covers options given to employees of another body corporate in the same group, thereby broadening the exemption to group schemes. We see no reason to limit the entitlement of former employees by introducing a time limit of eligibility. This would give companies and employees more flexibility, while keeping in line with the intention of the exemption.
The CLRFC recommends that the exemption under Section 273(1)(c) of the Securities and Futures Act be extended to offers of securities by a company to bona fide employees or former employees of the company or a company in the same group or the wife, husband, widow, widower or child or stepchild under the age of 18 of such employee or former employee.
1.1.6 To repeal s. 256, SFA
2.3.10 S. 277, SFA (previously s. 106F, CA) provides that the prospectus requirements do not apply to an offer of shares or debentures which are not previously issued but are uniform in all respects with shares or debentures previously issued and listed for quotation on a stock exchange, if a statement of material facts is lodged with MAS and SGX. We compared s. 277, SFA with s. 256, SFA (previously s. 44, CA), which requires an abridged prospectus to be issued for renounceable listed rights issues by Singapore incorporated companies. We take the view that, in principle, there is no reason for this differential treatment. Rights entitlements (even though they are renounceable) are initially given to existing shareholders of the company. An offer under s. 277, SFA could
apply to persons other than existing shareholders of the company. We do not see any reason for greater disclosure requirement to be prescribed for existing shareholders in the abridged prospectus for rights issues, as opposed to (possibly) non-shareholders in the statement of material facts for s. 277, SFA issues.
2.3.11 Given the overlap between s. 256, SFA and s. 277, SFA, we recommend that s.
256, SFA be repealed. Instead, rights issues by listed issuers incorporated in Singapore would have to comply with s. 277, SFA and a statement of material facts must be issued.
The CLRFC recommends repealing Section 256 of the Securities and Futures Act. Rights issues by listed issuers would have to comply with Section 277 of the Securities and Futures Act and a statement of material facts must be issued.
2.4 Refinement of existing exemptions
1.1.7 S. 274, SFA and s. 275, SFA (Previously s. 106C, CA and s. 106D, CA)
2.4.1 We recommend the retention of the existing exemptions under s. 274, SFA (previously s. 106C, CA) for institutional investors and s. 275, SFA (previously s. 106D, CA) for sophisticated investors. For offers to sophisticated investors under s. 275, SFA, offering materials like an information memorandum may only be distributed after being lodged with the MAS. We recommend removing the requirement for the information memorandum to be lodged with the MAS.
2.4.2 The s. 275, SFA exemption is frequently invoked as part of a global offering and in such cases, the information memorandum content is determined by international market demands. In a marketplace of sophisticated investors, we see no continuing value in the MAS taking on the role of a depository of information memoranda of exempted offerings, whether the offerings are listed or unlisted. The issuers and their advisers would, as a matter of prudence, maintain the same records and evidence as they have hitherto filed with the MAS so as to be able to establish their compliance with the exemption if investigated or challenged by regulators, investors or the public. Where the issuers invoking the exemptions are listed companies, information would already be available in the market. Where issuers are unlisted, the record kept by the issuers and their advisers should suffice. There is no countervailing public interest to be served in requiring the MAS to be a depository of exempted offering documents, which has the effect of increasing transaction costs. The efficacy of Form 3, which is to be lodged upon invocation of an exemption continues to be questionable as it adds a layer of administration cost without commensurate public interest or protection.
The CLRFC recommends that the existing exemptions in Section 274 and Section
275 of the Securities and Futures Act be retained. The current requirement to lodge the information memoranda and Form 3 with the Monetary Authority of Singapore should be dispensed with.
1.1.8 Insertion of “s. 273(3)” for s. 280, SFA [previously s. 106I(1), CA] to dispense with filing of notice
2.4.3 With respect to s. 280(1), SFA (previously s. 106I(1), CA), we would recommend the insertion of "s.
273(3)" as another instance to be exempted from the obligation to file a notice. S. 273(3), SFA (previously s.
106B(2), CA) deals with Ministerial exemptions which, where obtained, ought not to additionally require the filing of a notice to invoke such exemption. The Minister could, in appropriate cases, still require such filing as one of the conditions of exemption. Further, we do not see any reason why Singapore-incorporated issuers invoking these exemptions should be additionally required to maintain a register of such issues, whilst non-Singapore incorporated issuers making such exempted offers in Singapore are exempted from doing so. We would accordingly recommend the repeal of s. 280(2) – s. 280(5), SFA (previously s. 106I(2) – s. 106I(5), CA.
The CLRFC recommends that offers exempted under Section 273(3) of the Securities and Futures Act should not be required to file a notice to invoke the exemption. The CLRFC further recommends repealing Sections 280(2) – (5) of the Securities and Futures Act. Issuers invoking the exemption under Section 273(3) of the Securities and Futures Act need not maintain a register of such issues.
2.5 New exemptions
2.5.1 We considered the need to maintain the existing private placement exemptions as well as provide for small offering exemptions. We recognise that there will be some degree of overlap between these two exemptions, which are nevertheless necessary in order to preserve the continued availability of private capital raising, as currently exists under Singapore law. We recommend the introduction of the following new exemptions.
Private placement exemption
2.5.2 The CLRFC is of the view that it would be useful to introduce a private placement exemption which would make it clear that issuers may make offers to not more than 20 pre-identified or targeted offerees, without any restrictions on the type of offerees. The private placement exemption would be one of the "safe harbours" for which a prospectus is not required. Furthermore, no filing with the MAS would need to be made in respect of such private placements. The concept of the private placement exemption is no different from what exists under the current regime in the SFA. Under the current law, offers can be made without a prospectus where the offer is not an offer to the public, i.e. a private placement. What does or does not constitute a public offering is currently not clearly defined in the SFA and the structuring and characterisation of an offer is often subject to differing legal opinions.
2.5.3 In determining the 20-person limit, we considered a range of between 20 to 50 persons. In the UK and Hong Kong, private placements to no more than 50 unconnected persons are considered exempt offers. In the US, the limit for private placement is 35 offerees. We are of the view that as a start, 50 persons would be too numerous a group of investors in Singapore’s context. The current legal opinion as to what constitutes a private placement is generally a much lower number of persons ranging from 5 to 20 persons. Given the range of current legal opinions, the CLRFC recommends a 20-person limit. The legislation should empower the Minister to raise the threshold, when it is appropriate to do so in future.
2.5.4 We considered whether the limit should be on the number of offerees or on the number of persons accepting the offer. If the limit relates to the number of persons accepting the offer, the private placement exemption would capture a larger group of persons than desirable at this time. We therefore recommend a private placement exemption which would make it clear that issuers may make offers to not more than 20 pre-identified or targetted offerees. We wish to clarify that in addition to the private placement, the offeror can concurrently raise capital from an unlimited number of institutional and sophisticated investors.
2.5.5 We further considered whether it would be beneficial to impose resale restrictions (e.g. for a six-month period after the allotment or purchase). Under current law, there are no resale restrictions for private placements and we therefore propose that there should not be any resale restrictions imposed on private placements. In any event, any resale would be subject to the general rule for a prospectus to be filed, unless the resale is itself an exempted offering.
2.5.6 We also considered the issue of whether a maximum limit should be imposed on the amount of funds raised. Under the current law, there is no maximum limit on funds raised by way of private placement. Accordingly, we do not recommend a maximum limit on funds raised.
2.5.7 We have considered whether there ought to be any further restrictions relating to advertisements. We are of the view that no further restrictions are required, as the focus is on the number of offerees and not the number of acceptances. However, if the need arises, consideration may be given to introduce advertisement restrictions along the lines of s. 734(1), Australia's Corporations Act 2001, which provides that a person must not advertise or publish a statement that directly or indirectly refers to an offer or intended offer of securities which falls within the Australian full small offering exclusion
(20 issues in 12 months and an upper limit of A$2 million). We do not recommend that a filing be made with MAS in order to invoke the exclusion. We also do not recommend that a warning statement be included on the cover page of any offering materials stating that the shares or debentures are offered pursuant to the private placement exclusion. This is consistent with the position under current law in respect of offers which are not offers to the “public”. Whether or not warning statements are introduced in each case is to be left to the relevant target market. Where such private placements are made through licensed intermediaries, it is likely that selling restrictions will be fully set out whilst other private placements may be informally documented but comply fully with the exemption.
1.1.8.1.1.1.1.1.1 RECOMMENDATION 2.10
The CLRFC recommends the introduction of a private placement exemption for offers to up to 20 pre-identified offerees to raise unlimited funds without any statutorily prescribed prospectus content or filing, and without resale restrictions. The Minister should be empowered to raise the threshold number of pre-identified offerees when appropriate.
Small offering exemption
2.5.8 Our proposed small offering exemption would be a hybrid of the Australian full small offering exclusion (20 issues in 12 months, and an upper limit of A$2 million) and their partial small offering exclusion (A$5 million for which an offer information statement is required). For Singapore, we propose a S$5 million limit in 12 months. The small offering exemption should be limited to offerees who have:
(a) previous contact with the person making the offer; or
(b) some professional or other connection with the person making the offer; or
(c) indicated that they are interested in offers of that kind through some statements or actions.
2.5.9 We considered a lower limit but concluded that a S$5 million limit in 12 months would be sufficient safeguard, particularly in light of the restrictions on the types of persons to whom the shares or debentures may be offered. The S$5 million limit is to be computed on the amount of funds raised. There would be no limit on the number of persons from whom these funds may be raised.
2.5.10 We also considered whether it would be beneficial to impose resale restrictions for small offerings. As the initial offering is limited to certain offerees (as defined in para 2.5.8), we propose that resale restrictions should be imposed for six months after the allotment or purchase of securities made pursuant to a small offering exemption. During the six-month period, resales should be restricted to persons who have similar relationships with the offeror.
2.5.11 We further recommend that any offering materials must include a statement on the front cover to notify offerees that the shares or debentures are being offered pursuant to the small offering exemption.
1.1.8.1.1.1.1.1.2 RECOMMENDATION 2.11
The CLRFC recommends the introduction of a small offering exemption for offers of up to S$5 million (computed based on the funds raised) in 12 months to offerees who have:
(d) previous contact with the person making the offer; or
(e) some professional or other connection with the person making the offer; or
(f) indicated that they are interested in offers of that kind through some statements of actions.
Resale restrictions should be imposed for six months after the allotment or purchase of securities made pursuant to the small offering exemption to confine such resales to persons who have similar relationships with the offeror. Any offering materials must include a statement on the front cover of the offering materials to notify offerees that the shares or debentures are being offered pursuant to the small offering exemption.
2.6 Public Offerings of debentures
2.6.1 S. 240, SFA (previously s. 43, CA) governs offers of debentures or units of debentures in a corporation to the public. S. 244, SFA (previously s. 44, CA) provides that an invitation to the public to deposit money with or lend money to a corporation
shall not be issued, circulated or distributed by the corporation unless the requirements set out therein are complied with. S. 240 and s. 244, SFA represent historical attempts to address the inherent overlap between deposit taking and debenture issues. These attempts have been superceded by more recent banking legislation relating to deposit taking as expressed in s. 4A, Banking Act (Cap. 19). Deposit taking by unlicensed or unexempted institutions would constitute an offence under s. 4A(1), Banking Act.
2.6.2 S. 239(3), SFA operates to treat corporate invitations to deposit or lend as offerings of debentures, thereby bringing on board all prospectus and other compliance requirements of the SFA. In the light of this, s. 244, SFA (particularly in its attempt to restrict the description of corporate debt obligations to a list set out in s. 244(1)(c), SFA) is no longer useful. We would accordingly recommend the repeal of s. 244, SFA and the clarification in the Banking Act that the issue of corporate debt securities in compliance with or as exempted under the SFA do not constitute deposit taking for the purposes of s. 4A, Banking Act.
2.6.3 In addition, whilst s. 244, SFA makes it clear that banks are exempted from the s.
244, SFA prospectus requirements (by virtue of s. 244 (6), SFA) in respect of invitations to the public to deposit money with it, the SFA should clarify that deposits with banks
(particularly certificates of deposits) are not “debentures” for the purposes of Part XIII of the SFA. Regulation of deposit taking by banks should be within the purview of the Banking Act and not corporate legislation. However, where banks issue securities, there is no reason why they should not be similarly obliged to comply with the prospectus requirements of the SFA. There admittedly exists today an increasing congruence of banking products and securities and a distinction should be made between banking products which involve taking deposits (which would be regulated under the Banking Act) and products which are classified as debentures or other debt securities (which would be regulated in the SFA).
The CLRFC recommends the repeal of Section 244 of the Securities and Futures Act and the clarification in Section 4A of the Banking Act that corporate debt issues which comply with or are exempted under the Securities and Futures Act do not constitute deposit taking. In addition, the CLRFC recommends that the Securities and Futures Act should clarify that deposits with banks are not
“debentures” for the purposes of Part XIII of the Securities and Futures Act.
2.7 Differing regulation of public offers of shares and public offers of debentures
2.7.1 The public offerings of debentures in Singapore, in common with the public offering of shares, must comply with Singapore prospectus requirements unless exempted. Over and above the prospectus requirements, the issuers of debentures are statutorily obliged to comply with Division 1(3), Part XIII, SFA (previously s. 97, CA to s.
106, CA) which impose requirements for trustees and prescribed covenants in trust deeds.
2.7.2 We take the view that public offerings of debentures should not be subject to more onerous statutory requirements than public offerings of shares. In the nature of corporate securities, equities carry the risk of the enterprise whilst debt has priority over equity. Further, this differential treatment does not accord with the prevailing practices in the international bond market. In England, the duties of trustees have been summarised as follows: “English trust deed practice is not to charge the trustee with an investigatory role. The trustee is largely a passive recipient of information from the obligor e.g. trust deeds generally provide that the issuer will supply audited financial statements, annual directors certificates of compliance, notices of actual or pending defaults, and such other information as the trustee may request. Good practice is for the trustee to exercise these powers at appropriate intervals and to review the information....The Singapore Companies Act however transforms the trustee of a non-exempt public offering into an active watchdog... In view of all this, one wonders how Singapore trustees can be persuaded to come forward to put their heads on the block.”[29]
2.7.3 Current international bond issues are characterised by the appointment of fiscal and paying agents and prescribed procedures for bondholders meetings and decision making. The continuing disclosure obligations arise from the disclosure requirements set out in the bond instruments themselves and the disclosure requirements prescribed by the relevant stock exchange. The obligations in the SFA relating to trustees and trust deeds, apart from introducing a new layer of costs of compliance, have resulted in the need to secure the Ministerial exemption under s. 262, SFA (previously s. 97, CA) for most international bond issues in Singapore. Although exemptions have been readily available, such applications introduce additional time and financial costs. This is not consonant with our measures to promote the international competitiveness of the Singapore bond market.
2.7.4 In the UK, the provisions of Chapter VIII of the Companies Act 1985 specifically address only the liability of trustees. There is no statutory prescription that a trustee must be appointed. The UK Listing Rules do not require any trustee, trust deed or trustee covenants for listed specialist debt securities, including Eurobonds. With respect to retail distributed bonds, the UK Listing Rules require a trust deed and a minimal list of trustee obligations, which may be dispensed with, if approval is granted by the UK Listing Authority. The dispensation extends to bonds listed on the Dublin and Luxembourg exchanges (which do not prescribe trust deed, trustee and trustee covenants) which may be acquired by UK investors as a result of European Union recognition.
2.7.5 The current Singapore statutory prescriptions are modeled on the Australia legislation which in its current form is set out in s. 283AA to s. 283AE, Corporations Act
2001. Under Australian law, the trust deed must provide that the trustee must hold in trust for the benefit of debenture holders:
(a) The right to enforce the borrower's duty to repay;
(b) Any charge or security for repayment; and
(c) The right to enforce any other duties that the borrower and any guarantor have under the terms of the debentures or the provisions of the trust deed or under the law.
The duties of trustees and borrowers are also statutorily prescribed. These are set out in s. 283DA, Corporations Act
2001 and s. 283BA – s. 283BI, Corporations Act 2001.
2.7.6 The CLRFC received strong support from respondents on its proposals to remove the statutory requirements for a trustee and prescribed covenants in the trust deed for public offerings of debentures. We recommend that we adopt the UK approach and remove the statutory requirements pertaining to the appointment of trustees and prescribed covenants for public offerings of debentures. The requirements on the appointment of trustees, the duties of the trustees and the contents of the trust deed would be prescribed by SGX in the listing rules. Like the UK, we propose that the SFA should continue to address the liabilities of the trustee, if one is appointed. This would lead to a more level playing field for public offerings of shares and debentures. We also propose that the SFA should confer the rights on the MAS, SGX and debenture holder to apply to the court to compel a trustee to perform his duties as set out in the trust deed. We also propose to retain s. 267, SFA which would allow a trustee to apply to the court for directions in relation to any matter arising in connection with the performance of the functions of the trustee; or to determine any question in relation to the interests of the holders of debentures.
2.7.7 Trustees should not be required for debt securities that are issued to institutional and sophisticated investors, the current exemptions under Subdivision (4) of Division 1, Part XIII, SFA should continue to apply. Such exempted offers are subject to a resale restriction of 6 months, i.e. during the 6-month period, the debentures can only be sold to institutional or sophisticated investors. The CLRFC is of the view that the 6-month resale restriction is sufficient. For issues to the retail market, if the debentures are listed, the issuer of the debentures would have to comply with SGX's disclosure requirements and prescribed conditions, which we expect would be modeled on the UK Listing Rules. The SGX should be empowered to determine whether and when trustees and trust deeds are to be required. For issues of unlisted debentures to retail investors, these would be structured according to the dictates of the targeted market.
