On 8 October 2014, Parliament passed the Companies (Amendment) Bill 2014 (the “Amendment Bill”) to approve key changes to the Companies Act (the “Act”). These changes were effected in two phases. We have set out briefly below some of the key changes which could affect banking transactions.
The first phase of amendments focuses on the further easing of the prohibition against financial assistance in relation to the acquisition of shares in a company. It is expected that this will, in turn, facilitate more acquisition and leveraged finance deals in Singapore. The first phase of amendments took effect from 1 July 2015.
The second phase of amendments focuses on providing lenders and borrowers more structuring options in related-party transactions, making it possible for companies to enter into transactions (including by way of loans, guarantees, security or quasi-lending arrangements) with companies which are related (e.g. through common directors and shareholders) but which are not in the same corporate group. The second phase of amendments will take effect from 3 January 2016.
Phase 1: Easing of prohibition against financial assistance
The key changes are as follows:
1. Private Companies – Financial Assistance no longer applicable
Presently, both public and private companies are prohibited from giving any financial assistance for the purpose of, or in connection with, the purchase of their shares or the shares of their holding company, unless one of the “whitewash” procedures prescribed by the Act is complied with or the transaction falls within an exception under the Act.
With the change, only public companies (essentially, companies incorporated as public companies or which have more than fifty shareholders, whether or not listed in Singapore or elsewhere) and their subsidiaries will be subject to the prohibition on financial assistance. Notably, the existing financial assistance prohibitions will no longer apply to private companies (other than private companies which are subsidiaries of public companies).
This change will facilitate acquisition deals involving private companies and also delisting exercises.
2. Public Companies – Introduction of “Material Prejudice Test” as a new exception
For public companies (or their subsidiaries), the giving of financial assistance will no longer be prohibited if:
- the giving of the financial assistance does not materially prejudice (i) the interests of the company or its shareholders or (ii) the company's ability to pay its creditors;
- the board of directors of the company passes a resolution that (i) the company should give the financial assistance and (ii) the terms and conditions under which the financial assistance is proposed to be given are fair and reasonable to the company; and
- the directors’ resolution sets out in full the grounds for the directors' conclusions.
If the above conditions cannot be met, the public company (or its subsidiary) can still provide financial assistance by conducting one of the “full whitewash” procedures. These “whitewash” procedures have also been made slightly less onerous (for instance, solvency statements from directors under the “short method” of whitewash no longer have to be given under oath by way of a statutory declaration).
Please contact us should you require further details on the “full whitewash” procedure.
3. Dividends – no longer Financial Assistance as long as it is “Lawfully Made”
Presently, the payment of dividends by a company will not amount to financial assistance. However, the payment of dividends must be (a) in good faith and (b) in the ordinary course of commercial dealing. It may not be easy to fulfil both of these conditions.
With the change, the distribution of a company’s assets by way of dividends is not financial assistance if it is lawfully made, and it will no longer be necessary to satisfy the two conditions that presently apply.
Phase 2: Modifications to provisions relating to loans from companies to directors and associated companies
1. Modifications of restriction on loans to directors and connected companies to be extended to quasi-loans, credit transactions and related arrangements
Under sections 162 and 163 of the Companies Act, Singapore-incorporated companies (other than exempt private companies) generally could not grant, secure or guarantee loans to their directors or to companies which their directors (or their family members) have at least a 20% interest in, and which are not subsidiaries or which do not fall within the same corporate group. This general restriction will now be extended to quasi-loans, credit transactions and related arrangements, and guarantees and security granted in connection with these. Interest for the purposes of this restriction has also been tweaked to refer to interest in voting power of the company, rather than interest in share ownership (this tweak is in line with the recent amendments to the Companies Act to the definitions of “subsidiary” and “interest in shares”, which no longer look to mere shareholding, but to actual control and voting power).
A quasi-loan essentially involves a company agreeing to reimburse a creditor for payments made by him on behalf of the company or a third person. Credit transactions include hire-purchase agreements, finance leases, deferred payment arrangements or the like.
The rationale for this extension is to capture creative or alternative financial arrangements and address the use of devices other than loans. This means that the general restriction in effect applies to any arrangement that would, in substance, grant a benefit akin to that of a loan to directors or connected companies.
2. Shareholders’ approval for restricted transactions under section 163
Under the new regime, a company can enter into the abovementioned restricted transactions with connected companies under section 163, provided there is prior approval by the shareholders of the company at a general meeting (previously, so long as a transaction contravened section 163, it was unlawful). As a general rule, the interested director or directors and their family members must abstain from voting; but this rule does not apply in a situation where all the shareholders of the company have voted to approve the transaction.
The rationale for removing the general restrictions and allowing shareholders' approval is to facilitate corporate transactions generally, including joint venture situations. Transactions can now be structured to include loans to connected companies, provided shareholders' approval is forthcoming. However, prior shareholders' approval is required and there is no avenue for ratification.
3. Others – Changes to the list of registrable charges
Under section 131 of the Companies Act, certain charges created by a Singapore-incorporated company or a registered foreign company have to be lodged with ACRA within 30 days. Failure to register will result in the security being void against a liquidator and any creditor of the company. The list of registrable charges in section 131(3) has been updated to also include charges over licenses to use trademarks and registered designs.
Notwithstanding the amendments, the list is still not exhaustive. The Steering Committee overseeing the amendments to the Companies Act observed that, as a matter of practice, “even if charges created do not really fit into any of the registrable categories or items listed in section 131, law firms and banks have attempted to "squeeze" those charges into one of the categories in the list. This has resulted in the list of registrable charges being rather artificial. Moreover, there are now new types of securities and assets that may not fit into section 131(3) as it stands.” The Steering Committee therefore decided that it would be more flexible to leave it to the chargor and chargee to decide, in each individual case, whether a security should be registrable as a charge.