Jurisdiction - Singapore
Reports and Analysis
Singapore – Latest Development in Corporate Governance Regime.


February, 2012
2011, to some extent, can be considered a watershed year in terms of developments in the corporate governance regime in Singapore. The Corporate Governance Council (the “Council”) issued a consultation paper in June on the proposed revisions to the Code of Governance Governance (the “Code”) while the Singapore Exchange Securities Trading Limited (“SGX”) announced in September the amendments to its listing rules (the “Rules”). This article seeks to discuss some of the pertinent changes in the Code and the Rules.
(A) Enhanced SGX Rules 
SGX announced on 14 September 2011 various amendments to its listing rules (the “Amendments”) to strengthen corporate governance practices and foster greater corporate disclosure. The Amendments were to be effective as of 29 September 2011. 
These new Rules are prompted by the fallout from some S-chips (Chinese companies listed on SGX) during the 2008 financial crisis, which saw some controlling shareholders lose their controlling stake to creditors after defaulting on their loans. 
Rule 704(31) requires a listed company (the “Issuer”) to disclose any loan agreement or issuance of debt securities by it or its subsidiaries that contains a change in control provision or a condition which refers to the shareholding interest of its controlling shareholders (each, “Restrictive Covenant”), the breach of which will cause a default of the agreement or debt securities, significantly affecting the Issuer’s operations. In making such disclosure, an Issuer is required to disclose (a) the details of the Restrictive Covenant and (b) the aggregate level of the facilities that may be affected by a breach of the Restrictive Covenant.
The significance of Rule 704(31) in promoting corporate governance should not be underestimated. The aim of Rule 704(31) is to facilitate greater corporate disclosure so as to better protect the interests of the minority shareholders. It is important for shareholders to have knowledge of the Restrictive Covenants in an Issuer’s and its subsidiaries’ loan agreements, which when breached, will significantly affect the financial condition of the Issuer so that they are in a position to make informed investment decisions. The requirement for an Issuer to disclose the aggregate level of facilities affected by a breach of a Restrictive Covenant also allows its shareholders to take stock of the full extent of the liabilities that the Issuer is exposed to due to the typical cross default provisions found in most, if not all, loan agreements. 
Undertakings by controlling shareholders for share pledge arrangements
Rule 728, which is to be read together with Rule 704(31), obliges an Issuer which has entered into such agreements or issued such debt securities pursuant to Rule 704(31), to obtain an undertaking from its controlling shareholder(s) to notify it, as soon as such controlling shareholder(s) enter into any share pledging arrangements relating to their shares or know of any event which may potentially breach a Restrictive Covenant. An Issuer must immediately announce specific information such as (a) the name of the controlling shareholder, (b) the class and number of shares and the percentage of its issued share capital that is the subject of the security interest and (c) the parties in whose favour the security interest is created, upon such notification by its controlling shareholder(s).
Rule 728 will see shareholders being kept informed about share pledge arrangements, which was not the case for the Sino-Environment Technology saga in 2009. The then Chief Executive Officer defaulted on his personal loan after having used his shares in Sino-Environment Technology as security. This resulted in his shares being sold and such sale triggered an early redemption of Sino-Environment Technology’s outstanding convertible bonds. 
Application of Rules 704(31) and 728
Rule 704(31) applies to both existing loan agreements and debt securities and to facilities entered into on or after 29 September 2011. Therefore, Issuers would need to check if they and/or their subsidiaries have any existing loan agreements and debt securities documentation which require immediate announcement under the new Rule 704(31). As the spirit and intent of Rule 704(31) is to facilitate disclosure of the possibility of any breach of a Restrictive Covenant which affects an Issuer’s financial health, it is likely that Rule 704(31) is also applicable where a breach of a Restrictive Covenant would trigger a prepayment event, notwithstanding that a prepayment event is technically not an event of default under the agreement. 