The CLRFC recommends removing the statutory requirements pertaining to the appointment of trustees and prescribed covenants for public offerings of debentures. The requirements on the appointment of trustees, the duties of the trustees and the contents of the trust deed would be prescribed by Singapore Exchange Securities Trading Limited. The Securities and Futures Act should continue to address the liabilities of trustees where they are appointed. In addition, the Securities and Futures Act should be extended to confer the rights on the Monetary Authority of Singapore, the Singapore Exchange Securities Trading Limited and debenture holders to apply to the court to compel a trustee to perform his duties as set out in the trust deed. The CLRFC further proposes retaining Section 267 of the Securities and Futures Act, which would allow a trustee to apply to the court for directions.
2.8 Prospectus content prescription
2.8.1 The disclosure-based regime exemplified by s. 243, SFA (previously s. 45, CA) prescribes the standard of disclosure by requiring prospectuses to contain:
(a) all information that investors and their professional advisers would reasonably require to make an informed assessment of, inter alia, the rights and liabilities attaching to the shares and debentures, the assets and liabilities, profits and losses, financial position and performance, and prospects of the corporation; and
(b) matters prescribed by the MAS – these requirements are set out in the Securities and Futures (Offers of
Investments) (Shares and Debentures) Regulations 2002 (“SFR”).
2.8.2 On 3 March 2000, SGX amended its Listing Manual to require that issuers applying for listing comply with IOSCO's International Disclosure Standards in addition
to compliance with statutory prospectus requirements. Prospectuses issued in connection with unlisted securities would have to meet the 'reasonable investor' disclosure standard in s. 243, SFA (previously s. 45, CA). We would expect that professional advisers in unlisted public offerings would, as a matter of prudence, be prompted to comply with the IOSCO requirements, and any other standards of disclosure adopted by the SGX, to meet this test.
2.8.3 The IOSCO International Disclosure Standards sets out a benchmark standard for public offerings. These standards are not expressed in statutory form but act as a code of common international disclosure standards. In the near term, SGX listings and public offerings will continue to comprise a wide range of international and privatised corporates, small and medium size enterprises, and regional listings which will require customised adaptation and waivers. This timely review, adaptation and waiver process is better achieved through the SGX listing evaluation and approval process. The enactment of the standards in the SFR with the consequence of conferring legislative effect to these standards renders them less amenable to timely market driven adaptation and waivers. We would recommend a reconsideration of the efficacy of enacting the IOSCO’s International Disclosure Standards into statutory form in the SFR which are accordingly less amenable to timely variation and exemption. Alternatively, MAS could consider issuing practice guidelines which accord class adaptations and waivers to cater for those small and medium size listings and public offerings.
The CLRFC recommends a reconsideration of the efficacy of enacting the
IOSCO’s Disclosure Standards into statutory form in the Securities and Futures
(Offers of Investments) (Shares and Debentures) Regulations 2002. Alternatively, the Monetary Authority of Singapore could consider issuing practice guidelines which will provide class adaptations and waivers to cater for small and medium size listings and public offerings.
2.9 Prospectuses Registration
2.9.1 We considered whether prospectuses could be issued without a requirement for registration with the
Regulator, as is the current position in Australia.
2.9.2 However, the absence of registration arrangements creates problems for mutual recognition arrangements. This was recognised in the UK in the context of their unlisted public offering regime. These reciprocal arrangements normally require the home state to register the prospectus related to an offering. S. 156A, FSA was introduced to authorise the Financial Services Authority to approve prospectuses even where there was no application for listing. Under s. 87, FSMA 2000, the Financial Services Authority itself may approve such a prospectus.
2.9.3 In the case of Singapore, we believe that prospectuses for public offerings should continue to be registered with the Monetary Authority of Singapore. We would however recommend that the prospectus registration process be further streamlined, by dispensing with the signing and filing of Form 45. The directors would already have signed the prospectus and, in the prospectus, would have accepted the responsibility for the information contained in the prospectus, accordingly the further requirement to sign and file Form 45 is superfluous.
The CLRFC recommends the retention of the prospectus registration process, but to streamline the process such that directors need not sign and file Form 45 along with the prospectus registration.
2.10 Subsequent Sales
2.10.1 Under the previous Division 5A of the CA, where an institutional investor or a sophisticated investor has first purchased shares under the respective exemptions in s.
106 C and s. 106D, a subsequent sale of such shares or debentures may be made to any of the institutional investors (set out in s. 106C) or sophisticated investors (set out in s. 106D) without a prospectus being required to be registered if certain conditions are complied with, and after at least six months have elapsed from the date of initial acquisition, the shares or debentures may be sold to any other investor.
2.10.2 The SFA has imposed new restrictions. Under s. 276 of the SFA, subsequent sales of shares or debentures first offered pursuant to the equivalent of the s. 106C and s. 106D exemptions can only be made to other investors after six months from the date of initial sale provided the shares or debentures are listed or quoted on SGX, or a recognised securities exchange. No subsequent sale of unlisted shares or debentures may be made after six months to a person other than an institutional or sophisticated investor, unless the full prospectus requirements are complied with.
2.10.3 In Hong Kong, there is a six-month resale restriction in s. 41 of the Companies Ordinance. During the six-month period, there should be no offer to the public. Therefore, technically it is possible to sell to non-professionals during this period provided such sale does not constitute a public offering. Thereafter, it is possible to sell to other investors.
2.10.4 In Australia, subsequent sales of securities (whether listed or unlisted) are generally restricted to sophisticated or professional investors for a period of 12 months after the initial sale.
2.10.5 We see no compelling reason for Singapore to prescribe a more restrictive regime. There is no reason to prohibit resales to any willing buyer after the six-month period, whether or not the securities are listed or unlisted. The new restrictions under the SFA are unduly restrictive of start up capital raising.
The CLRFC recommends that subsequent sales of shares or debentures (both listed and unlisted), which are first acquired pursuant to the Sections 274 and 275 exemptions in the Securities and Futures Act, should be permitted at any time after six months from the date of initial acquisition. During the six-month restriction period, the shares or debentures can only be sold to institutional investors and sophisticated investors.
2.11 Collective Investment Schemes
2.11.1 The SFA is an improvement over the previous regime insofar as it now allow foreign funds which are constituted as trusts or limited partnerships to be offered to the public in Singapore. We would recommend that subsequent sales of collective investment schemes, which are first offered under exemptions in the SFA to institutional and sophisticated investors, be permitted.
The CLRFC recommends the secondary trading of collective investment schemes, which are initially acquired pursuant to an exemption under the Securities and Futures Act to institutional and sophisticated investors, be permitted.
1.1.8.1.1.1.1.1.3 3. CAPITAL MAINTENANCE
3.1 Par Value and Authorised Capital
3.1.1 The concept of par value has historically served to define the interests of shareholders and creditors. It is the permanent capital invested in the company by shareholders and describes the irreducible minimum of the company assets that could not be used to pay dividends or otherwise paid out to shareholders without court approval, before satisfaction of creditors.
3.1.2 We reviewed the concept of par value and its relevance in today’s business environment. We also considered whether the concept of authorised capital continues to serve any useful purpose. In analysing a company’s capital structure, a more meaningful measure is the total consideration paid for or payable on the shares, which would include the nominal value and the share premium. The rule that shares cannot be issued at a discount to par value operates to prevent a company from raising fresh funds where the market value of its shares has fallen below par value. A share is more meaningfully to be viewed as a proportionate interest in the net worth of a company and par value obscures this reality.
3.1.3 Australia has since 1998 and New Zealand has since 1993 abandoned the par value and authorised capital concepts. Canadian law does not have the concept of authorised capital. The UK Steering Committee has proposed to retain par value shares as it is constrained to do by reason of the 2nd EU Company Law Directive[30].
3.1.4 We recommend the removal of the concepts of par value and authorised capital as these have become meaningless and are often the source of confusion in measuring the value of the securities. It is also confusing to have an artificial divide between the share premium account and paid-up capital since both accounts are subject to the same
capital maintenance rules. The recommendation would give Singapore-incorporated companies greater flexibility to raise and maintain capital. It would also give companies wider choices to structure their capital and debt capital in response to their needs provided that there is full disclosure.
3.1.5 The removal of the concepts of par value and authorised capital would not affect a company’s shareholders fund. The shareholders fund comprises the company's accumulated profits to date, its paid-up capital and its share premium amount. It is the amount of money that shareholders are entitled to if the company is wound up.
3.1.6 The UK Steering Committee proposed that if the par value for shares were to be abolished, the nominal capital and share premium should be replaced as separate balance sheet items "with a single undistributable reserve of subscribed share capital. As a result, any permitted applications of the share premium account, and any reliefs from the obligation to transfer amounts to the share premium account, must either be extended to the whole of the subscribed share capital or removed completely[31]". In addition, the rule against allotment at a discount to par value would be removed. The UK Steering Committee suggested that it should be "replaced by a rule that the consideration received or due for an issue of shares, net of any commission or discount given, must equal the amount credited to the subscribed capital account which would replace share capital plus share premium[32]". For consistent treatment, we would expect that any proceeds in connection, directly or indirectly with the issue of shares must be credited to the undistributable reserves. Thus the proceeds of any issue of warrants or options whether or not exercisable would have to be credited to the undistributable reserves.
3.1.7 The UK Steering Committee also queried the continued restrictions relating to commissions/brokerage for procuring subscriptions in the light of the introduction of no- par value shares[33]. The UK Steering Committee suggested that on an issue of shares, the undistributable reserves should be increased by the net proceeds. A company would therefore be permitted to deduct the expenses of an issue of shares of the same class from the amount transferred to subscribed capital. However, this permission would not extend to the company's initial expenses, to commission or discount paid or allowed on the issue of other shares or debentures, or to the premium payable on the redemption of debentures[34].
3.1.8 The abolition of par value will require consequential amendments to the law. For example, allotment provisions referring to nominal capital should be modified (s. 57, CA and s. 63, CA). We also recommend that s. 67, CA regarding commissions/ brokerage for procuring subscriptions should be removed along with the removal of par value. References to discounts in s. 68, CA will have to be removed so that consideration for newly issued shares should equal the amount credited to the subscribed share capital.
S. 69, CA and other provisions relating to share premium accounts will also be unnecessary, except where the transitional provisions considered below are concerned.
3.1.9 We considered whether transitional provisions are required to deal with related issues (such as how amounts standing to the credit of the share premium account should be utilised). The UK Steering Committee looked into various transitional arrangements for a company with par value shares which is converted into a company with no par value shares. The objective of such provisions would be to preserve the effect of corporate documents like the Memorandum and Articles of Association, as well as the rights and obligations created by them. The UK Steering Committee considered the transitional provisions found in the Australian Corporations Law, specifically the previous s. 1444 and its corresponding sections. Previously, s. 1445, Australian Corporations Law, provided that references to the amount paid on a share would be references to the sum of all the amounts paid to the company at any time for the share. The amount unpaid would refer to the difference between that and the issue price
(disregarding any element of premium on nominal value).
3.1.10 Previously, s. 1447, Australian Corporations Law provided for the permitted uses of amounts standing to the credit of the share premium account immediately before the abolition of par value. The company would still be able to use such amounts to provide the premium payable on redemption of debentures or redeemable preference shares issued, to write off preliminary expenses of the company incurred before, and to write off expenses incurred, payments made or discounts allowed on or before, the abolition. This would preserve the uses of the share premium account regardless of whether such uses of share capital after the abolition were otherwise permitted.
3.1.11 The UK Steering Committee took a different stand. It proposed that if the par value concept were removed in UK, such uses would be disallowed. However, the UK Steering Committee was prepared to consider whether to permit certain deductions, such as the expenses of an issue of shares of the same class, payments made and discounts allowed before the abolition of par value, from the amount to be transferred to the subscribed share capital[35].
3.1.12 We considered whether to amalgamate the share premium account with the share capital account, and to permit the share premium account to be used for a one-off adjustment before the amalgamation. However, we considered that subsequent to the abolition of the par value concept, it would be more beneficial to preserve the use of the moneys which were standing to the credit of the share premium account, and to be able to continue to use these moneys for purposes permitted prior to the abolition. We therefore recommend the adoption of the Australian approach in respect of the transitional provisions.
3.1.13 With respect to the concept of authorised share capital, the UK Steering Committee proposed to abolish authorised share capital so that companies need not include in their Memorandum of Association a ceiling on the number of shares which
directors may issue. To counter any loss of information resulting from the abolition of authorised share capital, it proposed that the return of allotments should include information on the rights attaching to shares[36]. The UK government has accepted the recommendation to abolish the concept of authorised share capital[37].
3.1.14 We note that extensive consequential amendments in the CA would be required, including amendments to s. 71, CA, upon the abolition of authorised share capital concept.
The CLRFC recommends the abolition of the concepts of par value and authorised share capital. The amounts standing to the credit of the share premium account should be made available to provide the premium payable on redemption of debentures or redeemable preference shares issued, to write off preliminary expenses of the company incurred before, and to write off expenses incurred, payments made or discounts allowed on or before the abolition of par value.
3.2 Capital Reduction
3.2.1 We have considered whether the rules relating to reduction of capital should be simplified by eliminating the need for a special resolution passed by shareholders and the approval of a court.
3.2.2 The UK Steering Committee proposed that the requirement for authority in the Articles of Association and a special resolution should remain, but to dispense with the statutory prescription of court confirmation. Instead, the court confirmation would remain available but optional. Owing to the requirements of the EU Second Directive, there would be a statutory right for a creditor to object in court to any form of capital reduction by public companies[38], except one to write off losses or one which would create an undistributable reserve of not more than 10% of the reduced capital.
3.2.3 According to the UK Steering Committee, the notice of general meeting for both public and private companies would have to specify that a resolution to reduce capital was being placed before shareholders. The company would also have to make available for inspection at its registered offices, copies of the solvency declaration and the auditors' report (where prescribed). In addition, public companies would need to publicise the resolution in national newspapers to enable creditors to have a reasonable opportunity to exercise their right to object[39].
3.2.4 The UK Steering Committee’s proposals were accepted by the UK Government in their White Paper on Modernising Company Law[40]. The UK White Paper provides for two alternatives to companies to reduce their capital:
(a) Capital reduction for both private and public companies through a special shareholders’ resolution and with court approval; and
(b) Capital reduction for private companies through a special shareholders’ resolution supported by a solvency statement. Capital reduction for public companies through a special shareholder resolution supported by a solvency statement would additionally require public notification in the Gazette and newspapers, and made to each creditor for whom the public company has a current address. The resolution and solvency statement must be placed on public record (by delivery to the registrar) and the solvency statement must be available for inspection by creditors at the company’s registered officer. The proposed reduction of capital is subject to creditor challenge in court.
We note that in the UK, the Government has sought consultation on whether, for private companies, there is no need to provide a right of creditor to object to a reduction of capital.
The solvency statement is defined to be a statement by the directors of their opinion that the company could not at the time be judged unable to pay its debts; and that it would be able to pay its debts during the following year – or if winding up commenced within a year, that it could pay its debts during the year following the commencement of winding up. In forming their opinion, the directors must take account of current, contingent and prospective liabilities. A director who makes a solvency statement without having reasonable grounds for the opinions expressed would be guilty of an offence.
3.2.5 In Australia (s. 256B, Corporations Act 2001), a company has the general power to reduce its share capital if it:
(a) is fair and reasonable to the company's shareholders as a whole;
(b) does not materially prejudice the company's ability to pay its creditors; and
(c) is approved by shareholders under s. 256C, Corporations Act 2001.
In addition, a company may, without these protections, make “loss reduction” of capital
(i.e., reduce its share capital by cancelling paid-up share capital that is lost or is not represented by available assets) provided that the company cannot also cancel its shares (see s. 258F, Corporations Act 2001).
3.2.6 In New Zealand, a statutory declaration of solvency and shareholders' approval are necessary for a company to reduce its capital.
3.2.7 In Singapore, even though a formal declaration of solvency is currently not required under s. 73, CA, the practice is for companies to produce an affidavit attesting to the company's solvency in support of its application to the court for confirmation to overcome the risk of creditor objections.
3.2.8 We would recommend the introduction in Singapore, of an alternative process for capital reduction, which does not require court sanction but requires shareholders’ special resolution approval and the solvency statement. For private companies whose accounts are not audited, the directors would be required to make a statutory declaration of solvency that the company would be able to pay its debts in the following
12 months or in the event of a winding up. The directors' solvency declaration need not be supported by an auditor's report. For companies whose accounts are audited, the solvency declaration, if not made by a statutory declaration, should be accompanied by a report from the auditors to the effect that they have enquired into the state of the company and are not aware of anything to indicate that the opinion expressed by the directors in the solvency declaration is unreasonable in all the circumstances[41]. We also recommend that public companies should be further required to publish a notice (in advance of the proposed capital reduction) in a national newspaper to inform the public of the proposed capital reduction and that the proposed capital reduction be susceptible to creditor challenge in court.
The CLRFC recommends introducing an alternative capital reduction process which does not require court sanction. The alternative capital reduction process would require shareholders’ special resolution approval as well as a declaration of solvency. Where a company’s accounts are not audited, the directors would be required to make a statutory declaration of solvency. Where a company’s accounts are audited, the solvency declaration, if not made by a statutory declaration, should be confirmed by external auditors. For public companies, the alternative capital reduction process would further require publication of a notice
(in advance of the proposed capital reduction) in a national newspaper and making available for public inspection the shareholders’ resolution and solvency statement and be susceptible to creditor challenge in court.
3.3 Dividends
3.3.1 We have considered the prevailing common law rules relating to dividends and developments in the UK and Australia with a view to modernising the Singapore position. Under common law, dividends are payable if there are profits in a particular year, even if the company has accumulated losses on its balance sheet.
3.3.2 We also considered the meaning and scope of “profits”. Pursuant to s. 39 of the UK Companies Act 1980 (now s. 263 and s. 275 of the UK Companies Act 1985), dividends are only distributable out of accumulated realised gains minus accumulated
realised losses (so far as not written off in a prior reduction of capital exercise). The UK regulators have proposed to leave it to the accounting profession to prescribe the meaning of “realised”.
