Revision of the Takeover Code
Company Legislation and Regulatory Framework Committee Recommendations
Key Deals
Pursuant to Section 321 of the Securities and Futures Act 2001 (Act 42/2001), the Monetary Authority of Singapore issued a revised Singapore Code on Takeovers and Mergers which took effect on January 1 2002. The code applies only to takeover offers for listed companies, and for unlisted public companies (ie, companies with 50 or more shareholders) which have net tangible assets of S$5 million or more. The definition of 'offer' includes takeover and merger transactions, howsoever effected, including reverse takeovers, schemes of arrangement, partial offers and offers by a parent company for shares in a subsidiary. In 2002 a number of major takeover offers were launched under the code and the operation of its rules was examined, particularly those relating to conditional agreements and to schemes of arrangement.
Conditional agreements
Previously, if a conditional share acquisition agreement resulted in the acquisition of more than 30% of the company, this triggered a mandatory obligation to make a tender offer, whereas a put-and-call option agreement that produced the same result was excluded from this requirement. This distinction has been removed, as has the two-month period in which acquirers were previously required to make the general offer. The requirements have been condensed to the following:
- Immediately upon entering into either a share acquisition agreement or a put-and-call option agreement which, on fulfilment of the conditions precedent, would trigger a mandatory bid obligation, the potential offeror must make an announcement stating (i) the terms of the offer, (ii) the identity of the potential offeror, (iii) the conditions to be fulfilled prior to the offer being made, and (iv) the time period for the fulfilment of these pre-conditions (failing which the offer lapses);
- The pre-conditions must be stated clearly, and must be objective and reasonable; and
- The time period for fulfilment of the pre-conditions must be reasonable.
Where the conditions are not met, the offeror may still be obliged to make a general offer if it has demonstrated reasonable efforts to fulfil the conditions, and if the circumstances preventing the conditions from being met are not material in the context of the proposed transaction.
The nature of conditions that may be attached to offers has also engendered interest. In the recent management buy-out turned general offer for the shares of Natsteel Ltd, Mr Oei Hong Leong, a contender for the company, approached the Securities Industry Council (SIC) with a proposal for a takeover offer that included one condition to which the SIC could not agree. It is not unusual to subject a takeover offer to certain conditions, such as that of a majority acceptance level. However, Oei's condition was that his takeover vehicle, 99 Holdings, would make an offer for Natsteel only if the company paid a one-off cash dividend to all shareholders prior to the offer. Oei proposed this because he was an existing shareholder of Natsteel, and if the cash dividend was made the offer price he would have had to pay would have taken into account the cash dividend payable to him. The SIC replied that Oei would have to obtain confirmation on financing of the full offer price. The SIC may have feared that imposing a condition which was essentially a pre-condition on the making of an offer would cause uncertainty for shareholders (as to whether an offer would be made subsequent to the payout of the dividend).
Schemes of arrangement
Although schemes of arrangement fall within the definition of an 'offer' under the Takeover Code, there has been some ambiguity as to whether certain provisions of the code would apply to such schemes. The revised code now provides that schemes of arrangement may be exempted from selected provisions, such as those relating to the offer timetable and terms of the offer, but with the following safeguards:
- The following people should abstain from voting on the scheme:
- existing common substantial shareholders (ie, those who hold a minimum of 5% in both the companies to the scheme of arrangement);
- those persons (and their concert parties) who after the scheme may acquire or consolidate effective control in a scheme company; and
- where the above persons are also directors of the scheme company.
- existing common substantial shareholders (ie, those who hold a minimum of 5% in both the companies to the scheme of arrangement);
- Where a party will acquire or consolidate effective control in a scheme company after the scheme, the scheme document is to contain certain particulars of this party (including its name, current voting rights and details of its dealings with shares in the three months preceding the scheme), as well as a statement that by voting for the scheme, shareholders are agreeing to that party acquiring or consolidating effective control in the company without making a general offer.
- The scheme company is to appoint an independent financial adviser to advise its shareholders on the scheme. Where the scheme of arrangement involves a reverse takeover offer or a 'merger of equals', each of the scheme companies is to appoint an independent financial adviser to advise its respective shareholders on the scheme. In the proposed merger of equals between Comfort Group Ltd and DelGro Corporation Limited, which involves schemes of arrangement, Comfort has appointed Ernst & Young Corporate Finance Pte Ltd as financial adviser to the independent directors of Comfort, and DelGro has appointed NM Rothschild and Sons (Singapore) Limited as financial adviser to the independent directors of DelGro.
Company Legislation and Regulatory Framework Committee Recommendations
The Company Legislation and Regulatory Framework Committee 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 report that resulted from the committee's review contains general recommendations and also recommendations specific to small businesses, capital raising, maintenance and company charges, corporate governance and corporate insolvency.
