INTRODUCTION

 

The Companies (Amendment) Bill No. 25 of 2014 (“Amendment Bill”) was passed by the Singapore Parliament on 8 October 2014. The Amendment Bill sets out a wide range of amendments to the Singapore Companies Act (“Companies Act”), and marks a significant change to certain aspects of companies’ legislation in Singapore.

 

The amendments in the Amendment Bill (the “Amendments”) are to come into operation on a date to be appointed by notification in the Government Gazette but many of the Amendments are expected to come into force by the end of 2014.

 

This update aims to highlight certain amendments affecting the following key categories of corporate transactions and the potential issues that may be faced by stakeholders in practice:

 

(a) the provision of loans and quasi-loans to, and entry into credit transactions with, directors or entities connected with directors;

(b) the provision of financial assistance by a company for the acquisition of its own
shares; and

(c) the compulsory acquisition of shares.

 

LOANS, QUASI-LOANS & CREDIT TRANSACTION INVOLVING DIRECTORS
AND ENTITIES CONNECTED WITH DIRECTORS

 

Background – current prohibitions under sections 162 and 163 of the Companies Act
Presently, section 162 of the Companies Act prohibits a company (which is not an exempt private company (ie a private limited company whose shares are not held by any corporate body and has no more than 20 shareholders who are all natural persons) from making a loan to any of its directors or giving a security or guarantee for such a loan (the “Direct Prohibition”), subject to certain exceptions (eg where a loan is provided to a director engaged in full time employment with the company to acquire a home).

 

Section 163 of the Companies Act also prohibits a company (which is not an exempt private company)from making a loan to another company where the director(s) of the first company are interested in 20% or more of the shares of the second company, subject to certain exceptions (eg section 163 will not apply to loans by a company to its subsidiaries) (the “Indirect Prohibition”).

 

Existing Prohibition Relating Tto Loans To Directors/Entities Linked To Directors Extended To Cover Quasi-Loans And Credit Transactions

 

The amendments will extend the Direct Prohibition and the Indirect Prohibition (which currently only covers loans and guarantees), to also cover quasi-loans and credit transactions.

Credit transactions are transactions under which a party:

 

(a) supplies goods or disposes of immovable property under a hire purchase
agreement or a conditional sale agreement (Under section 2 of the Hire-Purchase Act, a conditional sale agreement refers to an agreement for the sale of goods under which the purchase price or part of it is payable by instalments, and the property in the goods is to remain in the owner (notwithstanding that the hirer is to be in possession of the goods) until such conditions as to the payment of instalments or otherwise as may be specified in that agreement are fulfilled);

 

(b) leases or hires any immovable property or goods in return for periodic payments;
and/or

 

(c) otherwise disposes of immovable property or supplies goods or services on
the understanding that payment (whether in a lump sum or instalments or by way of
periodic payment or otherwise) is to be deferred.

 

The Indirect Prohibition will also be expanded to cover transactions between a company (acting as the creditor or supplier) and a limited liability partnership in which the company’s director(s) have a 20% or more interest.

 

Given the enlarged scope of these prohibitions, it would be prudent for a company to exercise greater care when proposing to enter into a transaction which may benefit a director (or an entity in which its director(s) hold 20% or more of the voting power), and consider if such transaction may be regarded as a “quasi-loan” or “credit transaction” with the company acting as the creditor or supplier.

 

Directors who authorise transactions that breach these prohibitions may be guilty of an offence which can attract a fine of up to $20,000 or a prison term of up to 2 years.

 

Accordingly, if there is a risk that a proposed transaction is a “quasi-loan” or a “credit
transaction”, it will be necessary to consider if there are any exceptions that may permit the company to enter into the transaction.

 

New Shareholder Approval Exception To Be Made Available To Permit Transaction With Entities Connected With Directors

 

The current exceptions to the Direct Prohibition and the Indirect Prohibition are fairly limited. In particular, there is currently no process by which the shareholders of a company may approve a transaction that may run afoul of the Indirect Prohibition even if the shareholders wish to do so (for example because the terms of the transaction are on an arm’s length basis and the shareholders feel that the transaction will still benefit the company notwithstanding it is being entered into with another entity in which a director may have an interest in).

 

The Amendments will introduce an exception to the Indirect Prohibition to allow a transaction if prior shareholders’ approval in a general meeting is obtained. However, directors (and their family members) who are interested in the transaction must abstain from voting. They need not abstain if all the shareholders of the company vote to approve the transaction. This addresses concerns that shareholders of family owned companies might otherwise all have to abstain.

 

This new exception does not provide for post transaction ratification by shareholders. It would therefore still be important for a company to exercise care and consider if a proposed transaction could run afoul of the prohibitions prior to entering into the transaction.

 

It should also be noted that this new exception applies only with respect to the Indirect Prohibition and not the Direct Prohibition (ie transactions entered into directly with a director as opposed to an entity in that the director has an interest).

 

ABOLITION OF FINANCIAL ASSISTANCE PROHIBITION FOR PRIVATE COMPANIES

 

What is prohibited financial assistance? Section 76 of the Companies Act currently

prohibits any company incorporated under the Act from providing financial assistance for the acquisition of its own shares, or the shares of its holding company. The primary rationale for the prohibition is to protect creditors and to preserve the capital of a company.

 

However the scope of the existing rule under section 76 is very wide, and in practice can cover certain innocuous transactions that arguably do not fall within the mischief sought to be addressed by the prohibition. While there are certain “whitewash” procedures set out in the Companies Act (these are set out in sections 76(9A), 76(9B), 76(9C) and 76(10) of the Companies Act) that can be undertaken so that a company can enter into a transaction that may otherwise be prohibited, these procedures can delay or impede certain transactions such as leveraged buy-outs of companies incorporated in Singapore.

 

Restricted to public companies and their subsidiaries The Amendments will amend section 76 to limit the financial assistance prohibition such that it will apply only to public companies and their subsidiaries.

 

The prohibition is therefore no longer applicable to private companies whose holding or ultimate holding company is not a public company and such companies will be able to enter into transactions involving financial assistance without having to undertake the “whitewash” procedures set out in the Companies Act. For example, following the amendments to section 76, an acquisition of the shares of a private company (which is not a subsidiary of a public company)financed with loans secured on the company’s assets will no longer require a “whitewash”.