3.3.3 In Australia, dividends are, in theory, payable even though there are revenue deficits in previous years. However, the profits must be available at the date of payment, and not the date of declaration[42]. New Zealand has a statutory solvency test that applies to all types of distribution.
3.3.4 We propose adoption of the UK approach that distributions may only be made out of accumulated realised gains minus accumulated realised losses and to leave it to prescribed accounting standards and rules to determine the meaning of “realised”. We note that the Accounting Standards Board in the UK is proposing to move away from the concept of “realised profits” and would recommend that developments by reviewed by the CCDG.
The CLRFC recommends that the Council on Corporate Disclosure and Governance review the accounting standards and rules to limit distributions to be made only out of accumulated realised gains minus accumulated realised losses in the light of international developments moving away from the concept of
“realised profits”.
3.4 Financial Assistance
3.4.1 The current statutory formulation relating to financial assistance is fraught with uncertainty and amenable to reform. This is illustrated by Intraco v Multipak [1995] 1
SLR 313, where the Singapore Court of Appeal went beyond the literal wording of s. 76, CA and imposed the test of whether the assistance was in the commercial interest of the company.
3.4.2 The UK is required by the EU Second Directive to maintain a prohibition on financial assistance by public companies, subject to limited exceptions. In its Final Report, the UK Steering Committee recommended removing the prohibition for private companies to give financial assistance for the acquisition of their shares. The UK Government accepted this recommendation43 although draft clauses to implement this recommendation have not yet been released for consultation.
3.4.3 In Australia (s. 260A-D, Corporations Act 2001), companies are allowed to give financial assistance:
(a) where this does not materially prejudice the interests of the company or its shareholders or the company's ability to pay its creditors; or
(b) where the financial assistance is approved by shareholders by a special resolution (the person acquiring the shares and his associates must not vote on the resolution); or
(c) where the financial assistance is approved by unanimous consent of ordinary shareholders.
3.4.4 Certain types of financial assistance are permitted and these are set out in s.
260C, Corporations Act 2001 including:
(a) Financial assistance given in the ordinary course of commercial dealing;
(b) Financial assistance given by financial institutions; and
(c) Financial assistance given under an approved employee share scheme.
3.4.5 We note the uncertainty relating to the adoption of a materiality threshold, as expressed in para 12.77 of the Explanatory Memorandum to s. 260A(1)(a) of the Australian Corporations Act 2001, "it will not be possible to determine whether the transaction involves material prejudice merely by reference to arbitrary rules, such as the percentage impact the transaction will have on the company's profit".
3.4.6 New Zealand allows financial assistance in 3 circumstances, provided that a board resolution and directors’ certificate of solvency have been obtained. (s. 76 – s. 81, NZ Companies Act):
(a) Unanimous shareholder consent;
(b) Less than 5% of company funds involved; and
(c) Assistance is of benefit to shareholders not receiving the assistance and the terms and conditions are fair and reasonable to them.
3.4.7 The CA creates potential difficulties for issuers in the context of an initial public offering involving vendor and new shares, where investors require representations and/or warranties and/or indemnities from the issuer. Such representations or warranties are susceptible to be construed as providing financial assistance. Although the CLRFC is cognisant of the potential dangers of manipulation and abusive takeovers, we take the view that such assistance could be permitted, subject to, inter alia, shareholders’ approval and a declaration of solvency. Companies would be given a higher degree of flexibility to support transactions that make commercial sense and which do not materially prejudice the interests of the company or its shareholders. In addition, the misuse of company funds in relation to an issue or purchase of shares is an issue which is capable of being addressed in general company law duties and obligations. Thus, we recommend further liberalisation to permit the following:
(a) Financial assistance may be given where less than 10% of the company's paid-up capital is involved. We considered whether to restrict such financial assistance to be given only once in any financial year. However, we decided against such restriction in view of the safeguard of the solvency declaration
(details of which are set out in paragraph 3.4.8 below);
(b) Financial assistance may be given where it is approved by a unanimous resolution of shareholders;
(c) Financial assistance may be given under specific exemptions for financial institutions and approved employee share schemes (UK proposes to widen s.
153(4)(bb), UK Companies Act 1985 to cover transactions between employees or an employee trust and outside investors); and
(d) Representations, warranties and indemnities by an issuer or a vendor in the context of a public offering would not constitute financial assistance.
3.4.8 For purposes of (a) and (b), where a company’s accounts are not audited, an accompanying directors’ statutory declaration of solvency would be required. For companies whose accounts are audited, the solvency declaration, if not made by a statutory declaration, should be accompanied by a report from the auditors to the effect that they have enquired into the state of the company and are not aware of anything to indicate that the opinion expressed by the directors in the solvency declaration is unreasonable in all the circumstances. We consider that such solvency declaration would be sufficient to safeguard the interests of shareholders and creditors.
The CLRFC recommends the further liberalisation of our financial assistance restrictions to allow financial assistance to be provided in the following circumstances:
(e) where less than 10% of the company's paid-up capital is involved;
(f) where it is approved by a unanimous resolution of shareholders;
(g) under specific exemptions for financial institutions and approved employee share schemes; and
(h) for representations, warranties and indemnities by an issuer or a vendor in the context of a public offering.
For purposes of (a) and (b), where a company’s accounts are not audited, the directors would be required to make a statutory declaration of solvency. Where a company’s accounts are audited, the solvency declaration, if not made by a statutory declaration, should be confirmed by external auditors.
3.5 Share buy-back
3.5.1 We note that the buy-back regime has already been liberalised since its implementation in 1998, for example, to include preference shares. We reviewed whether share buy-backs should continue to be funded only from distributable profits.
3.5.2 In the UK, a public company can only repurchase shares out of distributable profits or a fresh issue of shares. The premium payable on purchases should be out of distributable profits. Off market purchases require a special resolution. A private company may redeem shares out of capital in certain circumstances[44]. In its Final
Report, the UK Steering Committee recommended, in the light of the amplified procedure for capital reduction, the repeal of the special procedure by which private companies may redeem or purchase their own shares out of capital. The UK government has accepted the recommendation[45].
3.5.3 We recommend a broader approach that share buy-backs should continue to be funded out of distributable profits or where supported by a declaration of solvency. This will enable companies to effect a share buy back under wider circumstances with the same range of controls as would operate in a capital reduction.
The CLRFC recommends that share buy-backs should continue to be funded out of distributable profits or where supported by a declaration of solvency.
Treasury shares
3.5.4 Under the current share buy-back regime, the shares which are the subject of the buy-back must be cancelled. We examined whether we could allow treasury shares in Singapore, accompanied by appropriate safeguards.
3.5.5 In the US, companies may keep repurchased shares in treasury. In the UK, the Department of Trade and Industry announced its support to permit treasury shares for certain companies.
3.5.6 Treasury shares are useful and cost effective, and would provide companies with greater flexibility to use share buy-backs as a form of capital restructuring. We propose to allow repurchased and redeemed shares to be held in treasury without the need for the company to obtain shareholders’ approval on how the repurchased and redeemed shares will be treated after the share buy-back. As a safeguard, the voting and other rights of the repurchased and redeemed shares would be suspended so long as they are held in treasury. We would expect that the impact of treasury shares on change of control and takeover obligations would attract similar treatment as currently accorded in share buy-back situations as provided in Appendix 2 of the Singapore Code on Take- overs and Mergers. We recommend that these treasury shares may be used by the company to meet its obligations under employee share option schemes. They may also be transferred to third parties to fund acquisitions or to raise cash. Any market abuses pertaining to the use of treasury shares would be subject to existing regulatory sanctions with respect to market manipulation.
The CLRFC recommends allowing repurchased and redeemed shares to be held in treasury without the need for the company to obtain shareholders’ approval on how the repurchased and redeemed shares would be treated after the share buy-
back. Their voting and other rights of the repurchased and redeemed shares would be suspended so long as they are held in treasury. Companies should be permitted to use treasury shares to meet their obligations under employee share option schemes, transfer to third parties to fund acquisitions or to raise cash.
Contingent Contracts
3.5.7 Our current regime does not permit the repurchase of shares by way of contingent contracts. A provision on contingent contracts would permit companies to issue pro rata to its shareholders tradable put warrants. These put warrants would give the holder the right to require the company to purchase its own shares in accordance with the terms of the warrants. We recognise that companies might wish to enter into contingent contracts to purchase their shares, and examined whether the buy-back scheme in the CA should be extended to include such contingent contracts.
3.5.8 S. 165, UK Companies Act allows a company to make an off-market purchase by way of a contingent contract, where such contract is "approved in advance by a special resolution of the company before the contract is entered into". In Australia, a company may enter into a contingent contract to purchase its shares under the provisions applicable to a selective buy-back. Selective buy-backs must be approved by a special or unanimous resolution.
3.5.9 We recommend that the CA be extended to allow companies to enter into contingent contracts to buy-back their shares and that such buy backs may be effected out of distributable profits or where supported by a declaration of solvency. In order to protect minority shareholders and to protect investors against speculative use or abuse of these instruments, we recommend that such contingent contracts may only be entered into with shareholders’ approval by way to special resolution.
The CLRFC recommends allowing companies to enter into contingent contracts to buy-back their shares, where such entry is approved in a special resolution by the companies’ shareholders.
3.6 One share one vote
3.6.1 We have reviewed s. 64, CA, which restricts one equity share to one vote in the case of public companies and their subsidiaries.
3.6.2 To give companies greater flexibility, it has been suggested that both private and public companies should be allowed to issue non-voting equity shares. We note that issue of non-voting equity shares in public companies would enable current controlling shareholders to maintain and consolidate control by the issue of disenfranchised non- voting equity shares and would accordingly not be consonant with shareholder democracy and accountability.
3.6.3 For public companies, it is important that all investors are treated equally. It is particularly important that ordinary shares of listed companies have equal voting rights. This would create a level playing field for all equity investors. Issuing shares with multiple voting rights could lead to a concentration of control in a few investors and would dilute the voting rights of other investors. As a matter of good corporate governance and to ensure that all investors are treated equally, the one-share-one-vote principle for public companies should remain.
3.6.4 The case for equity shareholder democracy and accountability is not equally compelling for private companies and accordingly, s. 64, CA is restricted to public companies and their subsidiaries. As private companies that are not subsidiaries of public companies may currently issue different classes of equity shares with multiple, limited or no voting rights, we see no continuing reason why this flexibility should not extend to private company subsidiaries of public companies. Such voting right flexibility would enable joint ventures and strategic alliances to be structured for private company subsidiaries of public companies.
The CLRFC recommends the retention of the statutory prescription of one-share- one-vote for public companies. All private companies, including subsidiaries of public companies, should be permitted to issue different classes of equity shares with multiple, limited or no voting rights.
4. COMPANY CHARGES
4.1 Company Charges Registration System
4.1.1 The company charges registration system and its link to the Bills of Sale Act [Cap. 24] by virtue of s.
131(3)(d), CA have been the subject of much criticism. There are two competing approaches that are currently under review.
4.1.2 Recently, the Singapore Academy of Law's Law Reform Committee examined the feasibility of moving away from the present regime to one based on a US Article 9 Uniform Commercial Code (“UCC”) 'first to file' regime. In the UK, extensive and continuing reviews have been undertaken, leading to a November 1994 consultation paper which showed a marked preference for retaining the present system under Part XII of the UK Companies Act 1985, but to incorporate some of the changes introduced by the unimplemented Part IV of the UK Companies Act 1989. Having received “convincing arguments in favour of radical change” in response to its consultation paper, the UK Steering Committee had in its Final Report put forth further proposals to adopt a notice- filing system and to seek further consultation on these proposals[46].
4.1.3 In the UK White Paper on Modernising Company Law, the UK government noted that the Law Commission and the Scottish Law Commission are examining the system for registering company charges and security and “quasi security” generally over property other than land, and making recommendations for reform[47]. In the light of the continuing consultation in the UK and the review in Singapore of the possibility of an overhaul in
favour of a UCC model, we do not recommend any immediate revisions to the current system of registration of charges at this time.
COMPANY LEGISLATION
AND REGULATORY FRAMEWORK COMMITTEE REPORT
CHAPTER THREE – CORPORATE GOVERNANCE
1. INTRODUCTION
1.1 The Corporate Governance Committee has recommended a Code of Corporate Governance, which has been accepted by the government. The SGX has announced that its Listing Manual will require all listed companies to disclose and explain deviations from the Code of Corporate Governance in their annual reports for annual general meetings held from 1 January 2003 onwards.
1.2 The Code of Corporate Governance encapsulates best practice and is not mandatory. We expect corporate governance standards in Singapore to evolve and improve over time. The CCDG will be responsible for the further evolution of the Code of Corporate Governance, and will regularly update it to ensure its continued relevance and usefulness. In reviewing the Code of Corporate Governance, best practices from leading jurisdictions should be adopted. The CCDG would also be actively engaged in raising standards of corporate governance in Singapore.
1.3 In this Chapter, we have reviewed the core provisions of Part V, CA with a view to identifying areas which would benefit from reform and refinement. We have reviewed efforts in the UK Steering Committee Final Report
2001[48], the New Zealand Law Commission Company Law Reform and Restatement[49] and the Australian Corporations Act 2001, which have attempted to provide a succinct restatement of directors’ duties. We have also taken into account the recommendations of the Corporate Governance Committee, particularly with regard to raising standards of performance of boards of directors. Finally, we have reviewed the adequacy and modernisation of shareholder decision-making and shareholder remedies.
1.4 Unless otherwise stated, our recommendations in this chapter apply to all forms of companies.
2. DIRECTORS
2.1 Definition of “Director”
2.1.1 Our review of s. 4(1), CA and s. 4(2), CA which define “director” for the purposes of the Companies Act, suggests no need for refinement or extension as they continue to effectively encompass nominee and shadow directors.
2.1.2 We note a drafting anomaly in s. 149(8), CA and s. 149A, CA, which attempt separate definitions of “director” and “shadow director” only for these provisions. The particular definitions of director and shadow director have the effect of repeating the substantive definitions in s. 4(1), CA and s. 4(2), CA and are accordingly superfluous and warrant repeal. We note also the reference to shadow directors in Rule 2 of the Companies (Application of Bankruptcy Act Provisions) Regulations[50].
The CLRFC recommends the repeal of the separate definitions of “director” and
“shadow director” in Sections 149(8) and 149A of the Companies Act.
1.1.8.2 2.2 Non-Executive Directors
2.2.1 We note that s. 201B(10), CA provides a definition of “non-executive director” for the purpose of determining the composition of the audit committee, which is prescribed for listed companies. As s. 201B, CA applies only to listed companies, we recommend that this section be migrated to the SFA. This is consonant with the approach of the UK Coordinating Group on Audit and Accounting Issues July 2002 report which similarly proposes prescriptive legislation for listed companies to form audit committees.
The CLRFC recommends that Section 201B of the Companies Act relating to audit committees of listed companies be migrated to the Securities and Futures Act.
2.3 Qualification of Directors
1.1.8.3 Training of Directors
2.3.1 In reflection of the core principle that shareholders are entitled to appoint such directors as they think appropriate to the company’s business and their interests, the CA does not prescribe any academic or professional qualifications for directors. The stock exchange requirements, transparency and market demands influence the experience and expertise of directors who are nominated and elected by listed companies. It would be in the public interest to enlarge the pool of eligible directors (especially for listed companies) through training and certification programmes, and to develop best practice codes and checklists for directors. These could be undertaken by the Singapore Institute of Directors in consultation with the SGX.
2.3.2 The Corporate Governance Committee, through the Code of Corporate Governance, recommended that the Nominating Committees of listed companies disclose the qualifications and experience of directors. We agree that such disclosure and other best practices should continue to evolve through non-statutory codes and best practices.
The CLRFC recommends that the Singapore Institute of Directors, in consultation with the Singapore Exchange, conduct more extensive and systematic training and accreditation for directors in Singapore.
1.1.8.4 Retirement Age of Directors
2.3.3 S. 153, CA states that directors of public companies and subsidiaries of public companies must seek annual reappointment if they are of or above the age of 70 years.
2.3.4 The UK Steering Committee proposed removing the statutory age limit for directors of public companies and replacing this with a requirement for the age of directors to be disclosed to the shareholders prior to the appointments or confirmation of appointments[51].
2.3.5 We see no compelling reason at this time to change the requirement in Singapore to require specific annual shareholder approval to re-appoint directors who are of or above the age of 70 years. Shareholders may re-elect such directors each year. The annual re-election process enables companies to appoint such directors who are able to serve whilst also inducing the boards of public companies and their subsidiaries to plan for succession and renewal. However, we do recommend that the shareholder majority vote prescribed by s. 153(6), CA be amended from its current special resolution to an ordinary resolution.
The CLRFC recommends the retention of Section 153 of the Companies Act, which requires directors of public companies and subsidiaries of public companies to seek annual reappointment if they are of or above the age of 70 years. The CLRFC also recommends that the re-election requirements be amended to provide for such appointment by way of an ordinary resolution as opposed to a special resolution.
Undischarged Bankrupts
2.3.6 S. 148(1), CA provides that undischarged bankrupts are prohibited from acting as directors of, or taking part in the management of any corporation, except with the leave of the Court or written permission from the Official Assignee. S. 148(3), CA provides that the Court or Official Assignee, as the case may be, may grant an application under s. 148(1), CA subject to certain conditions.
2.3.7 We recommend that a copy of the court order or written permission, where granted, be filed with RCB. In this way, the conditions of such order or permission would be available for public inspection.
The CLRFC recommends that a copy of the Court order or the Official Assignee’s written permission to undischarged bankrupts to serve as directors or be involved in the management of companies under Section
3. RESTATEMENT OF DIRECTORS’ DUTIES
3.1 We have reviewed the statutory duties of directors and the range of fiduciary and other common law duties in the light of more recent reforms proposed in the UK and New Zealand.