The key recommendation pertaining to M&A transactions relates to Section 215 of the Companies Act, which provides that an acquirer of 90% of the shares of a transferor company may compulsorily acquire the shares of the remaining dissenting shareholders upon notice of intention to do so. Correspondingly, the dissenting shareholders have a put option over their shares (Section 215(3) of the act). As the Companies Act also permitted the offeror company to structure an offer to be made by another company which is not "a nominee for the acquirer or its subsidiary", there was an inconsistency between the following two situations.
Where an offeror company held no shares in the target company, it would have to acquire 90% of all outstanding shares to achieve the percentage entitling it compulsorily to acquire the rest. Where an offeror company held a significant portion of the shares of the target company, it would have to acquire 90% of the target company's shares excluding those already held by the offeror company (eg, if the offeror company owned 60% of the target company, it would have to acquire 90% of 40% more).
However, where the offeror company held a significant portion of the shares of the target company (eg, 60%), it could incorporate a subsidiary company to make the offer to the target company. In this instance the target company was acting as the acquirer (where the offeror company then became its nominee in this transaction), and all the acquirer had to secure was the balance of the shares to bring the acceptance level up to 90% (ie, 90% of 100%, which is 30%).
After extensive review of the legislation in other jurisdictions, the committee decided to recommend an approach modelled on UK legislation. It proposed 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:
- shares held by the offeror company;
- shares held by a nominee of the offeror company;
- 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;
- shares held by a body corporate in which the offeror company is substantially interested; and
- 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 takeover offer.
This recommendation (along with the other 76 recommendations made in the report) was accepted by the government on October 22 2002.
A number of mergers hit the headlines in 2002, in fields as diverse as transport and telecommunications. Overall, M&A volume in 2002 was lower than that in 2001. There was a mixed response to going-private schemes, with an increase in general investor awareness and minority shareholder participation. The value of the 33 deals (excluding going-private transactions) completed between January 1 2002 and June 10 2002 stood at US$869.29 million.(1)
Mergers
On May 15 2002 Singapore Press Holdings Limited, STT Communications Ltd, NTT Communications Corporation, NTT Investment Singapore Pte Ltd, MediaCorporation of Singapore Pte Ltd, British Telecommunications plc, BT (Netherlands) Holdings BV, StarHub Pte Ltd and Singapore Cable Vision Ltd entered into a merger agreement to bring together StarHub and Singapore Cable Vision. The transaction was subject to several conditions, including the approval of the InfoComm Development Authority of Singapore and the Singapore Broadcasting Authority. The transaction successfully completed on July 2 2002.
On the transport front, the boards of Comfort and DelGro have decided to effect a merger between the two listed companies by separate schemes of arrangement. Comfort operates a fleet of taxis and private buses, and its listed subsidiary, Vicom Ltd, carries on vehicle inspection and independent assessment services. Comfort also has several joint ventures in China which carry out a wide range of transport-related businesses. DelGro operates and offers public bus services, taxis and car rental in Singapore. It also has businesses in Malaysia, the United Kingdom (through its subsidiary Metroline plc) and China. Comfort's market capitalization is S$625 million, while DelGro's market capitalization is S$611 million (both figures as at close of trading on November 20 2002).
The boards of Comfort and DelGro hope that the proposed merger will achieve cost savings and synergies, enhance growth, boost investor interest and increase shareholder value. It is intended that after the proposed merger, Comfort and DelGro will be delisted and become wholly owned subsidiaries of the newco, which will be listed. This transaction is unprecedented, and is probably the largest deal in which the companies have chosen to effect a merger subsequent to individual schemes of arrangement. Approvals must be sought, as it is a Companies Act requirement (Section 210) that a scheme of arrangement be approved by a minimum of 75% of the shareholders in value of those present and voting. The Companies Act also provides that the schemes must receive court approval. In addition, the approval of the Singapore Exchange must be obtained for the delisting of both Comfort and DelGro, and for the application to admit newco to the Official List of the Singapore Exchange.Acquisitions
The S$769 million takeover offer by 98 Holdings for the entire share capital of NatSteel Ltd started life as a proposed management buy-out for S$350 million. There was widespread investor interest, as investors anticipated Natsteel to be cash-rich (and as such, a worthwhile target to acquire) upon its divestment of its two subsidiaries, NatSteel Brasil Ltd and NatSteel Broadway Ltd. Shareholders, too, were looking forward to a high dividend payout. The share price of NatSteel began to climb as a result. The NatSteel deal highlighted many points relating to the Takeover Code, two of which are examined below.
