The Companies (Amendment) Bill No. 25 of 2014 (Amendment Bill) was passed by the Singapore Parliament on 8 October 2014. The Amendment Bill introduces the largest overhaul of the Singapore Companies Act (Cap.50) (Companies Act) since it was enacted in 1967.
The Companies (Amendment) Act 2014 (the Amendment Act) was gazetted on 1 December 2014, but no commencement date has been fixed. The amendments are expected to come into force in the second quarter of 2015. The effective date will be announced and more details provided about two months before the amendments are due to take effect.
In this article, we discuss the liberalisation of the laws prohibiting companies from providing financial assistance, one of the major changes to be made to the capital maintenance regime aimed at giving companies more flexibility in structuring transactions.
The doctrine of capital maintenance has been a key feature of English company law as it tempers some of the risks that come with the benefits of the separate legal personality and limited liability offered by companies. It was originally developed by the courts to ensure that a company does not improperly deplete its assets by returning capital to some shareholders to the detriment of its creditors and other shareholders.
The Companies Act presently prohibits companies from providing financial assistance for the acquisition of its own shares or the shares of its parent, except in certain specified instances. The prohibition was relaxed in the last round of company law amendments in 2006 with the introduction of the “whitewash” procedures (the Whitewash Exemption). The Whitewash Exemption allows companies to give financial assistance where certain solvency requirements and prescribed procedures are complied with.
The Amendment Act will relax the prohibition further. When it comes into effect, the prohibition against financial assistance under Section 76 of the Companies Act will no longer apply to private companies and will only apply to public companies and their subsidiaries. A new exemption to the prohibition will also become available.
The steering committee responsible for the Companies Act review was initially in favour of abolishing the financial assistance prohibition entirely, as:
- It believed that the abusive transactions sought to be prevented by the prohibition could be dealt with under separate areas of
- Section 76 in its current form is overly complex and has been interpreted differently by judges. This has resulted in a great deal of uncertainty in applying the provision in practice.
- The Whitewash Exemption provides such a wide exception that the financial assistance prohibition has lost its potency. In practice, most advisers simply recommend the Whitewash Exemption whenever there is a potential question of financial assistance.
- Financial assistance provisions cause difficulty in structuring transactions as they tend to cause delay.
However, while the Monetary Authority of Singapore (MAS) agreed with abolishing the financial assistance prohibition for private companies, the MAS was of the view that it would not be prudent to do so for public companies. Other major jurisdictions like Australia, Hong Kong and the EU nations have maintained limitations on financial assistance, while the UK has abolished the prohibition for private companies only.
WHAT THIS MEANS FOR PRIVATE COMPANIES
After the amendments take effect, private companies will be able to structure transactions where reasonable financial assistance is provided to a purchaser of its shares.
However, this does not mean that a private company may freely provide funding to a purchaser of its shares. Directors should be wary of breaching their fiduciary duties where such transactions provide no commercial benefit to the company or are detrimental to the company and the interests of its creditors and other shareholders.
As a general rule, directors of private companies should bear in mind that where financial assistance is given:
- It should be given for a commercial purpose in the context of a transaction that the board of directors reasonably believes to be for the company’s benefit.
- The assistance should not materially affect the company’s ability to meet its debts and does not materially deplete the company’s assets.
NEW “NO MATERIAL PREJUDICE” EXEMPTION
To address the concern that the financial assistance restrictions may prevent or render more expensive a range of potentially beneficial or innocuous transactions for public companies, the Amendment Act introduces a new “no material prejudice” exemption (the New Exemption). The new exemption will stand as an alternative option to the Whitewash Exemption.
To use the New Exemption, the financial assistance must not materially prejudice:
- the interests of the company and its shareholders; and
- its ability to pay its creditors.
The board of directors must pass a resolution stating:
- that the company should give the assistance;
- that the terms of the assistance are fair and reasonable; and
- the grounds for their conclusion in full.
Public companies may initially be hesitant to use the New Exemption due to uncertainty over the materiality threshold involved. However, we suspect that the New Exemption will eventually become the preferred option in a majority of transactions, given that the Whitewash Exemption involves directors making solvency statements under Section 7A of the Companies Act, which if given without reasonable grounds attracts a fine of up to S$100,000, a jail term of up to 3 years, or both.