3.2 The broad canvas of legal issues relating to governance and directors’ duties covers the following:
(a) The standard of care and diligence of directors;
(b) The duty of good faith;
(c) Conflict of interest rules i.e. corporate opportunity;
(d) The power to manage or direct the management of the business of the company and the proper purpose exercise of powers;
(e) The enforcement of directors’ duties which must be underscored by statutory enforcement by shareholders, statutory derivative action, civil penalties provisions and criminal penalties; and
(f) Disclosure of interests relating to emoluments, directors’ interests in contracts, directors’ interests in shares and regulation of financial transactions between directors and the company and controls over indemnities.
3.3 The UK Steering Committee sets out an approach that is based on two pillars:
(a) Whether it is possible to draft an all inclusive statement of directors’ duties
(one which would require directors to promote the success of the company in the interests of its members, but take into account all relevant considerations, including the implications for the company of their decisions over time and also the wider relationships, such as those with employees, suppliers, customers and the community-at-large); and
(b) For improved transparency, principally through the proposed operating and financial review, which will give an account by the directors of the performance and direction of the business, including in all cases, a fair review of achievements, trends and strategic direction, and covering other matters, including wider relationships, risks and opportunities and social and environmental impacts, where these are relevant to an understanding of the performance of the business.[52]
3.4 In its Final Report 2001, the UK Steering Committee sets out a restatement of the general principles that are applicable to a director in the performance of his functions as director and in relation to his entering into transactions with the company.
The general principles would also apply to a director and former director in relation to the use of property, information and opportunities of the company and to benefits from third parties. These are intended to replace the corresponding equitable and common law principles. The restatement is not intended to authorise the contravention of any prohibition or requirement imposed on directors by or under any other enactment or rule of law.
We set out these principles below, with adaptations as illustrative of their intended scope and range for Singapore set out in italics. We would await the final outcomes of the UK legislative draft.
Obeying the Constitution and other lawful decisions
1. A director of a company must act in accordance with-
(a) the company’s constitution, and
(b) decisions taken under the constitution ( or by the company, or any class of members, under any enactment or rule of law as to means of taking company or class decisions),
and must exercise his powers for their proper purpose.
The matters to which the director are to have regard to in exercising their powers shall include
(a) the interests of the company’s employees generally; and
(b) the rulings of the Securities Industry Council on the interpretation of the principles and rules of and the practice to be followed under the Singapore Code on Take-overs and Mergers.
Promotion of company’s objectives
2. A director of a company must in any given case -
(a) act in the way he decides, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (excluding anything which would breach his duty under paragraph 1 or 5); and
(b) in deciding what would be most likely to promote that success, take account in good faith of all the material factors[53] that it is practicable in the circumstances for him to identify.
Delegation and independence of judgment
3. A director of a company must not, except where authorised to do so by the company’s constitution or any decisions as mentioned in paragraph 1-
(a) delegate any of his powers; or
(b) fail to exercise his independent judgment in relation to any exercise of his powers[54].
Care, skill and diligence
4. A director of a company must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both -
(a) the knowledge, skill and experience which may reasonably be expected of a director in his position; and
(b) any additional knowledge, skill and experience which he has.
Transactions involving conflict of interest
5. A director of a company must not -
(a) in the performance of his functions as director, authorise, procure or permit the company to enter into a transaction, or
(b) enter into a transaction with the company,
if he has an interest in the transaction which he is required by this Act to disclose to any persons and has not disclosed the interest to them to the extent so required.
Personal use of the company’s property, information or opportunity
6. A director or former director of a company must not use for his own or anyone else’s benefit any property or information of the company, or any opportunity of the company which he became aware of in the performance of his functions as director, unless-
(a) the use has been proposed to the company and the company has consented to it by ordinary resolution; or
(b) the company is a private company, the use has been proposed to and authorised by the board, and nothing in the constitution invalidates that authorisation; or
(c) the company is a public company, its constitution includes provision enabling the board to authorise such use if proposed, and the use has been proposed to and authorised by the board in accordance with the constitution.[55]
Benefits from third parties
7. A director or former director of a company must not accept any benefit which is conferred because of the powers he has as director or by way of reward for any exercise of his powers as such, unless the benefit is conferred by the company or -
(a) acceptance of the benefit has been proposed to the company and the company has consented to it by ordinary resolution; or
(b) the benefit is necessarily incidental to the proper performance of any of his functions as director.
Special Duty where company more likely than not to be unable to meet debts
8. At a time when a director of a company knows, or would know but for a failure of his to exercise due care and skill, that it is more likely than not that the company will at some point be unable to pay its debts as they fall due -
(a) the duty under paragraph 2 does not apply to him; and
(b) he must, in the exercise of his powers, take such steps (excluding anything which would breach his duty, under paragraph 1 or 5) as he believes will achieve a reasonable balance between-
(i) reducing the risk that the company will be unable to pay its debts as they fall due; and
(ii) promoting the success of the company for the benefit of its members as a whole.[56]
Special duty where no reasonable prospect of avoiding insolvent liquidation
9. At a time when a director of a company knows, or would know but for a failure of his to exercise due care and skill, that there is no reasonable prospect of the company’s avoiding going into insolvent liquidation-
(a) neither paragraph 2 nor paragraph 8 applies to him; and
(b) he must, in the exercise of his powers, take every step with a view to minimising the potential loss to the company’s creditors that a person exercising due care and skill would take (excluding anything which would breach his duty under paragraph 1 or 5);
and “due care and skill” here means the care, skill and diligence required by paragraph 4.
3.5 In the UK White Paper on Modernising Company Law, the UK government agreed that directors’ general duties should be codified in statute[57]. The UK government is currently considering how the text of the draft duties may be improved before they are crafted into the law. The CLRFC recommends that the UK statutory restatement, when released, be adopted in Singapore, subject to adaptation. The enactment of these general principles, bolstered by statutory remedies to enforce directors’ duties, will form the bedrock of directors’ duties, which would continue to be amenable to evolution through case law. While this will mean the repeal of s. 157, CA which provides that “A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office”, the general principles will operate together with the specific statutory provisions which we have reviewed and propose to refine as set out in this chapter.
The CLRFC recommends the adoption of UK’s statutory restatement of the general principles for directors, subject to adaptation to suit Singapore’s context.
3.6 Use of Information and Advice
3.6.1 We recognise that directors may rely on information prepared by and received from professionals and experts, and recommend that they be accorded protection for reasonable reliance of such advice. S. 107 of the New Zealand draft legislation[58] would be a model worth adopting.
The CLRFC recommends that directors be accorded protection for reasonable reliance on advice and information from professionals and experts along the lines of the Section 107 of the New Zealand draft legislation.
3.7 Directors’ Duties and Liabilities on the Consent
3.7.1 The UK Steering Committee, in its Final Report, recommended that the form which directors sign to acknowledge their duties on appointment, be revised to focus the minds of directors on their duties and liabilities[59]. In the UK White Paper on Modernising Company Law, the UK government proposed that all new directors should receive plain language guidance summarising the main legal requirements placed on directors[60].
3.7.2 In Chapter One, we recommended retaining the requirement for directors to give their consent to act when the company is incorporated. The CLRFC is of the view that it would be useful to remind a director of his duties and liabilities at the point of giving his consent. We recommend that a summary account of directors’ duties and liabilities be inscribed on the director’s consent to act.
The CLRFC recommends that a summary account of directors’ duties and liabilities be inscribed on the director’s consent to act.
4. RETENTION AND REFINEMENT OF EXISTING STATUTORY DUTIES
4.1 General Duty to Disclose Interests in Contracts
4.1.1 We recommend retaining s. 156, CA which prescribes a disclosure regime for
“Disclosure of interests in contracts, property, offices, etc”, but extending it beyond contracts to include “transactions”.
4.1.2 S. 156(8), CA extends the disclosure obligation of directors to require disclosure where members of the director’s family have interests in contracts with the company. However, s. 156, CA does not provide a definition of “family” for the purposes of such disclosure. We would recommend clarifying the position by providing a new definition in s. 156, CA which corresponds to the definition provided in s. 163(5), CA. On the ground that the other directors in the company are already aware of the interest, we see no reason to adopt in Singapore the further recommendations in the UK, regarding the concept of a register of directors’ interests and the need to provide a defence for non- disclosure.
The CLRFC recommends extending the scope of Section 156 of the Companies Act beyond “contracts” to include “transactions”. The definition of “family” in Section 156(8) of the Companies Act should be aligned to the definition provided in Section 163(5) of the Companies Act.
4.2 Payments to Directors
4.2.1 We note the recommendation in the UK that covenanted payments to directors, i.e. all predetermined sums other than pensions in respect of past services should not require shareholder approval. In Singapore, this has effectively been the same result arrived by the Court of Appeal in Grinsted v Brittania Brands [1993] 3 S.L.R. 157. We accordingly do not recommend any further revisions to s. 168, CA.
4.2.2 We confirm the value of s. 169, CA in requiring single item disclosure for shareholder approval of emoluments to directors as a measure of continuing accountability and transparency.
4.2.3 We note that the Corporate Governance Committee has recommended the disclosure of directors’ emoluments in listed companies, through the disclosure of a series of tiered levels of payment in lieu of exact amounts for each director. This is intended to provide some degree of confidentiality. S. 164A, CA provides another means of disclosure relating to directors’ emoluments and other benefits upon the requisition of members representing either 10% in number or 5% in shareholdings.
RECOMMENDATION 3.10
The CLRFC recommends no change to Section 168 of the Companies Act and affirms the requirement for single item disclosure for shareholder approval of the provision or improvement of emoluments to directors under Section
169 of the Companies Act.
4.3 Loans to Directors
4.3.1 We would recommend clarification of s. 162(1)(b), CA to provide that the housing loan permitted thereunder be confined to the home occupied or to be occupied by the director, and should not be extended to housing loans for multiple homes or for investment. In the context of Singapore’s open economy and the need to provide housing for expatriate or new entrants, it is desirable to enable such loans to be made within the controls of s. 162, CA.
The CLRFC recommends that Section 162(1)(b) of the Companies Act be amended to clarify that the housing loan permitted thereunder be confined to the home occupied or to be occupied by the director, and should not be extended to housing loans for multiple homes or for investment.
4.4 Disclosure by Nominee Directors
4.4.1 It was suggested that a provision be introduced in the CA to recognise the reality underlying the appointment of nominee directors and, in particular, the issue of nominee directors making available corporate information to their nominators. The UK Steering Committee has preferred to leave this area to be developed by the courts.
4.4.2 We are inclined to clarify and give statutory effect to the position of nominee directors in Singapore by adapting the New Zealand model. S. 145, New Zealand Companies Act 1993[61] expressly permits such disclosure, subject to the fulfillment of several prescribed conditions. In essence, the New Zealand provision allows for disclosure of information by the nominated director to his nominating shareholder in accordance with whose directions or instructions the director is accustomed to act, provided, inter alia, that the disclosure is entered into an interests register and that it does not put the interests of the company in jeopardy. We recommend that, in lieu of a disclosure in the director’s interests register, such disclosure should be minuted in the relevant board minutes. RECOMMENDATION 3.12
The CLRFC recommends recognising the position of nominee directors by permitting them to disclose information to their nominating shareholder, provided it does not put the interests of the company in jeopardy and that such disclosure is minuted in the relevant board minutes.
4.5 Indemnity for Directors
61 S. 145 of the New Zealand Companies Act 1993 provides:
1.1.1.1.1.1.1.1.1 “Use of Company Information
(1) A director of a company who has information in his or her capacity as a director or employee of the company, being information that would not otherwise be available to him or her, must not disclose that information to any person, or make use of or act on the information, except:
(a) For the purposes of the company; or
(b) As required by law; or
(c) In accordance with subsection (2) or subsection (3) of this section; or
(d) In complying with section 140 of this Act.
(2) A director of a company may, unless prohibited by the board, disclose information to:
(a) A person whose interests the director represents; or
(b) A person in accordance with whose directions or instructions the director may be required or is accustomed to act in relation to the director's powers and duties and, if the director discloses the information, the name of the person to whom it is disclosed must be entered in the interests register.
(3) A director of a company may disclose, make use of, or act on the information if:
(a) Particulars of the disclosure, use, or the act in question are entered in the interests register; and
(b) The director is first authorised to do so by the board; and
(c) The disclosure, use, or act in question will not, or will not be likely to, prejudice the company.”
4.5.1 We propose to update s. 172, CA and adopt the extended coverage of s. 310 of the UK Companies Act
1985. We also propose replacing s. 391, CA with s. 727 of the UK Companies Act 1985, thus reversing the approach of the Singapore Court in Hytech Builders v Tan Eng Leong [1995] 2 SLR 795, which decided that relief under this provision was only available for a claim for damages and not for account of profits against a director. By contrast, in Coleman Taymar v Oakes [2001] 2 BCLC 749, where the company elected to claim an account of profits rather than damages for breach of fiduciary duty, it was held that s. 727 of the UK Companies Act 1985 (which is materially the same as s. 391, CA) allowed the director to seek relief from liability. The Chancery Court refused to follow the decision in Hytech, which was cited to the court, stating that a liability to account was just as much a liability as one to pay damages. We believe that relief should be available even where the claim against the director is for an account of profits and that s. 391, CA be amended to provide that “liability” in the context of s. 391, CA includes a liability to account for profits made.
The CLRFC recommends that Section 172 of the Companies Act be updated to incorporate the extended coverage offered in Section 310 of the UK Companies Act 1985. The Committee further recommends replacing Section 391 of the Companies Act with Section 727 of the UK Companies Act 1985 and that the definition of “liability” in the context of Section 391 of the Companies Act be redrafted to include a liability to account for profits made.
1.1.8.5 4.6 Decriminalisation and Remedies for Breach of Directors’ Duties
4.6.1 We recommend a total review of the CA with the objective of decriminalising those provisions where civil and regulatory sanctions would be sufficient.
4.6.2 While we note the concerns expressed by some public respondents that decriminalization may encourage misconduct, we are of the view that a number of our current criminal sanctions can be eliminated without affecting the integrity of our business environment. We recommend the continuance of criminal penalities for egregrious and fraudulent misconduct. Several current criminal sanctions should be eliminated, as they are traps for the unwary. For example, there does not appear to be a compelling need to prescribe criminal sanctions for directors who fail to acquire their shareholding qualification as may be prescribed by a company’s articles. It is sufficient that such director vacates office for failure to do so. Accordingly we recommend the repeal of s. 147(4), CA.
4.6.3 The UK Steering Committee is seeking to codify the civil remedies available in relation to breach of directors’ duties. In the UK White Paper on Modernising Company Law, the UK government announced its support should a workable scheme be devised, on the codification of civil remedies available in relation to breach of directors’ duties[62]. To deter potential wrongdoers and help improve compliance, the UK government is also considering having a public register of convictions drawn to the attention of the public and shareholders[63]. When the UK codification is released, we recommend that it be adopted in Singapore subject to adaptation.
The CLRFC recommends an overall review of the Companies Act with a view to eliminating criminal sanctions for such areas where civil or regulatory sanctions are
sufficient. The CLRFC further recommends that the UK codification of civil remedies, when released, be adopted in Singapore subject to adaptation.
1.1.8.6 4.7 Relationship between the Board and the General Meeting
4.7.1 We recommend the adoption of the statutory restatement of the distribution of powers between directors and general meeting in the following model used in s. 198A of the Australian Corporations Act 2001: “(1) The business of a company is to be managed by or under the direction of the directors. (2) The directors may exercise all the powers of the company except any powers that this Act or the company’s constitution (if any) requires the company to exercise in general meeting.” This will override article 73 of Table A, Fourth Schedule, CA which provides that management powers are also subject to “such regulations, being not inconsistent with the aforesaid Regulations or provisions, as may be prescribed by the company in general meeting.”
4.7.2 In the Singapore decision of Credit Development v IMO [1993] 2 SLR 370, on a construction of article 73 of Table A, Fourth Schedule, CA, it was held that an ordinary resolution of shareholders in a general meeting may exercise some of the powers given to the directors. The holding in Credit Development takes a different approach from UK and Australian cases (now clearly backed by the slightly different articles they have and also provisions like s. 198A, Australian Corporations Act 2001) which give management more autonomy. While the decision in Credit Development is useful in those exceptional cases where the majority shareholder does not control the board, it may not be necessary with the re-statement of directors’ duties that has been recommended, and in particular, the re- emphasis on the duty of directors to exercise their powers for proper purposes.
The CLRFC recommends a statutory restatement of the distribution of powers between directors and general meeting along the lines of Section 198A of the Australian Corporations Act 2001.
5. SHAREHOLDER RIGHTS
5.1 Limitation of Majority Rights
5.1.1 Barring unfairly prejudicial conduct for which minority shareholders may seek court remedies under s. 216, CA, shareholder decisions are properly effected and the minority bound provided they have been taken by the prescribed majority votes of shareholders. The UK Steering Committee has recommended that the case law imposing limits on majority rule in the context of alterations of articles of association or alteration of class rights, be statutorily codified. This would require a restatement of the common law position, which in the UK is represented by cases such as Allen v Gold
Reefs of West Africa Ltd [1900] 1 Ch 656 (CA). The UK White Paper on Modernising Company Law proposed including an “entrenching provision”, stating that certain specified provisions in the constitution may not be altered except by unanimity or by a greater majority than the 75% needed for a special resolution; or unless other special conditions are met. The entrenching provision may be inserted into the company’s constitution on formation, or afterwards if all the members agree. It may also be
removed or altered, but only if all the members agree[64]. We note that in Australia, the courts have added a further restriction to majority shareholder rule by requiring shareholders to exercise their powers to alter the articles of association for a proper purpose[65].
5.1.2 The UK Steering Committee has also recommended that in the context of shareholder resolutions to ratify or condone wrongs, such resolutions are effective, provided that the votes of members with an interest or subject to the substantial influence by a person with an interest in the wrong are to be discounted.[66] We would endorse such an approach but note the difficulty of defining substantial influence.