Similarly, Rule 728 applies to both new and existing facilities of Issuers and their subsidiaries. Therefore, Issuers should proceed immediately to obtain the requisite undertaking from their controlling shareholders even if such controlling shareholders have not entered into any share pledge arrangements. 
Notwithstanding the above, we understand that a number of Issuers have consulted SGX and have been granted a grace period of up to 29 October 2011 to comply with the new Rules. 
Further new Rules have been introduced to oblige Issuers to make appropriate announcements and/or disclosures when they make specific key appointments or when there are changes to key appointments within the Issuer group. These are highlighted as follows:
Obligation to inform SGX of irregularities upon cessation of service- Rule 704(7)(b)
The purpose of this Rule is to implement a mandatory whistle blowing policy for key executives of an Issuer to inform SGX of any financial irregularities upon the cessation of their service. This Rule is applicable to any director, chief executive officer (“CEO”), chief financial officer (“CFO”), chief operating officer, general manager or other executive officer of equivalent authority. Such key executives are to inform SGX in writing as soon as possible if they are aware of any irregularities in the Issuer which would have a material impact on the group, including financial reporting. 
Legal representatives- Rules 610(7) & 704(11)
There is a requirement in some civil law jurisdictions such as the People’s Republic of China for companies to appoint legal representatives who are vested with the authority to represent, exercise rights and enter into binding contracts on their behalf. 
Under Rules 610(7) and 704(11), it is now necessary for an Issuer to announce and where applicable, disclose in the prospectus or offering memorandum, the appointment of and changes to its or its principal subsidiaries’(1) legal representative(s) or person(s) with equivalent authority (the “Legal Representatives”) with the sole power to represent and enter into binding contracts on its behalf. Pursuant to Rule 610(7), information such as (a) the identity of the Legal Representative(s), (b) the powers and responsibilities of such Legal Representative(s), (c) any risks in relation to their appointment, including concentration of authority and impediments to their removal and (d) the description of the procedures implemented to mitigate the risks in relation to their appointment and an opinion by the Issuer’s board on the adequacy of such procedures, must be disclosed.
(1) A principal subsidiary is a subsidiary whose latest audited consolidated pre-tax profits account for 20% of more of the latest audited consolidated pre-tax profits of the Group.
The Legal Representatives of S-chips are important figures because they often hold the company seal used to execute transactions and transfer assets. Rules 610(7) and 704(11) aim to resolve the problems relating to the Legal Representatives of some S-chips which are or have principal subsidiaries based overseas, that have surfaced over the years. There have been instances whereby the Legal Representatives of S-chips refused to comply with the directions of the Issuer’s board or have fled and disappeared from the country after various irregularities in the Issuer’s accounts have been discovered.
It is envisaged that the disclosure requirements under Rules 610(7) & 704(11) may make Issuers more careful in their selection of Legal Representatives and therefore boost corporate governance practices in Singapore.
Independent directors who sit on the board of overseas principal subsidiaries- Rules 704(12) & 610(8) 
An Issuer is now required to disclose in the relevant prospectus or offering memorandum and announce whether any of its independent directors is appointed to the board of its principal subsidiaries that are based in jurisdictions other than Singapore. An Issuer must also announce the appointment of an independent director to the board of its principal subsidiaries and the cessation of service of such independent director. 
The requirement of the appointment of at least one Singapore-resident independent director onto the board of principal subsidiaries outside Singapore was proposed in the December 2009 consultation paper. The rationale of having at least one Singapore-resident independent director is to enhance accountability. However, the general feedback received in response to the consultation paper was that it is hard to find independent directors willing to serve on the board of principal subsidiaries which are operating in jurisdictions they are unfamiliar with.
The rationale of these Rules is two-fold, namely (i) to ensure there is some form of accountability from Issuers who have their principal subsidiaries based overseas vis-a-vis the independent directors appointed to the board of such principal subsidiaries and (ii) in doing so, restore the confidence of retail investors in these Issuers whose corporate image may have been affected by the scandals of other Issuers with overseas principal subsidiaries. 