'No-increase' statements
Mr Ong Beng Seng signalled his interest in NatSteel by making a takeover offer on October 3 2002 via his consortium, 98 Holdings, of S$1.93 per share, which encouraged the share price to rise. 98 Holdings later revised its offer price to S$2 per share on October 20 2002. On October 31 98 Holdings stated it did not intend to revise the offer price by issuing a so-called 'no-increase' statement. Just over one month later, however, 98 Holdings increased its offer price. It did so in reliance on Note 2 to Rule 20.2 of the Takeover Code, which provides that an offeror can choose not to be bound by its 'no increase' statement. Rule 20.2 states expressly that if an offeror has made a no-increase statement, the offeror will not be allowed subsequently to amend the terms of the offer in any way, except in wholly exceptional circumstances or where the right to do so has been specifically reserved.
98 Holdings' no-increase statement contained a reservation that allowed a revision in event of a competing bid. In light of the continued acquisition of NatSteel shares by Oei Hong Leong, which nonetheless did not amount to a competing bid, the Securities Industry Council considered that "wholly exceptional circumstances" existed, permitting 98 Holdings to increase its offer price notwithstanding the no-increase statement. After revising its share price on November 13, 98 Holdings expressly set aside the no-increase statement.
How long should an offer stay open?
98 Holdings' offer of October 3 was subject to the general rules on timing. The announcement of the offer was to be followed up with an offer document, posted between 14 and 21 days after the date of the announcement. The offer was to remain open for at least 28 days from the date on which the offer document was posted. The price was then revised from S$1.93 to S$2, and subsequently to S$2.03. At that point, 98 Holdings' offer was extended until December 4 so as to give shareholders at least 14 business days to consider the revised offer. It was then further extended on December 4 to December 9, when 98 Holdings further revised its offer price to S$2.05. This meant that the deadline for acceptances was pushed back until December 23. However, on December 18 the offer was further revised to S$2.06. The 98 Holdings offer also became mandatory on December 18 2002. The deadline for acceptances was thus postponed past the 60-day 'final-day' rule of Rule 22.9 twice - first until January 3 2003 and subsequently until January 10 2003. The final-day rule provides as follows:
"No offer (whether revised or not) will be capable of becoming or being declared unconditional as to acceptances after 3.30 pm on the 60th day after the date the offer document is initially posted, nor of being kept open after the expiry of such period, unless it has previously become or been declared unconditional as to acceptances. An offer may be extended beyond that period of 60 days with the permission of the council. The council will normally grant such permission if a competing offer has been announced."
In this case the offer document was despatched on October 24 2002. The 60th day from this date was December 24 2002 (calendar days, rather than working days, are counted for this purpose). The reasoning behind the final-day rule is to create certainty by ensuring a cut-off date for offers, rather than giving the offeror an unlimited period in which to continue making off-market purchases of shares with a view towards amassing 50% plus one share, so that the offer becomes unconditional. This illustrates the practical difficulties faced by all parties involved in a takeover situation in adhering to the final-day rule. If new information comes to light in the days following an offer, the target company will doubtless wish to provide shareholders with the necessary information, advice and time so that they can reach an informed decision on the offer (one of the key principles of the code). However, the provision of new information may necessitate a postponement of the cut-off date for offers, which in turn will lengthen the period of uncertainty about the outcome of the offer for shareholders
Going-private transactions
Several listed companies went private in 2002. Keppel Corporation recently obtained court approval to privatize Keppel FELS at S$1.55 a share. Keppel Corp has three main business areas - offshore and marine, infrastructure and property. To rationalize its companies in the offshore and marine sector, Keppel Corp privatized Keppel FELS, and subsequently combined the expertise and experience of Keppel FELS and Keppel Shipyard (formerly Keppel Hitachi Zosen) to create the largest rig-building and marine group in the region. Thus, all of Keppel Corp's marine activities have been brought under one roof. To complete this going-private transaction, Keppel utilized some S$402 million of its cash from an earlier divestment. Keppel FELS's shares were delisted on November 6 2002.
SembCorp Industries' October bid to take its listed subsidiary SembCorp Marine private did not enjoy similar success. One popular explanation for its failure is the increased awareness of minority shareholders (ie, shareholders holding less than 5% of the company's issued share capital), a theory which is further borne out by the failure of the going-private scheme for Keppel Telecommunications and Transportation, which was rejected by its shareholders in March 2002. With reference to the SembCorp Marine going-private scheme, the vice-president of the Securities Investors Association of Singapore commented:
"Over the past year or so, minority investors have become much more assertive. Their numbers at annual general meetings have been creeping up and they are also speaking up a lot more at these events."(2)
The Securities Investors Association of Singapore, which boasts a membership of 52,000 securities investors, was also active last year in promoting investor awareness and corporate transparency.
For further information on this topic please contact Yap Lian Seng, Yap Wai Ming or Sharon Poh at Stamford Law Corporation by telephone (+65 6389 3000) or by fax (+65 6389 3099) or by email ([email protected] or [email protected] or [email protected]).
Endnotes
(1) The KPMG Corporate Finance Mergers and Acquisitions Analysis (based on figures supplied by Dealogic 2002).
(3) The New Paper - October 24 2002.