The CLRFC recommends the adoption of the recommendation in the UK Steering Committee’s Final Report to statutorily impose limits on majority rule in the context of alterations of the articles of association or alteration of class rights. The CLRFC also recommends that shareholder resolutions to ratify or condone wrongs be effective, provided that the votes of members with an interest or subject to the substantial influence by a person with an interest in the wrong have been discounted.
5.2 Passing of Resolutions at General Meetings
5.2.1 The CA provides for physical meetings to be held and for resolutions to be passed at the meetings. Unanimous circular shareholder resolutions may be effected unless the CA specifically prescribes that a meeting be held e.g. s. 184, CA.
5.2.2 We have, in Chapter One, recommended that private companies be permitted to elect to have circular resolutions passed by prescribed majorities in lieu of holding physical meetings. One respondent suggested that we should empower a single member to demand a physical meeting. The CLRFC notes that the UK government has, in the White Paper on Modernising Company Law, indicated that such an approach has
“serious disadvantages”[67]. On balance, we are of the view that the interests of minority shareholders can be protected by statutorily empowering shareholders (representing at least 5% of the outstanding ordinary shares) the ability to demand a physical meeting.
5.2.3 The question remains whether private companies should in any event be required to convene at least one annual general meeting, whose minimum business is set out in s. 175, s. 201 and article 46 of Table A, Fourth Schedule, CA, at which accounts are to be laid and directors and auditors appointed and dividends declared. The profit and loss account and the balance sheet are laid before an annual general
meeting as required by s. 201, CA. Currently, S. 366A and s. 379A of the UK Companies Act 1985 allow private companies to elect by unanimous agreement to dispense with the holding of annual general meetings. This is to enable companies where all shareholders are also directors to dispense with the formality of an annual general meeting, where they so decide. The UK has further relaxed its existing requirement for private companies to hold an annual general meeting. The UK White Paper on Modernising Company Law states that the Companies Bill will remove the requirement for private companies to hold annual general meetings which are, for most companies, “an unnecessary formality that carries out no business of substance”[68]. As a starting position, we recommend the adoption of s. 366A and s. 379A of the UK Companies Act 1985 for private companies in Singapore.
5.2.4 We reviewed s. 186, CA, which requires companies to lodge resolutions (both special and ordinary) and agreements binding any class of shareholders with the RCB. Whilst there continues to be a public interest in the filing of special resolutions, some questions have been raised as to whether the public interest to require the filing of
“resolutions or agreements” relating to classes of shareholders would require the filing of all shareholder agreements, which inherently apportion shareholder rights amongst the parties. For avoidance of doubt, we recommend the deletion of the expression “or agreements” in s. 186(1)(b), CA.
The CLRFC recommends adopting Sections 366A and 379A of the UK Companies Act 1985, which allow private companies to elect by unanimous agreement to dispense with the holding of annual general meetings. For purposes of clarification, the CLRFC further recommends the deletion of the expression “or agreements” in Section 186(1)(b) of the Companies Act.
1.1.9 5.3 Voting at General Meetings
5.3.1 We have considered the proposals to permit companies to elect to have electronic voting procedures. There are no impediments under the CA to electronic voting should any company wish to adopt and prescribe such voting procedures in its articles of association.
5.3.2 The Corporate Governance Committee has observed that the default requirement in the CA prescribes voting by physical attendance (whether of the registered shareholder or his nominated proxy) and that telephonic, electronic or other modes of absentia voting would be possible where specifically provided in a company’s articles of association.
5.3.3 The Disclosure and Accounting Standards Committee has also observed that the CA should be medium neutral in approach as to how companies, especially listed companies, release their financial results and annual reports to shareholders. This
would allow companies to release financial and corporate information via the Internet. We endorse this observation with respect to the announcement and release of financial and other information as may be prescribed by the SGX. The SGX should be the agency to prescribe rules and procedures governing the use of web-casts and dial-ins for the disclosure of information.
5.3.4 With respect to statutory reports, we would recommend that electronic distribution be permitted, together with printed hardcopies to be made available to members as they may require. The analogous concept is s. 203A, CA which permits the distribution of summary financial statements but reserves the entitlement of members to receive full financial statements upon request. This elective approach which enables shareholders who wish to continue to receive printed hard copies is consistent with the approach in other jurisdictions. The UK takes this approach for the distribution of accounts and annual reports, summary financial statements and notices of meetings[69].
The CLRFC recommends that the Singapore Exchange should be the agency to prescribe rules and procedures governing the use of web-casts and dial-ins for the disclosure of information. The CLRFC further recommends that the Companies Act be amended to provide for the electronic distribution of statutory reports to shareholders and for hardcopies to be available to shareholders who require them.
6. ACTION BY MINORITY SHAREHOLDERS
6.1 The Company’s Constitution and Personal Rights
6.1.1 The UK Steering Committee Final Report affirmed the preference for the retention of the contractual character of the constitution instead of a statutory replacement, which is the existing position in s. 39, CA[70]. It modified its final recommendations relating to enforcement by proposing a different approach, namely that all obligations imposed by the constitution should be enforceable by individual members both against the company and other members, unless the contrary was provided in the constitution or unless the breach in question was trivial or the remedy fruitless.71 The latter would empower the courts to exclude vexatious claims. We would endorse the final recommendations of the UK Steering Committee for adoption.
The CLRFC recommends adopting the recommendation of the UK Steering Committee that the contractual character of the constitution be retained – i.e. all obligations imposed by the constitution should be enforceable by individual members both against the company and other members, unless the contrary was provided in the constitution or unless the breach in question was trivial or the remedy fruitless.
6.2 Remedies for enforcement of Breaches of Directors’ Duties and Derivative
Actions
6.2.1 We await the follow up recommendations and draft legislation in the UK on the remedies for enforcement of breaches of directors’ duties, as well as proposed improvements to the derivative actions in the UK. Accordingly, we make no recommendations now, until the UK provisions are available for review and consideration in Singapore.
Company Legislation
and Regulatory Framework Committee Report
CHAPTER FOUR – CORPORATE INSOLVENCY
1 INTRODUCTION
1.1 In this chapter, we have reviewed the existing separate treatment of corporate and individual insolvency under the CA and the Bankruptcy Act (Cap. 20) respectively as against the models in the UK, US, Australia, Canada, and New Zealand.
1.2 We have examined the following issues:
° whether the current provisions in the CA relating to insolvent liquidation and rehabilitation of companies should be hived off and placed in separate omnibus personal and corporate insolvency legislation;
° a review and refinement of the existing suite of rescue options for ailing companies such as receivership, judicial management and scheme of arrangements under s. 210, CA and whether there are additional options which Singapore should introduce; and
° the need to increase and improve institutional capacity, including regulating and qualifying insolvency practitioners in Singapore.
1.3 A fine balance needs to be struck to accommodate rehabilitation and restructuring of businesses in financial difficulty and those businesses that are beyond redemption. The latter category would require an orderly and efficient liquidation process to avoid deterioration of the company’s remaining assets to the detriment of creditors. We are mindful that any rescue regime brings into play a tension between the need to maximise value through preserving businesses which can be resuscitated or rejuvenated (and which may result in economic benefits for creditors, employees and society as a whole) and the freedom of creditors to enforce security (as the security was provided with the full knowledge that it might be enforced). In the course of our review we have also reviewed developments relating to the UNCITRAL Model Law on Insolvency and would recommend that we await further developments which would indicate how these would impact the insolvency legislation of the major common law jurisdictions.
1.1.10 2 CONSOLIDATION & REFINEMENT OF OUR INSOLVENCY LEGISLATION
2.1 The current legislative framework in Singapore in relation to insolvency procedures (specifically, corporate liquidation, receivership, judicial management and schemes of arrangement) represents a mix of adaptations from the UK and Australia. The main provisions relating to corporate liquidation, judicial management,
receivership and schemes of arrangement are found in discrete portions of the CA. At the same time, certain provisions of the Bankruptcy Act[72] relating to void and voidable transactions have been extended by reference to apply to insolvent companies under liquidation or judicial management[73]. S. 327(2) and s. 329(1), CA introduce by reference the bankruptcy law provisions relating to rights of secured and unsecured creditors and unfair preferences respectively to insolvent corporate liquidations. As s.
4(1) and s. 4(2) of the Civil Law Act (Cap. 43) repeat the contents of s. 327(2), CA, they should accordingly be repealed.
2.2 Insolvency and restructuring (whether for companies or individuals) have evolved along common core concepts and it is timely for Singapore to modernise and consolidate its insolvency legislation and structure in an omnibus insolvency legislation, which would provide for orderly and efficient liquidation and restructuring.
2.3 Some of the following observations with respect to judicial management arise from the history of our judicial management legislation. Our judicial management provisions are modelled on the UK administration provisions combined with selected provisions imported from Singapore’s liquidation regime. We need to re-examine whether these selected liquidation provisions are indeed appropriate, whether more should be imported or whether the stand-alone treatment of administration under the UK Insolvency Act 1986 is conceptually and practically a preferable approach.
2.4 We have received suggestions that non-petitioning creditors be empowered to apply to court for the appointment of interim judicial managers. We have also received suggestions that the unfair preference rules in liquidation be extended to judicial management. These suggestions are premised on approximating the judicial management process closely with the liquidation process. This approach is not reflected in the UK administration provisions. In the UK, the consistent approach is to treat administrations substantively as a process that is different from liquidations.
2.5 The opportunity should be taken, in drafting the new omnibus insolvency legislation, to harmonise and consolidate several areas of uncertainty which have been highlighted to the CLRFC. These are:
(a) The definition of “associate” for the purposes of regulating transactions at undervalue, unfair preferences and extortionate credit transactions in the Companies
(Application of Bankruptcy Provisions) Regulations[74], could be better defined.
(b) Whether s. 87, Bankruptcy Act, which excludes the proof of unliquidated tortious damages in bankruptcies, should be attenuated for purposes of corporate insolvencies.
(c) Whether s. 76(4), Bankruptcy Act, which obliges secured creditors to realise their security within 6 months of a bankruptcy order, extends to corporate insolvencies by reason of s. 327(2), CA.
(d) Whether s. 330, CA, which voids floating charges created within 6 months of commencement of winding up save to the extent of cash received, should automatically apply to judicial management without the need for a Court order. We should also review whether s. 131, CA should fully operate in relation to judicial management. This is currently excluded because s. 131, CA is not within Part X, CA which governs judicial management, and is also not included in s. 227X(b), CA which imports into a judicial management certain sections applicable in a liquidation.
(e) The rules of proof of debts should be standardised with respect to liquidation and bankruptcy.
(f) The operative date for the application of insolvency set-off should clearly be stated. In relation to earlier legislation, the Singapore Court of Appeal held that the relevant point in time is the commencement of winding up, i.e. the date of the presentation of the winding up petition (Good Property Land Development v Societe-Generale
[1996] 2 SLR 239). This is contrary to the established English and Australian positions. In addition, under the current bankruptcy legislation, it seems fairly clear that the relevant time for set-off is the date of the bankruptcy order. We recommend that the proposed insolvency set-off provision prescribe that the set-off takes place at the date of the winding up order.
(g) S. 259, CA renders void all dispositions of the company’s property after the presentation of a winding up petition unless otherwise ordered by the Court, regardless of whether they are in fact made for the benefit of the company, for valuable consideration, for carrying out the company’s contractual obligations, or for preserving the value of the company as a going concern. While an application may be made to the Court for a validation of the disposition, this involves time and expense, and places undue uncertainty particularly during the period between the filing of a petition and the Court’s granting or dismissal of the petition. We recommend that we adopt the Australian approach of exempting transactions in the ordinary course of business and dispositions of property for valuable consideration equivalent or exceeding the value of the property to be disposed.
(h) We would recommend the adoption of the UK insolvency legislation which prohibits essential service-providers such as the provider of telecommunications, electricity, gas and water, to demand payment of pre-judicial management debts by threatening to withhold their supplies or services. The case for the introduction of such a prohibition is more compelling in an environment of multiple privatised service providers[75].
2.6 While we recommend the consolidation of the insolvency regime, we recognise that there are certain specific areas that straddle insolvency law and general company law (e.g. schemes of arrangement and registration of security interests) that would continue to require similar but separate expression in both corporate and insolvency legislation.
(a) Schemes of arrangement: We would recommend the retention of s. 210 – s. 212, CA
in the CA. Although schemes of arrangement are often used to effect compromises between an insolvent company and its creditors, one of the primary purposes of the scheme of arrangement provisions is also to facilitate the implementation of corporate mergers and amalgamations. It would clearly be inappropriate to require such mergers and amalgamations, which frequently involve perfectly solvent corporations, to be conducted under the proposed Insolvency Act. In the UK, the scheme of arrangement provisions have been retained in the Companies Act 198576 instead of being inserted in the UK Insolvency Act 1986.
(b) Registration of security interests: We would recommend the retention of the main
provisions dealing with the registration of security interests in the CA. This is the case in the UK – the provisions dealing with the registration of security interests are found in the UK Companies Act 198577 and not in the UK Insolvency Act 1986. The issues of which interests are registrable, as well as the timing and registration procedures, are of direct relevance to companies, shareholders and external creditors at all times during the existence of a company and not only when they become insolvent.
2.7 We note that the UK Department of Trade & Industry has commenced a further review of the UK Insolvency regime: “Insolvency - A Second Chance”[78], the Enterprise Bill and “An update on the Corporate Insolvency Proposals”, 14 Jan 2002. Such reviews have been prompted against the backdrop of promoting an enterprise culture and are designed to encourage entrepreneurs who have failed honestly to try again. At the same time, there are sufficient remedies against those who take advantage of their creditors. We recommend that the Singapore omnibus insolvency legislation take into account these recent developments.
2.8 It would follow that subsidiary omnibus insolvency legislation should be similarly introduced, which would incorporate the Companies (Winding Up) Rules[79] as well as those relating to judicial management and receivership that are found in the Companies Regulations80 and the Bankruptcy Rules[81]. Accordingly, we recommend repealing the Companies (Application of Bankruptcy Provisions) Regulations[82].
2.9 We should examine the data of our judicial management process and the use of s.
210(10), CA moratorium, in the light of their success as rescue procedures. Opportunity should be taken in this overall review to revisit the merits of a management-in-control US Chapter 11 process in lieu of judicial management. One respondent similarly suggested the merits of the US Chapter 11 arrangement. He observed that most external judicial managers and their staff are not able to take over the day-to-day operations of a company without the presence, input and involvement of the company’s management.
RECOMMENDATION 4.1
The CLRFC recommends the introduction of an omnibus Insolvency Act and subsidiary legislation that are applicable to both companies and individuals. The omnibus legislation would set out the common principles and procedures and consolidate and update all core areas including voluntary arrangements, judicial management, receivers and managers, voluntary and court winding up, liquidators, preferential debts, secured and unsecured debts, disclaimer, malpractices and insolvency practitioners modelled after the UK Insolvency Act 1986.
3 COMPANY VOLUNTARY ARRANGMENTS
3.1 Companies encountering financial difficulty are obliged to initiate a scheme of arrangement by convening creditor meetings and obtaining special majority consents or invoking the judicial management process; both of which are complex, time consuming and expensive.
3.2 The Company Voluntary Arrangement was introduced in the UK in its Insolvency Act
1986, as a simple process by which a company can enter an arrangement with its creditors, and thereby bind all unsecured creditors, provided that its proposals have been appraised and implemented by a qualified independent insolvency practitioner. Such proposals require only a simple majority of shareholders and a 75% majority in value of creditors in order to bind all unsecured creditors[83]. One of the deficiencies of the original arrangement was the absence of a moratorium period. Subsequent reform proposals have included the introduction of a 28-day statutory moratorium, which may be extended by court order for another maximum of 60 days[84]. It is possible to address some of the operational deficiencies of the CVA process, in particular, to provide clarity as to the obligations of the CVA supervisor upon a failure of the process and of the status of the funds collected upon a subsequent liquidation of the company. We recommend the introduction of company voluntary arrangements in Singapore, modelled after the UK Insolvency Act 1986.
1.1.11 RECOMMENDATION 4.2
The CLRFC recommends the introduction of company voluntary arrangements, modelled after the UK Insolvency Act 1986, in the proposed omnibus insolvency legislation.
4 STANDARDISATION OF QUALIFIED INSOLVENCY PRACTITIONERS
4.1 There are currently different qualifications for persons acting as liquidators or judicial managers. In a winding up by the Court, the liquidator is appointed by the Court and must be either the Official Receiver or an approved company auditor[85]. In a members’ voluntary winding up, the liquidator is appointed by the company during a general meeting. The liquidator appointed in a members’ voluntary winding up need not be the Official Receiver or an approved company auditor. The nominated judicial management petitioner must be an approved company auditor who is not the auditor of the company[86]. A judicial manager appointed by the court or nominated by the Minister need not be an approved company auditor[87]. We see merit in a common standard for all insolvency practitioners whether receivers, administrative receivers, liquidators or judicial managers.
4.2 We also see value in widening the range of qualified insolvency practitioners who will be accredited to provide insolvency services not only for Singapore companies, but also for cross border insolvency and restructurings in the region. We recommend that the range of qualified insolvency practitioners be extended to include finance and other professionals. The UK Insolvency Practitioners Regulations 1990[88] prescribes that insolvency practitioners should have:
(i) a recognised university degree or a recognised General Certificate of Education at the advanced level;
(ii) passed an insolvency examination set by a Joint Insolvency Examination Board or have acquired in or been awarded in a country outside the United Kingdom professional or vocational qualifications which indicate that the applicant has the necessary knowledge and competence; and
(iii) has the necessary working experience (defined as a certain number of working hours while employed by a person carrying on insolvency practice).
4.3 We further recommend the establishment of an insolvency practitioners’ association that would be responsible for accreditation of insolvency practitioners, continuing education and setting of professional standards.
The CLRFC recommends establishing a common qualification for all insolvency practitioners e.g. receivers, administrative receivers, liquidators and judicial managers. The range of qualified persons should be extended to finance and other professionals. The CLRFC further recommends establishing in due course an Insolvency Practitioners Association, which would be responsible for accreditation of insolvency practitioners, continuing education and setting of professional standards.
