Singapore: New Takeover Code To Come Into Force

The Singapore Code on Take-overs and Mergers was issued on 6 December 2001 and will come into effect on 1 January 2002. All take-over announcements made prior to 1 January 2002 will continue to be governed by the old law. Followers of the corporate law in Singapore will be aware that the law is currently in a flux, as the country pushes to reinvent itself. This Article provides a quick insight into this sate of flux and then looks broadly at the new Take-over Code provisions

The Monetary Authority of Singapore (‘MAS’) on 6 December 2001 issued the long awaited Singapore Code on Take-overs and Mergers (‘Take-over Code’) pursuant to section 321 of the Securities and Futures Act (‘SFA’). This follows two rounds of public consultation by the Securities Industry Council (‘SIC’) in November 1999 and May 2001 on proposed changes to the Take-over Code.

Some preliminary points:

• The Take-over Code has been issued pursuant to section 321 of the new SFA. Given that the Take-over Code is slated to come into force on 1 January 2002, the SFA, or at least such relevant provisions of the SFA, will kick into force on 1 January 2002 as well.
• In the event that the SFA comes into force on 1 January 2002, sections 213 and 214 and the Tenth schedule of the Companies Act, Chapter 50 (‘Companies Act’) will be repealed. In this regard, the Minister (which is likely to be the Minister for Finance) is empowered pursuant to section 343(3) of the SFA to repeal any written law which appears to him unnecessary having regard to the SFA by an appropriate gazette notification.
• With the above changes made, a saving provision provides that take-over offers already made or announced to the public before 1 January 2002 will continue to be governed by the existing Take-over and Mergers Code (‘Existing Code’) and the existing provisions of the Companies Act.
• No mention has been made as to whether the relevant portions of the Singapore Exchange Listing Manual will be amended.

The Take-over Code incorporates feedback received from market participants as well as best practices from other jurisdictions. This Article highlights the key changes that have been introduced.

Nature, Purpose & Scope

The Introduction to the Take-over Code states that it is intended to be non-statutory in nature in that it does not have the force of law. Its primary objective is fair and equal treatment of all shareholders in a take-over or merger situation. It is also expressly said that the Code is not concerned with the financial or commercial advantages or disadvantages of a take-over or merger, as such matters should be decided by the company and its shareholders. Instead, the Take-over Code is focussed on achieving fairness and in this regard, a fundamental requirement is that shareholders in the company subject to a take-over offer must be given sufficient information, advice and time to consider and decide on the offer.

A key factor of the Take-Over Code is that the primary responsibility for ensuring compliance with the Code rests with the parties and their respective directors to a take-over or merger and their advisers, and not with the SIC. This is the essence of self-regulation, which is the approach being adopted in Singapore now.

The Take-over Code will apply only to take-over offers for:

• listed companies; and
• unlisted public companies with 50 or more shareholders and net tangible assets (‘NTA’) of S$5 million or more.

The Take-over Code will not apply to other unlisted public companies. This effectively narrows the scope of the Take-over Code. The Existing Code, pursuant to the provisions of the Companies Act, extended to all public companies regardless of the number of shareholders or the NTA value.

The Take-over Code also applies to all offerors, whether they are natural persons (be they resident in Singapore or not and whether citizens of Singapore or not), corporations or bodies unincorporated (be they incorporated or carrying on business in Singapore or not); and extends to acts done or omitted to be done in and outside Singapore.

General Principle 1 of the Code requires that the spirit as well as the precise wording of the Take-over Code must be adhered to by parties in a take-over or merger transaction. Further, the General Principles and the spirit of the Take-over Code will apply in areas or circumstances not explicitly covered by any Rule.

The Take-over Code is administered and enforced by the SIC. Where there is or appears to be a breach of the Take-over Code, the SIC will summon the alleged offender to appear before it for a hearing. Every alleged offender has the opportunity to answer allegations and to call witnesses. The SIC may also summon witnesses. As a rule, the SIC’s proceedings are informal and parties appearing before the SIC, whether for disciplinary or other purposes, should present their case in person and lodge written submissions in their own name. While alleged offenders and witnesses may consult their legal advisers during hearings before the SIC, these advisers may not examine or cross-examine witnesses nor answer questions on behalf of their clients.

If the SIC finds that there has been a breach of the Take-over Code, it may have recourse to private reprimand or public censure. In a flagrant case, the SIC may recommend further action designed to deprive the offender temporarily or permanently of its ability to enjoy the facilities of the securities market. If the SIC finds evidence to show that a criminal offence has taken place whether under the Companies Act, the SFA or under the criminal law, it will refer the matter to the appropriate authority.

The Take-over Code is organised as a set of General Principles and Rules. The General Principles are essentially standards of good commercial conduct. These General Principles apply to all transactions with which the Take-over Code is concerned. They are, however, expressed in broad terms and the Take-over Code does not define the precise extent of, or limitations, on their application.

In addition to the General Principles, the Take-over Code contains a series of Rules. Of these, some are effectively expansions of the General Principles and examples of their application and others are provisions governing specific aspects of take-over procedure. Although most of the Rules are more detailed than the General Principles, they too are not framed in technical language and, like the General Principles, are to be interpreted in such a way as to achieve their underlying purpose.