Negative confirmation by Audit Committee on the competency, character and integrity of CFO- Rule 610(6)
The Audit Committee of an Issuer is required to assess and issue a negative confirmation that after making all reasonable enquiries and to the best of their knowledge and belief, nothing has come to their attention to cause them to believe that the person to be appointed as CFO (or its equivalent) does not have the competence, character and integrity expected of a CFO of an Issuer. This negative confirmation must be included in the prospectus or offering memorandum.
The rationale of this Rule is to place the onus on the Audit Committee of an Issuer to carry out sufficient ‘due diligence’ on all potential candidates vying for the role of CFO prior to the Issuer’s appointment of the CFO so as to ensure that such CFO appointed will possess the requisite competence, character and integrity to effectively perform the functions of a CFO.
Rule 719 states that an Issuer should have a robust and effective system of internal controls which address financial, operational and compliance risks. It further empowers the Audit Committee (or such other committee) to commission an independent audit on internal controls for its assurance or where it is not satisfied with the systems of internal control. 
Rule 1207(10) further requires an annual report of an Issuer to contain inter alia, an opinion of its board, with the concurrence of the Audit Committee, on the adequacy of the internal controls of the Issuer. This opinion should address financial, operational and compliance risk of the Issuer. 
The Council proposed changes to 14 of the principles in the Code and their accompanying guidelines and introduced two new principles in its consultation paper on proposed revisions to the Code. 
Independent directors play a crucial role in providing guidance, supervision and checks and balances to an Issuer’s management team and executive directors for effective corporate governance and in protecting the overall interests of an Issuer.  
Relationships with substantial shareholders
The issue of when a director is considered independent has been much deliberated and discussed. There are some commentators who feel that relationships with substantial shareholders may influence an independent director’s exercise of his objective judgment while there are others who argue that since substantial shareholders’ interests are often aligned with the other shareholders in an Issuer, directors who have relationships with substantial shareholders may still be deemed as independent. 
In addressing the concerns of many commentators to ensure the genuine independence of ‘independent’ directors, the Council has recommended to extend specific instances whereby a director is deemed to be non-independent to include persons associated with a substantial shareholder of an Issuer in the current or in the past three financial years. The Council has taken the view that to enable independent directors to perform their function effectively in Issuers, it is pertinent that they do not possess any relationship with substantial shareholders or organisations providing material services to Issuers. This is reflected in the revised principle 2 of the Code. 
While the above recommendation by the Council is a welcome change which will further boast the standards of corporate governance in Singapore, its implementation may be trickier. This is because for years, the boards of many Asian Issuers have been dominated by directors who either (a) hold a controlling interest in the Issuer or (b) who have long standing relationships with such controlling shareholders. To deem a person associated with a substantial shareholder as a non-independent director may lead to Issuers having to make overhaul changes to its existing independent directors. Given that the pool of experienced directors is limited in Singapore, finding experienced directors who fulfill the more stringent requirement of an ‘independent’ director is likely to be challenging. 
Directors’ tenure on an Issuer’s board
Another issue is whether a director’s tenure on an Issuer’s board may affect his independent judgment. The Council has taken the view that the independence of directors may be compromised after a long time spent on the board due to their friendship and familiarity with management. The Council has determined 9 years from the date of first election as the maximum tenure which an independent director can serve on the board before being deemed as no longer independent. 
As this proposal is likely to impact upon a significant number of Issuers and the pool of experienced directors is limited in Singapore, affected Issuers may have to immediately commence their search for suitable replacement independent directors and revamp their board if this proposal is implemented. This may also result in the phenomenon of some Issuers ‘swapping and rotating’ their independent directors.     However, as the risk of the independence of directors being compromised after 9 years spent on an Issuer’s board is real and not to be dismissed, this proposal should be supported in the interests of promoting best corporate governance practices. 