COMPANY LEGISLATION
AND REGULATORY FRAMEWORK COMMITTEE REPORT
CHAPTER FIVE – BOUNDARIES AND CONCLUDING RECOMMENDATIONS
1. INTRODUCTION
1.1 IN THIS CONCLUDING CHAPTER OF OUR REPORT, WE WOULD EXPRESS OUR BROAD APPROACH TO COMPANY LAW REFORM IN THE FOLLOWING TERMS. OUR BASELINE CA HAS SERVED US WELL FOR ALMOST 4 DECADES, AND THE ADAPTATIONS AND AMENDMENTS THAT HAVE BEEN INTRODUCED SINCE THEN HAVE SOUGHT TO ADDRESS SPECIFIC PROBLEMS AS THEY HAVE ARISEN. THE LEGACY IS THAT SINGAPORE HAS A FUNCTIONING COMPANY LAW WITH A HIGH DEGREE OF COMPLIANCE. FOR THE CURRENT AND FORESEEABLE FUTURE, WHICH IS INCREASINGLY A GLOBALLY COMPETITIVE ONE, WE NEED A LEGAL FRAMEWORK THAT IS CONDUCIVE TO RISK TAKING AND ENTREPRENEURSHIP, AND WHICH SUPPORTS OUR OBJECTIVE OF BEING A WORLD-CLASS BUSINESS AND FINANCIAL CENTRE. SINGAPORE’S CORPORATE REGULATORY FRAMEWORK MUST ALSO BE EFFICIENT AND GLOBALLY COMPETITIVE.
1.2 WE ARE NOT ALONE IN SEEKING A NEW MARKET-DRIVEN MODEL AS LEADING JURISDICTIONS, SUCH AS THE UK, HAVE EMBARKED ON THE SAME COURSE FOR A NUMBER OF YEARS. WE WOULD REITERATE AND ENDORSE THE GUIDING PRINCIPLES ENUNCIATED BY THE UK STEERING COMMITTEE[89], WHICH SHOULD GUIDE AND INFLUENCE THE FINAL SHAPE OF OUR NEW PROPOSED CA AND REGULATORY STRUCTURE.
1.3 We conclude this chapter with our review of disparate issues which have been raised. These include broadening the scope of book-entry securities to cater for securities issued by non-Singapore incorporated companies, disclosure requirements of substantial shareholdings, requirements for mergers and amalgamations, and repeal of the provisions governing investment companies in the CA.
2. GUIDING PRINCIPLES OF COMPANY LAW, REGULATORY STRUCTURE AND FRAMEWORK
2.1 In setting the content, structure and framework of our company law, we need to constantly keep in sight its core function of how we facilitate the conduct of business whilst preserving a range of responses to market failure and criminal conduct. The UK
Steering Committee’s Guiding Principles bear repetition and endorsement and are summarised as follows:
(a) The general principle is that company law should be primarily enabling or facilitative - i.e. it should provide the means for those engaged in business and other corporate activity to arrange and manage their affairs in the way which they believe is most likely to lead to mutual success and effective productive activity.
(B) REGULATORY INTERVENTION MAY BE REQUIRED WHERE:
(i) the desired legal result cannot be achieved without legal provisions to define it and make it effective - concept of corporate personality;
(ii) the result sought is so predictable that it makes sense for the law to provide a ready made but optional (“default”) solution - providing a model constitution;
(iii) there is, or may be, substantial risk of market failures, so that protections for the party unable to protect himself through his own choices, actions and remedies are required - shareholders’ protection against abuses by directors with a personal interest in company transactions; and
(iv) there is a public interest in the activity in question which requires that those involved respond to wider demands - published information, fraud and dishonesty.
2.2 We believe in a calibrated range of sanctions, which includes criminal, civil and regulatory sanctions, as well as professional sanctions and censure. These would enable the Regulators to better differentiate between honest business failures and those that merit criminal sanctions. What is intended is a shift from primary legislation, which amendment would require more time and resources, to subsidiary regulations and best practice codes which can more speedily reflect changing market needs.
2.3 We would temper enthusiasm for self-regulation with the recognition of its inherent limitations of market and self-interest, and affirm the value of regulators being closely informed by industry. We need to resource and institutionalise a systematic review process involving the regulators, the SGX and the industry associations which will facilitate regular and systematic review, timely response, and standards setting in the light of market and regulatory developments in the major economies.
The CLRFC recommends that the guiding principles identified by the UK Steering Committee be adopted in Singapore. The CLRFC further recommends a calibrated range of sanctions, which includes criminal, civil and regulatory sanctions, as well as professional sanctions and censure. A regular review process involving regulators, as well as market and industry players, should be institutionalised to
track, evaluate and respond to market and regulatory developments in the major economies.
3. BOOK-ENTRY SECURITIES IN SINGAPORE
3.1 We note that the Central Depository (Pte) Limited (“CDP”) pioneered the set up and operation of a highly successful depository system initially without the aid of legislation. Legislation subsequently followed in the shape of Part IV Division 7A, CA which provides the statutory backdrop against which a scripless trading system is now operated by the CDP for securities traded on the SGX. This immobilisation process involves the deposit of share certificates with the CDP and thereafter, the trading and settlement being effected electronically through book-entries in its depository registers. We have reviewed Division 7A, CA in the light of the CDP’s market rules and with the objectives of providing greater legal certainty for investors relating to their ownership and title, widening the category of securities that may be traded on a scripless basis, and promoting further growth of securities custody services in Singapore.
3.2 Division 7A, s. 130A to s. 130P, CA provides the legal framework for the operation of “a book-entry or scripless system for the transfer of securities”. In addition, Division 7A is supported by:
(a) Subsidiary legislation: the Companies (Central Depository System) Regulations, 1994 Ed[90]. (the “Regulations”);
(b) the Terms and Conditions for Operation of Securities Account with CDP (the
“Terms and Conditions”); and
(c) CDP's Rules and Procedures (“CDP Rules”).
3.3 Division 7A, CA and the subsidiary legislation confer statutory rights and obligations, whereas CDP's Terms and Conditions and Rules are contractual in nature. The right of an investor to enforce these terms and conditions is dependent on the pre- existence of a direct contractual relationship between CDP and the investor who must be an account holder.
3.4 Legal Title and Ownership
3.4.1 The immobilisation of the securities with a central depository would ordinarily result in an investor being de-linked from the issuer, so that he no longer has directly enforceable rights against the issuer[91]. Where the securities are registered with an issuer, the central depository is recorded as the holder of those securities in the issuer's register of members or debenture holders, as the case may be. Where the securities are fully bearer in nature (i.e. no registration with the issuer is required, e.g. a physical global bond certificate), the central depository or its designated common depository is the holder of the securities and entitled thereto.
3.4.2 THE INTERMEDIATION OF A CENTRAL DEPOSITORY AS CUSTODIAN AND THE DE-LINKING OF THE INVESTOR FROM THE ISSUER COULD RAISE CONCERNS FOR INVESTORS WHO REQUIRE CERTAINTY OF OWNERSHIP
(WHETHER LEGAL OR EQUITABLE) OF THE SECURITIES. SINCE THE CENTRAL DEPOSITORY IS EITHER NAMED AS THE REGISTERED HOLDER OF THE SECURITIES, OR IS THE HOLDER OF AND ENTITLED TO THE BEARER SECURITIES, IT IS GENERALLY VESTED WITH THE LEGAL TITLE AND OWNERSHIP. AS A CONSEQUENCE, THE INVESTOR'S INTEREST CAN ONLY BE EQUITABLE IN NATURE UNLESS STATUTE IS ABLE TO RESTORE HIM TO A DIRECT RELATIONSHIP WITH THE ISSUER.
3.4.3 Notwithstanding that CDP is named in the issuer’s register of members, s. 130D, CA seeks to restore the investor's position for certain types of securities deposited with CDP, by deeming CDP depositors[92] as members, or holders of debentures or any derivative instruments, as the case may be, of the securities.
3.4.4 However, s. 130D, CA is limited in scope and application as it applies only to book-entry securities of listed securities of Singapore-incorporated companies. It does not deal with the rights of depositors of:
(a) Listed equity securities issued by non-Singapore incorporated corporations and securities issued by supra-nationals and states;
(b) Listed debt and derivative securities issued by Singapore and non-Singapore incorporated issuers, other than debt and derivative securities of Singapore- incorporated companies who have CDP named in its register of members;
(c) Unlisted securities by Singapore and non-Singapore issuers;
(d) Dematerialised securities; and
(e) Interests in collective investment schemes.
3.4.5 As CDP currently accepts both listed and unlisted securities under its Debt Clearing and Settlement System for debt securities, we recommend that the statutory treatment of book-entry securities should be extended to include a wider range of securities issued by Singapore corporations as identified above. The rights, title and interests of securities issued by non-Singapore incorporated entities will be determined by the place of incorporation and a review should be undertaken to provide that insofar as Singapore law is relevant, the relevant depositor shall be treated as if he were a member of the company or registered holder of the relevant securities.
The CLRFC recommends that the statutory treatment of book-entry securities should be extended to the following range of securities:
(f) Listed equity securities issued by non-Singapore incorporated corporations and securities issued by supra-nationals and states;
(g) Listed debt and derivative securities issued by Singapore and non-Singapore incorporated issuers other than debt and derivative securities of Singapore- incorporated companies who have Central Depository (Pte) Limited named in its register of members;
(h) Unlisted securities by Singapore and non-Singapore issuers;
(i) Dematerialised securities; and
(j) Interests in collective investment schemes.
With respect to securities issued by Singapore corporations, the same treatment may be accorded. With respect to securities issued by non-Singapore corporations, it should be provided that insofar as Singapore law is relevant such depositor shall be treated as if he were a member of the corporation or registered holder of the relevant securities.
3.5 Equitable Title or Ownership
3.5.1 Although s. 130D, CA deems CDP depositors as members, or holders of debentures or derivatives in limited circumstances, in practice, CDP continues to receive from the issuer any entitlements and dividends relating to the depositors' securities. Upon receipt, CDP will then arrange for these entitlements and proceeds to be credited or paid to the depositors.
3.5.2 For securities listed on SGX to be accepted into clearing systems such as Euroclear and Cedel, and by international investors, an important and recurring issue is whether assets (e.g. securities, entitlements and cash) held by CDP on behalf of its depositors will be treated as general assets of CDP and be available for distribution to its creditors in the event of its insolvency. Where CDP has legal title to those assets, it is important to establish that CDP holds those assets on trust for its depositors, and that the assets have been "ring-fenced" from CDP's general assets.
3.5.3 CDP is currently defined in s. 130A, CA as, inter alia, a depository which as a bare trustee operates the central depository system for the holding and transfer of book-entry securities. A bare trustee is in turn defined in the same section as a trustee who has no beneficial interest in the subject matter of the trust. CDP's status as a bare trustee is an important provision which should be recast as a substantive provision in Division 7A, CA rather than appearing in the definition section under s. 130A[93], CA.
3.5.4 It is important to note here that whilst Division 7A, CA recognises that CDP acts as trustee for its depositors (defined as account holders or depository agents but not including sub-account holders), it does not address the position of persons further down the custody chain who may be the ultimate owners of the securities but are not depositors or direct account holders with CDP. This omission recognises, perhaps, that relationships further down the custody chain are more appropriately defined by individual contractual arrangements between the investor and intermediary custodians.
3.5.5 Recognition of CDP’s status as a bare trustee may not, on its own, be adequate to create a proper trust over assets held by CDP on behalf of its depositors. This is because book-entry securities are, in their nature, unallocated and fungible. Securities of one depositor held by a central depository or custodian are generally pooled and co- mingled with those of another in the same series. It is difficult, if not impossible, at times to identify which particular assets within the pool should belong to a particular depositor. For a valid trust to be established, the securities have to be fungible, or made fungible in nature, and be co-owned collectively by all the depositors under an equitable tenancy- in-common akin to unit trusts[94]. Any declaration of trust by the CDP over such assets must reflect the collective ownership of the depositors so that each depositor is only entitled to a pro rata share in the pool of securities or proceeds arising therefrom.
3.5.6 Para 5.7 of the Terms and Conditions was introduced on 15 March 2000 to address this issue:
“Deposited Securities are held by the Depository on a fungible basis. Securities of the same issue and all payments made pursuant to, or received on account of such Securities, are held by the Depository on behalf of the Depositors to whose Securities Accounts such Securities are credited, as trustee for the collective benefit of such Depositors. For this purpose, all payments made pursuant to or received on account of, each such issue of Securities shall, prior to payment thereof by the Depository to the relevant Depositors, be held in a separate account on trust for the relevant Depositors collectively.
In the event that it becomes necessary to recover the Deposited Securities from the Depository, the rights to recovery of Securities of the same series from the Depository shall be exercised, against the pool of such Securities, collectively by the Depositors to whose Securities Accounts such Securities are credited.
No Depositor shall have any right to specific Securities, but each Depositor shall, instead, be entitled, subject to these Securities Account Conditions, to transfer (by book entry) or to withdraw from the Depository an amount of Securities of any issue equivalent to the amount credited to any Securities Account in his name, without regard to the certificate numbers of the Securities certificates, and the Depository's obligation to any such Depositor with respect to such Securities will be limited to effecting such a transfer or withdrawal.”
3.5.7 We note that the Euroclear system is supported in similar terms by Belgian statutory decree the Royal Decree No. 62 of November 10, 1967 - Enhancing the Circulation of Agent. Accordingly, we recommend that the provisions in Para 5.7 of the Terms and Conditions be re-enacted in the CA and/or SFA respectively, so that these provisions would have statutory entrenchment, rather than just contractual effect. Statutory restatement that the trust assets of CDP are shielded from CDP’s creditors in the event of CDP’s insolvency would further enhance investors’ confidence. We also
recommend that statutory provisions be introduced to enhance the protection of securities in the sub-accounts of a depository agent upon the insolvency of the depository agent, by providing for pro rata entitlements to the pool of securities held by the depository agent.
3.5.8 We expect that a twin track regime would be extended to book-entry securities of
Singapore-incorporated companies and non-Singapore-incorporated companies.
The CLRFC recommends that the Companies Act and/or Securities and Futures Act respectively should expressly define the depositors’ collective ownership of the Central Depository (Pte) Limited’s (“CDP”) trust assets, so that each depositor is only entitled to a pro rata share in the pool of securities or proceeds arising from such assets held in trust by CDP. The CLRFC further recommends that statutory provisions should be introduced to enhance the protection of securities in the sub-accounts of a depository agent upon the insolvency of the Depository Agent, by providing for pro rata entitlements to the pool of securities held by the depository agent.
3.6 Extend s. 366(2)(j), CA to all Corporations
3.6.1 S. 366(2)(j), CA was amended in 1998 to exclude share transfers and share registration services relating to listed corporations that are conducted in Singapore from the requirement to register a foreign branch in Singapore. To broaden the range of corporate custodial and registration services in Singapore, we recommend that the exclusion be extended to all corporations, both listed and unlisted.
1.2 RECOMMENDATION 5.4
The CLRFC recommends that Section 366(2)(j) of the Companies Act be extended to share transfers and share registration services of all corporations, both listed and unlisted.
4. DISCLOSURE OF SUBSTANTIAL SHAREHOLDINGS
4.1 S. 82 – s. 84, CA
4.1.1 S. 82(2)(b), CA requires persons who acquire an interest in not less than 5% of the voting shares of a SGX-listed company to notify the company within 2 days after of such occurrence. S.
83, CA requires any changes in such interests thereafter to be similarly reported within 2 days after the date of such change. Representations have been received suggesting that the time period for reporting be extended in the light of the difficulties encountered by international fund managers in making timely disclosures, and secondly, that changes thereafter be confined to
discrete or rolling thresholds of 1%, rather than the current requirement to disclose any changes in shareholding.
4.1.2 The investors’ interest in access to current movements in substantial shareholdings of listed companies is not in question. We note that the disclosure of movements in substantial shareholdings of listed companies becomes acute in creeping acquisitions and change of control of listed companies. In the US, there is a degree of relief provided under Regulation 13D-G of the General Rules and Regulations Promulgated under the Securities Exchange Act of 1934 for independent voting money managers. Whilst we acknowledge that most international fund managers acquire listed shares not for purposes of control, we cannot eliminate instances or occasions upon which control may in fact be exercised. We acknowledge difficulties that might be encountered by international fund managers to report within the short time frame of 2 calendar days. We note that Australia[95] and Canada[96] require disclosure within 2 market days, whilst others require 5 or 7 days. With currently available electronic means of disclosure, we see no reason to extend the timelines for disclosure beyond 2 market days and would so recommend. For consistency we recommend that the timeline for reporting of shareholdings by directors as required by s. 165, CA be similarly extended from 2 calendar days to 2 market days.
4.1.3 With respect to whether the reporting of changes should be confined to changes involving
1% or more, we would support the suggestion that reporting be required when the shareholding exceeds discrete 1% thresholds above the minimum 5% threshold, e.g. when the shareholding crosses 6%, 7% etc. Such reporting should include details of all transactions (both purchases and sales) that took place between the last report and the current report. The report of historical details is to ensure the continued value of these registers in subsequent monitoring of share transactions against contemporaneous corporate events and announcements.
The CLRFC recommends that the timeline for reporting of substantial shareholders, changes and cessation in Sections 82(2)(b), 83(2) and 84(2) of the Companies Act respectively, as well as the timeline for reporting of shareholdings by directors in Section
165 of the Companies Act be extended to 2 market days. In addition, reporting of changes prescribed by Section 83 of the Companies Act should be required when the shareholding exceeds discrete 1% thresholds above the minimum 5% threshold, e.g. when the shareholding crosses 6%, 7% etc. Such reporting should include details of all transactions
(both purchases and sales) that took place between the last report and the current report.