To assist with interpretation of the Rules, notes have been inserted under the Rules, where appropriate, to provide guidance as to how the Rules will normally be applied by the SIC.

The voting control levels at which a take-over offer is required to be made have been changed in line with international trends. Under the Take-over Code, a person will be required to make a general offer for a public company if:

• he acquires 30% (instead of 25% now) or more of the voting rights of the company; or
• he already holds between 30% and 50% of the voting rights of the company, and he increases his voting rights in the company by more than 1% in any six-month period (instead of 3% in 12 months now).

Currently, an offeror who incurs an obligation to make a take-over offer must pitch the offer at the highest price paid by him and his concert parties for offeree company shares in the preceding 12 months. In view of increasingly volatile markets, the Take-over Code shortens the price reference period to six months to strike a better balance between market efficiency and equity.

The offer timetable has been amended to require the offeror to post the offer document within 21 days (instead of 28 days now) of the offer announcement and keep the offer open for at least 28 days (instead of 21 days now). The intention of this is to give more time for the offeree company and its shareholders to consider an offer.

There may be occasions when an upstream company distributes its shareholdings in a downstream company to shareholders in the upstream company on a pro rata basis. The Take-over Code clarifies that an upstream shareholder who acquires or consolidates effective control in the downstream company as a result of such a distribution will not incur an obligation to make a general offer for a downstream company if:

• he owns or controls more than 50% of the upstream company; or
• he is not acting in concert with any director of the upstream company.

In all other cases, the upstream shareholder may:

• seek downstream shareholders’ approval to waive the requirement for him to make a general offer for the downstream company;
• divest his shareholdings to within the mandatory offer thresholds (see paragraph 4 above) or to his minimum aggregate effective interest in the downstream company during the last three years, whichever is higher; or
• make a general offer for the downstream company.

Currently, a person who enters into a conditional share acquisition agreement, which upon completion would trigger a mandatory offer, is required to post the offer document within two months of entering into such an agreement. A put-and-call option agreement, on the other hand, is not subject to this restriction. The Take-over Code removes the two-month deadline for conditional share acquisition agreements and harmonises the requirements for the two different types of agreement as follows:

• upon entering into a conditional share acquisition agreement or a put-and-call option agreement, the potential offeror must announce immediately his identity, the terms of the potential offer, the conditions to be fulfilled before the offer is made, and the time period for the fulfilment of these pre-conditions;
• the pre-conditions should be objective and reasonable and the time period for fulfilling them should be reasonable; and
• the potential offeror cannot invoke any condition to cause the agreement to lapse unless he has demonstrated reasonable efforts to fulfil that condition and the circumstances that caused the non-fulfillment of that condition are material in the context of the proposed transaction.

Schemes of arrangement may be exempted from selected provisions of the revised Take-over Code, such as those relating to the offer timetable and terms of the offer, subject to conditions. The key safeguards include:

• Existing common substantial shareholders (ie those who hold 5% or more interests in both the companies to the scheme of arrangement) as well as those persons and their concert parties who after the scheme may acquire or consolidate effective control in a scheme company (and / or a new entity that holds one or both of the scheme companies) to abstain from voting on the scheme. If such persons are directors of a scheme company, they are to abstain from making a recommendation to shareholders of that scheme company on the scheme.
• Where a person will after the scheme acquire or consolidate effective control in a scheme company (and / or a new entity that holds one or both of the scheme companies), to disclose in the scheme document his name, his current voting rights in the scheme company, his voting rights in the scheme company and / or new entity after the scheme, as well as details of his dealings in shares of the scheme company during the three months preceding the scheme. The scheme document must also state that by voting for the scheme, shareholders are agreeing to the person acquiring or consolidating effective control in the company without having to make a general offer.
• The scheme company which is in effect the offeree company to appoint an independent financial adviser to advise its shareholders on the scheme. Where the scheme of arrangement involves a reverse take-over offer or a ‘merger of equals’, each of the scheme companies is to appoint an independent financial adviser to advise their respective shareholders on the scheme.

Director responsibilities are more clearly stated in the Take-over Code.

The Take-over Code requires the directors to ensure that proper arrangements have been put in place to monitor the conduct of a take-over offer. In this regard, it is expressly provided that the SIC expects the directors to co-operate with it in connection with its enquiries, including providing promptly such information as it may request.

Instances of when directors may face conflicts of interest is also highlighted. In this regard, a director who has entered into an employment agreement with the offeror or with a person acting in concert with the offeror is in conflict. Where a director believes he may be in a conflict, he should consult the SIC on whether it is appropriate to assume such responsibilities as imposed on him under the Take-over Code.

The General Principles also provide that despite the fact that a directors’ primary duty is to act in the best interest of their shareholders, there are instances when compliance with the Take-over Code will place limitations on how the director can act.

This Article has only provided a snap-shot of the changes introduced by the Take-over Code. Perhaps the one thing to note is that although the Take-over Code is much longer than the Existing Code, it is certainly couched in less technical language and is easier to follow.