The Council has further recommended that at least half of an Issuer’s board be comprised of independent directors under 4 specific circumstances as follows:
(a) where the chairman and the CEO are the same person;
(b) the chairman and CEO are immediate family members;
(c) the chairman and CEO are both part of the management team; or 
(d) the chairman is not independent.
This recommendation stems from the belief that for effective corporate governance, an Issuer should avoid having concentration of power or authority. However, whether having at least half the board of directors as independent directors will indeed introduce an adequate objective and independent element on a board, may in practice, depend heavily on the choice of independent directors and in particular, the quality and integrity of these independent directors. Should an Issuer appoint long time friends or associates of its chairman or CEO (who are likely or inclined to share the same views as its chairman or CEO) as its independent directors, the ability of such independent directors to perform the role of acting as the check and balance to the executive/ management team may be compromised.
Directors are expected to allocate sufficient time and effort to their board duties so as to supervise an Issuer effectively. Accordingly, there has been increased focus across different jurisdictions around the world on the ability of directors holding multiple directorships to adequately perform their duties. For instance, the United Kingdom has taken the step of specifying the maximum number of directorships a director is permitted to hold. 
The Council has concluded that the demands of each directorship may vary depending on a number of factors such as the size and nature of the companies a director serves on, and the director’s role and responsibility on the board. The Council has recommended that the Nominating Committee consider this issue and satisfy themselves that each director is able to perform his duties, bearing in mind the directors’ principal commitments and other board representations. For the purpose of this proposal, the term ‘principal commitments’ is to include all commitments which involve significant time commitment such as full-time occupation, consultancy work, committee work, non listed company board representations and directorships and involvement in non-profit organisations. A director sitting on the board of non-active subsidiaries should not be deemed as principal commitments. Further, the Council has recommended that each board discloses in an Issuer’s annual report, the maximum number of listed company board representations its directors can hold.
Global events over the last few years have placed the governance of risk management by Issuers into sharp focus. While the Audit Committee is responsible for an Issuer’s risk governance, internal controls and audit function in Singapore, various other jurisdictions have revised their corporate governance practices to provide that the board is responsible for an Issuer’s risk governance. 
The Council has recommended introducing in the Code, provisions that state that (a) the board is responsible for an Issuer’s risk governance, determining the nature and extent of risk which an Issuer may undertake and ensuring that management maintains a sound system of risk management and internal controls, (b) the board should determine appropriate means to carry out its responsibility of monitoring the Issuer’s risk management framework and policies and (c) the board should comment on whether it has received assurances from the CEO and CFO that (i) the financial records have been properly maintained and the financial statements reflect a true and fair view of the Issuer’s operations and finances and (ii) an effective risk management and internal control system has been implemented. 
There is hardly any remedy available to shareholders of Singapore Issuers, particularly retail shareholders, without control over the board of such Issuers when things go awry. The current Companies Act does not permit shareholders of an Issuer to initiate a derivative action on behalf of the Issuer to sue for any wrongdoing committed against the Issuer. Notwithstanding the recent proposal from the steering committee for the review of the Companies Act to allow retail investors to launch class action suits against directors and executives who commit criminal acts, aggrieved shareholders are not afforded much other protection. 
It is therefore heartening to witness the latest developments in the corporate governance regime, which should bolster corporate governance practices, facilitate greater corporate disclosure and provide shareholders much needed comfort as to the effectiveness, integrity and independence of the boards of Issuers. 
Note: the final recommendations to the changes in the Code were announced by the Council on 22 November 2011. To facilitate compliance with the revised Code, the Council recommended that a transitional period be introduced such that the Code would only take effect for Issuers in respect of annual reports relating to financial years commencing from 1 July 2012 onwards. 

For further information, please contact:
Eng Wee Chong, Senior Legal Associate, Duane Morris & Selvam


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