4.2 Scrip Lending Transactions
4.2.1 We have received suggestions that the disclosure of substantial shareholding obligations introduces a superfluous transaction cost to scrip lending in the following circumstances. A conventional direct scrip lending transaction would be effected by the transfer of securities from the securities account of a CDP depositor/lender to that of the depositor/borrower. Whilst all economic rights and benefits are retained by the depositor/lender by contract, this transfer would
be construed as a change of interest where it involves substantial shareholders and thus require disclosure as prescribed by s. 83, CA.
4.2.2 Where scrip lending is undertaken by an intermediary nominee (broker, custodian or bank) acting as an agent, the intermediary would not receive or deliver any securities, and would not itself be required to disclose interests. However, where the intermediary receives and delivers securities directly (primarily where scrip lenders wish to maintain confidentiality of their identity or require the credit risk of the intermediary and not the scrip borrower), there are some questions whether the intermediary is itself obliged to disclose substantial shareholding interests and changes thereto where the aggregate of such scrip lending securities and its own proprietary securities trigger the 5% threshold. In order to further support the development of the scrip lending market in Singapore, we recommend that s. 7(9), CA be extended to include a new exemption for scrip lending intermediaries (without affecting the obligation of the scrip lenders and the scrip borrowers). Scrip lending intermediaries whose securities are transferred to and out of its proprietary securities accounts in connection with a scrip lending transaction within two market days should be exempted from Division 4 of Part IV, CA.
The CLRFC recommends that scrip lending intermediaries, whose securities are transferred to and out of its securities account in connection with a scrip lending transaction within two market days, be exempted from Division 4 of Part IV of the Companies Act.
5. THRESHOLD FOR COMPULSORY ACQUISITION
5.1 S. 215, CA enables an acquirer of 90% of the shares (other than shares already held at the date of the offer by the acquirer, or by a nominee for the acquirer or its subsidiary) of a transferor company, to compulsorily acquire the remaining dissenting shareholders upon notice of its intention to acquire the remaining shares. S. 215(3), CA accords such dissenting shareholders with a compulsory put option in such circumstances.
5.2 Where an offeror company holds no shares in the target company, it would have to acquire 90% of all outstanding shares in order to invoke the right to compulsorily acquire the dissenting 10%. Where an offeror company holds a significant portion of the shares of the target company, it would ordinarily have to acquire 90% of the target company shares excluding those held by the offeror company and by a nominee for the offeror company or its subsidiary. However, under the current provisions in the CA, the offeror company may structure an offer to be made by another company which is not “a nominee for the acquirer or its subsidiary”. In such cases, the acceptances by such significant shareholder may be included together with all other acceptances for purposes of computation of the 90% level of acceptances, which then permits the invocation of the right of compulsory acquisition under s. 215, CA.
5.3 Although dissenting shareholders have the statutory right under s. 215(1), CA to apply to Court to order otherwise, case law suggests that in the absence of special circumstances, the court will presume that an offer is fair and proper where it has been accepted by 90% acceptances. The court will not substitute its own view of fairness for that of such a majority[97]. The court may be persuaded not to so order where, for example, it can be shown that the advice of an independent financial advisor had been erroneous[98]. Minority shareholders and others have from time to time expressed views that the current legal position does not enhance the prospects of their receiving better values for their minority shareholdings.
5.4 We have reviewed the positions in the UK and Hong Kong. In these jurisdictions, shareholdings of the offeror company and any associate of the offeror company are disregarded for the purpose of computing the 90% acceptance threshold. S. 430E, UK Companies Act 1985 provides that an associate of an offerer company means: (i) nominee of the offeror company; (ii) holding company, subsidiary or fellow subsidiary of the offeror company, or a nominee of such holding company, subsidiary or fellow subsidiary; (iii) a body corporate in which the offeror company is substantially interested; and (iv) any person, who is, or is a nominee of, a party to any agreement with the offeror for the acquisition of, or an interest in, the shares which are the subject of the take-over offer.
5.5 Australia imposes two thresholds which must be reached in order to compulsorily acquire the dissenting minority: the offeror must (i) hold at least 90% of the issued share capital of the offeree company; and (ii) have received at least 75% acceptances of the shares being offered for[99]. The shares that are “offered for” exclude those that are held by the offeror company and any associate of the offeror company.
5.6 The CLRFC has also received expressed views that argue against a regime that would allow a determined minority to hold at ransom the new controllers’ ability to privatise and convert their acquired company into a wholly owned subsidiary. On balance, the CLRFC recommends tightening s. 215, CA along the lines adopted in UK. This is consistent with the underlying policy that compulsory acquisition is available when a substantially independent majority group of shareholders (defined as 90%) have accepted an offer made by the offeror company.
The CLRFC recommends that Section 215 of the Companies Act be amended to exclude the following types of shares for the purpose of computing the 90% acceptance threshold:
(f) shares held by the offeror company;
(g) shares held by a nominee of the offeror company;
(h) shares held by a holding company, subsidiary or fellow subsidiary of the offeror company or a nominee of such holding company, subsidiary or fellow subsidiary;
(i) shares held by a body corporate in which the offeror company is substantially interested; and
(j) shares held by any person, who is, or is a nominee of, a party of any agreement with the offeror for the acquisition of, or an interest in, the shares which are the subject of the take- over offer.
6. MERGERS AND AMALGAMATIONS
6.1 S. 212, CA was originally intended to facilitate amalgamation of companies and their undertakings through wide powers accorded to the courts to effect a transfer of assets and liabilities through such court orders. Because of its restrictive application by the courts, it has rarely been successfully invoked. In today’s business environment of mergers and amalgamations of companies, it is timely for Singapore to introduce a merger process that is clear and efficient and which is tax neutral.
6.2 S. 251 and s. 259 of the Delaware Corporations Code (Title 8, Chapter 1, Subchapter IX, Merger, Consolidation or Conversion) provide for a streamlined merger process which requires a directors’ resolution in support of a merger, the preparation and circulation of the merger agreement and critical information to shareholders for a shareholders special majority vote, and a filing with the Regulator. Upon the effective date of the filing, the successor corporation assumes, by operation of law, all the rights and interests, as well as the obligations and liabilities of the merged entities.
6.3 The New Zealand Law Reform Commission Company Law Reform: Transition and Revision Report No. 16 recommended a process which is modelled on the Delaware Corporations Code. The broad outline of the draft statutory form which illustrates the process and consequences of an efficient merger/amalgamation process which concurrently protects shareholder and creditor rights are set out below. We recommend the introduction of a more effective and efficient statutory form of merger/ amalgamation process to be modelled on s. 188 – s. 194A, New Zealand Law Commission Company Law Reform: Transition and Revision No. 16.
“188 Amalgamations
Two or more companies may amalgamate, and continue as one company which may be one of the amalgamating companies or may be a new company.
189 Amalgamation proposal
(1) Each company which proposes to amalgamate must approve an amalgamation proposal setting out the terms of the amalgamation and in particular
(a) the name of the amalgamated company, if it is the same as the name of one of the amalgamating companies;
(b) the registered office of the amalgamated company;
(c) the maximum number of directors of the amalgamated company;
(d) the full names and residential addresses of the director or directors of the amalgamated company;
(e) the address for service of the amalgamated company;
(f) the share structure of the amalgamated company, specifying:
(i) the number of shares of the company;
(ii) the rights, privileges, limitations and conditions attached to each share of the company;
(iii) Whether the shares are transferable or non-transferable, and if transferable, whether their transfer is subject to any conditions or limitations;
(g) a copy of the constitutional document, if any, of the amalgamated company;
(h) the manner in which the shares of each amalgamating company are to be converted into shares of the amalgamated company;
(i) if any shares of an amalgamating company are not to be converted into shares of the amalgamated company, the consideration that the holders of those shares are to receive instead of shares of the amalgamated company;
(j) any payment to be made to any shareholder or director of an amalgamating company, other than a payment of the kind described in paragraph (i);
(k) details of any arrangements necessary to perfect the amalgamation and to provide for the subsequent management and operation of the amalgamating company.
(1A) An amalgamation proposal may specify the date on which the amalgamation is intended to become effective.
(2) If shares of one of the amalgamating companies are held by or on behalf of another of the amalgamating companies, the amalgamation proposal must provide for the cancellation of those shares when the amalgamation becomes effective without any payment in respect of those shares, and no provision may be made in the proposal for the conversion of such shares into shares of the amalgamated company.
190 Manner of approving amalgamation proposal
(1) The board of each amalgamating company must resolve that in its opinion
(a) the amalgamation is in the best interests of the shareholders of the company; and
(b) the amalgamating company will satisfy the solvency test immediately prior to the time at which the merger is to become effective; and
(c) the amalgamated company will satisfy the solvency test immediately after the time at which the amalgamation is to become effective.
(2) The directors voting in favour of a resolution required by subsection (1) must sign a certificate that, in their opinion, the conditions set out in subsection (1) are satisfied.
(3) The board of each amalgamating company must send to each shareholder of that company not less than 20 working days before the amalgamation is to take effect
(a) a copy of the amalgamation proposal;
(b) copies of the certificates given by each board under subsection (2);
(c) a statement of any material interests of the directors, whether in that capacity or otherwise;
(d) such further information and explanation as may be necessary to enable a reasonable shareholder to understand the nature and implications for the company and its shareholders of the proposed amalgamation.
(4) The amalgamation proposal must be approved
(a) subject to the constitution of each such company, by shareholders of each amalgamating company by special resolution; and
(b) by any interest group of an amalgamating company, where any provision in the amalgamation proposal would, if contained in any amendment to the company’s constitution or otherwise proposed in relation to that company, require the approval of that interest group.
(5) Every director who fails to comply with subsection (2) may be guilty of an offence under section 277(1).
1.2.1 191 Short form amalgamation
(1) A company and one or more of its wholly-owned subsidiaries may amalgamate and continue as one company without complying with section
189 and 190 if the board of each amalgamating company resolves
(a) to approve an amalgamation of the amalgamating companies on the terms that
(i) the shares of each amalgamating subsidiary company will be cancelled without any payment or any other consideration in respect of those shares; and
(ii) the constitution of the amalgamated company will be the same as the constitution of the amalgamating holding company; and
(b) that in its opinion the amalgamated company will satisfy the solvency test immediately after the time at which the amalgamation will become effective.
(2) Two or more wholly-owned subsidiary companies of the same holding company may amalgamate and continue as one company without complying with sections 189 and 190 if the board of each amalgamating company resolves
(a) to approve an amalgamation of the amalgamating companies on the terms that
(i) the shares of all but one of the amalgamating companies will be cancelled without any payment or other consideration in respect of those shares; and
(ii) the constitution of the amalgamated company will be the same as the constitution of the amalgamating company whose shares are not cancelled; and
(b) that in its opinion the amalgamated company will satisfy the solvency test immediately after the time at which the amalgamation will become effective.
(3) The resolution referred to in subsections 1(a) or (2)(a) is deemed to be an amalgamation proposal for the purposes of sections 192 and 194.
(4) The directors voting in favour of a resolution required by subsections (1) or (2)
must sign a certificate that, in their opinion, the condition set out in paragraph
(b) of the relevant subsection is satisfied.
(5) Every director who fails to comply with subsection (4) may be convicted of an offence under section 277.
1.2.2 192 Registration of amalgamation
After an amalgamation has been approved under sections 190 or 191 the following documents must be sent to the Registrar:
(a) the amalgamation proposal, if any;
(b) any certificates required under section 190;
(c) a certificate signed by the board of each amalgamating company stating that the company has approved the amalgamation in the manner required by this Act and by the constitution of the company;
(d) a certificate signed by the board, or proposed board, of the amalgamated company stating that in their opinion no creditors will be prejudiced by the amalgamation;
(e) consents to the prescribed form signed by each of the persons named as directors in the amalgamation proposal.
193 Certificate of amalgamation
(1) Forthwith after receipt of the documents required under section 192, the
Registrar must
(a) if the amalgamated company is the same as one of the amalgamating companies, issue a certificate of amalgamation in the prescribed form; or
(b) if the amalgamated company is a new company, enter on the New Zealand register the particulars of the company required by section 272 and issue a certificate of amalgamation in the prescribed form together with a certificate of incorporation in the prescribed form.
(2) Where an amalgamation proposal specifies a date on which the amalgamation is intended to become effective, and that date is the same as or later than the date on which the Registrar receives the documents required under section 192, the certificate of amalgamation and any certificate of incorporation issued by the Registrar must be expressed to have effect on that date.
194 Effect of certificate
(a) the amalgamation becomes effective;
(b) the amalgamated company has the registered name specified in the amalgamated proposal , if it is the same as a name of one of the amalgamating companies;
(c) the Registrar is required to remove the amalgamating companies other than the amalgamated company from the New Zealand register;
(d) the amalgamated company succeeds to all the property, rights and privileges of each of the amalgamating companies;
(e) the amalgamated company succeeds to all the liabilities of each of the amalgamating companies;
(f) proceedings pending by or against any amalgamating company may be continued by or against the amalgamated company;
(g) any conviction, ruling, order or judgment in favour of or against an amalgamating company may be enforced by or against the amalgamated company;
(h) the shares and rights of the shareholders in the amalgamating companies are converted into the shares and rights provided for in the amalgamation proposal, if any.
1.2.3 194A Creditors’ rights on amalgamation
Where immediately after the time when an amalgamation becomes effective, an amalgamated company does not satisfy the solvency test, any creditor of any of the amalgamating companies may recover any loss he or she suffered by reason of the amalgamation
(a) if no certificate was given by directors of that amalgamating company, in accordance with section 190(2) or 191(4), from the directors of that amalgamating company at the time the amalgamation was approved; or
(b) if such certificate was given, and if there were no reasonable grounds for the opinion that the amalgamated company would satisfy the solvency test, from the directors who signed the certificate.”
The CLRFC recommends the introduction of a more effective and efficient statutory form of merger/ amalgamation process to be modelled after Section 188
– Section 194A of the New Zealand Law Commission Company Law Reform: Transition and Revision Report No. 16.
7. INVESTMENT COMPANIES
7.1 Division 1 of Part XI of the CA contains provisions which regulate investment companies that are proclaimed to be investment companies by the Minister. Such companies are essentially set up to invest in marketable securities for the purposes of revenue and for profit. There are provisions restricting the amount of borrowing and investment for such companies. Several investment companies, which historically were sponsored by Singapore banks, have more recently been liquidated. We recommend the repeal of these obsolete provisions. Investment companies, which are in substance investment funds, ought to be structured and listed, without statutory prescription as to how they are to be operated. Where such funds are listed, the SGX listing rules and prospectus disclosure requirements would provide sufficient disclosure to investors.
The CLRFC recommends the repeal of Division 1 of Part XI of the Companies Act.
1.3 Appendix I
1.3.1 LIST OF RESPONDENTS
1.3.1.1.1.1.1 First Public Consultation
(1) Alan Lim
(2) Andrew Hunter Hoahing & Co
(3) Anthony Ow, Association of International Accountants-Singapore branch
(4) Assan Masood, Menon & Associates
(5) Associate Professor Lan Luh Luh and Dr Ho Yew Kee, Department of Business
Policy, Faculty of Business Administration, NUS
(6) Associate Professor Victor Yeo Chuan Seng and Assistant Professor Joyce Lee
Suet Lin, Division of Business Law, Nanyang Business School, NTU
(7) Association for Investment Management and Research (AIMR)
(8) Association of Chartered Certified Accountants (ACCA)
(9) Barry Wee Yhih Terk
(10) BDO International
(11) Beth Anne John
(12) BNP Paribas, Singapore branch
(13) Bob Low Siew Sie
(14) C C Yang & Co
(15) C K Leong & Associates
(16) Casey Lin
(17) Chan Jacqueline
(18) Chengteik Towers Pte Ltd
(19) Daniel Chan, UOB Asset Management Ltd
(20) David Peh Teng Lip
(21) Deloitte & Touche
(22) Don Ho & Associates
(23) EFRS Consultants
(24) Elaine Hiew
(25) Ernst & Young
(26) Fatima Sani
(27) Fklim and Bhchia
(28) Gabriel Ang
(29) Graeme McCallum, Lloyd Wise
(30) Group of 13 signatories
i. Robin Chia, Robin Chia & Co
ii. Teo Boon Tieng, Teo Boon Tieng & Co
iii. Goh Soo Chao, Richard Goh Management Services
iv. Neo Por Sit, Accent Business Consulting Pte Ltd
v. Goh Ngiap Suan, Goh Ngiap Suan & Co
vi. Tan Hong Khong
vii. Tay Ngiap Joo, Edwin Tay & Co
viii. Serene Tan, A-Plus Services Centre ix. Chery Sheue Mei, Group Accountants x. Agnes Low K. C., K. C. Low & Co
xi. Tan Theong Hee, TTH Management Consultants
xii. Jonathan Tan, Tan C.H. & Co
xiii. Steven Yit Chee Wah, CW Yit & Associates
(31) Group of 3 signatories
i. Lim Meng Eng, M E Lim & Co
ii. Low Aik Har, A. H. Low & Co
iii. Seow Fong Wan, Seow Fong Wan & Co
(32) Group of 7 signatories
i. Lee Nyen Fatt, N. F. Lee & Co
ii. Ong Eng Joo, E. J. Ong & Co
iii. Yeo Cheng Hee, N. F. Lee & Co
iv. Ong Sin Huat, Ong Yong & Partners
v. Tan Peck Leng, Irving, Irving Tan & Co
vi. Lee Swee Siele, S S Lee & Co
vii. Chow Chuen Wei, William, C W Chow & Co
(33) H. Wee & Co
(34) Heng Lee Seng & Co
(35) Institute of Certified Public Accountants (ICPAS)
(36) Invesco Asset Management Singapore
(37) Jason Lee Soon Sin
(38) Jerry Lee, Ng, Lee & Associates
(39) Jesseka Teo
(40) Ji Teo
(41) John Lee Mong Wah
(42) K Y Chik & Associates
(43) K Y Chiu & Co
(44) Kelvin
(45) Kon Yin Ton, Foo Kon Tan Grant Thornton
(46) Kong Lim & Partners
(47) KPMG
(48) Lai Seng Kwoon
(49) Laura Ng Kwee Hong
(50) Law Society of Singapore
(51) Lee & Lee Electronics (S) Pte Ltd
(52) Lee Kok Poh & Co
(53) Leong Kwong Tat
(54) Lim Ai Hong
(55) Lim Siew Ngo
(56) Lim Whye Mon
(57) Ling Choo
(58) Lo Hock Ling & Co
(59) Low Aik Har
(60) Low Kok Kim & Co
(61) Lui Ah Chong
(62) Mabel Sim, Societe Generale
(63) Maggie Yuen
(64) Mark Anthony Holdings Pte Ltd
(65) Michelle Lim
(66) N K Ho & Co
(67) Oh Bin Cheng
(68) Ong Lian Hwa
(69) Paul Tan, Tan, Teo & Partners
(70) PG Secretarial Pte Ltd
(71) Phuan Phui Seck, Brian
(72) Poon Moon Hoe
(73) PricewaterhouseCoopers
(74) Questor Management
(75) Rebecca Chip Lye Yin
(76) Robert Tan & Co
(77) Roland Ma, MGI Chan-Ma & Co
(78) S H Tang & Associates
(79) S S Chan
(80) SH Lock
(81) Singapore Exchange
(82) Singapore Institute of Directors (SID)
(83) Staff at Khoo Management
i. Toh Peck Khwai
ii. Lee Yar Sze
iii. Lee Jenny
iv. Delima Widjaja
(84) Steven Tan & Co
(85) Tan Chieh Inn
(86) Tan Ching Siew
(87) Tan Saw Bin
(88) Tan Seng Boon, Frontier E-Consulting Pte Ltd
(89) Tan Tong Kai
(90) Tan, Chan & Partners
(91) Tang
(92) Teo Meng Hua
(93) TeoFoongWongLCLoong
(94) Terence Teo Boon Seng
(95) The Singapore Association of the Institute of Chartered Secretaries and
Administrators
(96) Thomas Koh Hui Chang
(97) Tony Wong, Wong Hong Koon & Co
(98) Vera Yeo
(99) Vivienne Chiang
(100) Willie Tay
(101) Wong Khen Seng
(102) Wong Sook Yee
(103) Xu Hong
(104) Yeo Yew Swee & Co
(105) Yip Yan Moi
1.3.1.1.1.2 Second Public Consultation
(1) Matthew Ma
(2) Lawrence Koh
(3) H.P. Wee
(4) Associate Professor Ng Eng Juan
(5) Tan Eng Kian
(6) Stephen Moore
(7) Nancy Khoo
(8) Patrick Tan Kim Hai
(9) Professor Ivan Png
(10) Tan Tiong Heng
(11) Wilfred Ching
(12) Yip Wai Hong
(13) Byron Jeremy Peter Chan
(14) Ong Lian Hwa
(15) Kenneth Chin
(16) Yeo Lim Yam
(17) H. A. Tan
(18) Ayadurai Jothidas
(19) Ian A. MacLean
(20) Yeo Yew Swee & Co
(21) Cher
(22) Institute of Certified Public Accountants of Singapore
(23) Grace Chong Tan
(24) Foong Daw Ching
(25) Lim Y.H. & Co
(26) Liow Soon Huat
(27) Seatown Foundation Engineering Pte Ltd
(28) Lee Chor Peng
(29) Pan Asia Securities Lending Association
(30) The Association of Chartered Certified Accountants
(31) Lee Soon Sin Jason
(32) Liaw Kim Swee
(33) Edwin Lee
(34) Stella Tan
(35) Seah Hou Kee
(36) Associate Professor Lee Pey Woan
(37) Anthony J. Twohill & Co
(38) K. Y. Chiu & Co
(39) Deloitte & Touche, Singapore
(40) T .W. Lee & Co
(41) Abdul Hamid & Co
(42) Dr Choong Chow Siong
(43) Andrew Ang
(44) S. B. Tan & Co
(45) T. S. Tay & Associates
(46) Singapore Institute of Directors
(47) Dr Ho Yew Kee
1.3.1.2.1 Assistant Professor Luh Luh Lan
(48) Andrew Hunter Hoahing & Co
(49) Group of 4 signatories
i. Seow Fong Wan & Co
ii. M .E. Lim & Co
iii. A .H. Low & Co
iv. Commercial Planners
(50) BDO International
(51) Singapore Association of the Institute of Chartered Secretaries and
Administrators
(52) Joe Christian
(53) Elsie Lian
(54) LTC & Associates
(55) Raffles Corporate Consultants Pte Ltd
(56) David Chew
(57) Joe Wong
(58) Investment Company Institute
(59) N. F. Lee & Co
(60) Y. M. Kew & Co
(61) H. T. Khoo & Co
(62) Richard Sykes
(63) Wong Hong Koon & Co
(64) Group of 3 signatories i. Teo Lee Kiang ii. Tey Siok Hoon iii. Tan Seng Vui
(65) Ang & Co
(66) Ernst & Young, Singapore
(67) R Nithianantham & Co
(68) Group of 2 signatories
i. S. S. Chan
ii. Sim Hang Khiang
(69) Barry Wee & Co
(70) Tan, Teo & Partners
(71) Teo Liang Chye & Co
(72) Tan Tok Jin
(73) Dr Ho Ngiap Kum
(74) Singapore Exchange Ltd
(75) Group of 22 signatories
(76) Toh Poh Suan
(77) Kong, Lim & Partners
(78) Ng, Lee & Associates-DFK
(79) Group of 2 signatories
i. Wong Sook Yee & Co
ii. K. K. Tham & Co
(80) K. K. Tham & Associates
(81) E. J. Ong & Co
(82) Singapore Technologies Pte Ltd
(83) K. Y. Chiang & Co
(84) L. Y. Leong & Co
(85) PricewaterhouseCoopers, Singapore
(86) Peter Lim Boon Seng
(87) Wong Khen Seng
(88) Tan Ching Siew
(89) Chio Lim & Associates
(90) KPMG, Singapore
(91) Koh Swee Tian & Co
(92) B. S. Lim & Co
(93) Ong Yong & Partners
(94) Jonathan Tan
(95) Paul Go & Co
(96) Y. K. Kwan & Co
(97) Association of Banks in Singapore
(98) Fraser & Neave Ltd
(99) Terence Tan Bian Chye
(100) Teo Eng Tian & Co
(101) Economic Development Board
(102) Rob Everett
(103) David Graham
(104) Alan Cameron
[1] Consultation Documents are available online at http://www.dti.gov.uk/
[2] 7 Edw 7 c 24
[3] S 4(2) UK LP (7 Edw 7 c.24)
[4] Law Commission Consultation Paper No 161 and Scottish Law Commission Discussion Paper No 118
available at www.lawcom.gov.uk
[5] 2000 c 12
[6] 1985 c 6
[7] 1994 c 7
[8] NZ Company Law Reform and Restatement Vol. 9, Pages 193 and 194
[9] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 6.2 and Part III, draft clause 11.
[10]S. 201A(1) of the Corporations Act 2001, s. 282(3) of the UK CA and s. 150 of the New Zealand
Companies Act 1993.
[11] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 6.2.
[12] A special resolution is defined by s. 184, CA as a resolution requiring a majority of not less than three- fourths of members present and voting. The notice of the meeting, whether Annual General Meetings or Extra-ordinary General Meetings, must specify the intention to propose a resolution as a special resolution and at least 21 days notice of such meetings must be given. Special resolutions are required for alteration to the Memorandum and Articles of Association, change of name of company and reduction of capital.
[13] Special notice (and not special resolutions) must be given to the company to transact any of the following, namely, removal of auditor before expiration of term of office [s. 205(4)], removal of director before expiration of term of office [s. 152(2)] and appointment of a person in place of a director so removed [s. 152(2)].
[14] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 2.22.
[15] [1981] 1 All ER 533
[16] Modern Company Law for a Competitive Economy Final Report, Volume 1, Chapter 2, Page 28, Paragraph 2.14. The Company Law Review Steering Group, June 2001.
[17] Modern Company Law for a Competitive Economy Final Report, Volume 1, Chapter 2, Page 29, Paragraph 2.15. The Company Law Review Steering Group, June 2001.
[18] Companies (Amendment) Bill - Second Reading dated 27 March 1974. Parliamentary Debates Vol. 33, Columns 956 to 958.
[19]S. 283 of the UK CA.
[20] Modern Company Law for a Competitive Economy Final Report, Volume 1, Chapter 4, Page 68, Paragraphs 4.7 and 4.8. The Company Law Review Steering Group, June 2001
[21] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 6.6.
[22]S. 175, CA and s. 197, CA
[23] Modern Company Law for a Competitive Economy, Final Report, Volume 1, Chapter 3, Page 49-54, Paragraphs 3.33-3.45. The Company Law Review Steering Group, June 2001.
[24]Modern Company Law for a Competitive Economy, Final Report, Volume 1, Chapter 3, Page 49, Paragraph 3.34. The Company Law Review Steering Group, June 2001.
[25] This arises from one of the Disclosure and Accounting Standards Committee recommendations.
[26]According to the Guidance Booklet on Dormant Companies, issued by the UK Companies House (last updated in Feb 2002), the term “no significant transactions” means “no entries in the company’s accounting records”. The amount paid for shares when the company is first formed and a few costs that the company may incur to keep the company registered at Companies House do not count as significant accounting transactions. (http://www.companies-house.gov.uk)
[27]S. 651 and 653, UK CA
[28] Modern Company Law for a Competitive Economy, Final Report, Vol. 1 Chapter 1, Page 228, Paragraph 11.18. The Company Law Steering Committee, June 2001.
[29] International Loans, Bonds and Securities Regulation by Philip R Wood (1995, Sweet & Maxwell)
(p198, 199, 200).
[30]Para 7.2 of Modern Company Law, Vol. 8, Completing the Structure November 2000.
[31]Para 3.19, Modern Company Law Vol.3 Company Formation and Capital Maintenance October 1999.
[32]Para 3.8, Modern Company Law Vol.3, Company Formation and Capital Maintenance Order 1999.
[33]Ibid para 3.6
[34]Ibid para 3.21
[35] Capital Maintenance: Other Issues June 2000 para 19
[36]Para 3.15, Modern Company Law Vol. 3 Company Formation and Capital Maintenance: October 1999
[37] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 6.5
[38] In the case of private companies, however, the court will not be involved even where there is a return to shareholders. Ibid para 3.31
[39]Ibid para 3.32
[40] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 6.5 and Part III, draft clauses 50-58
[41]Ibid para 3.30
[42]S. 254T, Corporations Act 2001
[43] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 6.5
[44]S. 171, UK Companies Act 1985
[45] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 6.5
[46]Para 12.8 of UK Final Report
[47] UK White Paper on Modernising Company Law, Volume I, Part II, paragraphs 6.18-6.20
[48]Modern Company Law for a Competitive Economy Final Report, Volume 1 & 2, The Company Law
Review Steering Group, June 2001
[49] Report No. 9 of the New Zealand Law Commission, Company Law: Reform and Restatement (1989)
[50] Rule 2, Companies (Application of Bankruptcy Act Provisions) Regulations S293/95
[51]Modern Company Law for a Competitive Economy – Final Report, Volume 1, Chapter 6, Page 140, Paragraph 6.18, The Company Law Review Steering Group, June 2001
[52]Modern Company Law for a Competitive Economy - Completing the Structure, Chapter 3, Page 33, Paragraph 3.2. A consultation document from the Company Law Review Steering Group, November 2000.
[53]Notes
(1) In this paragraph, “the material factors” means-
(a) the likely consequences (short and long term) of the actions open to the director, so far as a person of care and skill would consider them relevant; and
(b) all such other factors as a person of care and skill would consider relevant, including such of the matters in Note (2) as he would consider so.
(2) Those matters are-
(a) the company’s need to foster its business relationships, including those with its employees and suppliers and the customers for its products or services;
(b) its need to maintain a reputation for high standards of business conduct; and
(c) its need to achieve outcomes that are fair as between its members.
[We have not adopted paragraph (b) of the UK formulation which is influenced by EU
developments relating to community and environmental impact.]
(3) In Note (1) a “ person of care and skill” means a person exercising the care, skill and diligence required by paragraph 4.
(4) A director’s decision as to what constitutes the success of the company for the benefit of its members as a whole must accord with the constitution and any decisions as mentioned in paragraph 1.
[54]Where a director has, in accordance with this Schedule, entered into an agreement which restricts his power to exercise independent judgment later, this paragraph does not prevent him from acting as the agreement requires where (in his independent judgement, and according to the other provisions of this Schedule) he should do so.
[55]Notes
(1) In this paragraph “the board” means the board of directors acting without the participation of any interested director.
(2) This paragraph does not apply to a use to which the director has a right under a contract or other transaction that he has entered into with the company, or that he has in the performance of his functions authorised, procured or permitted the company to enter into.
[56] (1) What is a reasonable balance between those things at any time must be decided in good faith by the director, but he must give more or less weight to the need to reduce the risk according as the risk is more or less severe.
(2) In deciding in any case what would be most likely to promote the success of the company for the benefit of its members as a whole, the director must take account in good faith of all the material factors that it is practicable in the circumstances for him to identify.
(3) The Notes to paragraph 2 apply also for the purposes of this paragraph.
(4) In this paragraph, “due care and skill” means the care, skill and diligence required by paragraph 4.
[57] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 3.5
[58] Report No. 9 of the New Zealand Law Commission, Company Law: Reform and Restatement (1989)
[59]Modern Company Law for a Competitive Economy - Final Report, Volume 1, Annex C (Statement of Directors’ Duties – Draft Clause and Schedule and Explanatory Notes), Page 349, Explanatory note 4, The Company Law Review Steering Group, June 2001.
[60] UK White Paper on Modernising Company Law, Volume I, Part II, paragraphs 3.16 and 3.17
[62] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 3.18
[63] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 6.24
[64] UK White Paper on Modernising Company Law, Volume I, Part III, draft clause 21
[65]Gambotto v WCP Ltd (1995) 182 CLR 432 (High Court of Australia) but see Re Advance Bank of
Australia (No.2) (1997) 23 SCSR 513 at 532
[66]Modern Company Law for a Competitive Economy – Final Report, Volume 1, Chapter 7, Page 170,
Para 7.60, The Company Law Review Steering Group, June 2001.
[67] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 2.12
[68] UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 2.11
[69] “Electronic Communications for Companies: An Order under the Electronic Communications Bill”, a consultative document from the UK Department of Trade and Industry, February 2000.
[70]S. 39(1), CA provides as follows:
“Subject to this Act, the memorandum and articles shall when registered bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles.”
[71]Para 5.71, “Modern Company Law for a Competitive Economy – Completing the Structure”, a consultation document from The Company Law Review Steering Group, November 2000, proposes that these rights should include: “(the rights) to be entered in the register of members, to transfer shares; to vote and participate in meetings, to receive dividends properly declared and determined distributions and to pre-emption should be defined as personal, together with any other right breach of which gave rise to direct harm to the member rather than not indirect, or collective, harm to the company as a whole.”
[72] Cap. 20
[73]There are also provisions in several other enactments that confer priority on certain types of claims against a company in liquidation. Specifically, these are the Workmen’s Compensation Act (Cap. 354), the Income Tax Act
(Cap. 134), the Employment Act (Cap. 91), the Banking Act (Cap. 19) and the Insurance Act (Cap. 142).
[74] Cap. 50 Regulation 3 (1990 Revised Edition), Singapore Subsidiary Legislation as amended by S293/95
[75]S. 233, UK Insolvency Act 1986
[76]S. 425, UK Companies Act 1985
[77]S. 395 et. seq., UK Companies Act 1985
[78] White paper, “Productivity and Enterprise – Insolvency: A Second Chance”, CM 5234, July 2001
[79] Cap.50 Rule 1 (1990 Revised Edition), Singapore Subsidiary Legislation as amended by S 184/69, S 434/94, S
[513]/95, S 118/96, S 184/98, S 118/2000, S 128/2001, S 315/2001
[80]Cap. 50 Regulation 1 (1990 Revised Edition) as amended by S 445/93, S 2/96, S 561/98, S 27/2001, S 314/2001, S 27/2002
[81] Cap. 20 Rule 1 (2002 Revised Edition), Singapore Subsidiary Legislation as amended by S 304/99
[82] Cap. 50 Regulation 3 (1990 Revised Edition), Singapore Subsidiary Legislation as amended by S293/95
[83]Rule 1.19, UK Insolvency Rules 1986
[84] Para 8 and 32 of Schedule A1 Insolvency Act 1986 (Cap 39) as amended by the UK Insolvency Act 2000
[85]S. 9(3), CA
[86]S. 227B(3)(a), CA
[87]S. 227B(3)(e), CA
[88] UK Statutory Instrument 1990, No. 439
[89] Modern Company Law for a Competitive Economy Final Report, Volume 1, Paragraphs 1.10 – 1.35.
[90] Cap 50, Regulation 2, S446 of 1993 as amended by s47/94
[91] Joanna Benjamin, The Law of Global Custody (1996), p 193
[92]S. 130A, CA defines depositors as “account holders and depository agents, but not sub-account holders”.
[93] See s. 21, Malaysian Securities Industry (Central Depositories) Act 1991 which provides that “For the purposes of paragraph 6A(9)(a) of the Companies Act 1965, a central depository or its nominee company shall, in relation to deposited securities which are registered in its name, be deemed to be a bare trustee.”
[94] Benjamin supra, note 1, chapter 5 and pp 193 - 195
[95]S. 671B, Corporations Act 2001
[96]S. 101, Ontario Securities Act
[97]Re Hoare & Co Ltd (1934) 150 L.T. 374.
[98]Re Lifecare International Plc 1989 5 BCC 755
[99]S. 661A, Corporations Act 2001