For industrial engineering companies in Singapore, talent recruitment, staff loyalty and performance motivation have always been vital.
To that end, employee share incentive plans serve as important tools for industrial engineering businesses to achieve these objectives, by providing employees with long-term rewards linked to the businesses’ success.
There are three employee share incentive plans commonly put in place by companies in Singapore, namely:
- Employee Share Option Plan (“ESOP”);
- Employee Share Awards Plan (“ESAP”); and
- Phantom Share Option Plan (“PSOP”).
Under an ESOP employees can be granted the right (but not an obligation) to purchase shares in the future at a pre-determined price, regardless of the fair market value of the shares at the time of grant.
An ESAP allows companies to award employees actual shares (rather than options) for free.
In contrast, a PSOP is in substance a cash bonus arrangement under which the amount of the cash payment due to an award holder is commonly calculated in a manner that mimics the income yield and capital growth of shares in the company. No shares are actually issued or transferred in the operation of a PSOP.
Given the numerous variations of employee share incentive plans, there is no ‘one-size-fits-all’ regulation in Singapore that governs all employee share incentive plans. Rather, employee share incentive plans are governed by a myriad of regulations depending on the way they are structured.
Industrial engineering companies wishing to establish or operate share incentive arrangements in Singapore will therefore need to consider certain regulatory matters which can impact upon such arrangements in Singapore. A broad outline of the most pertinent regulations (and some common pitfalls) are set out below.
Trap for the unwary – limited number of shareholders for private companies
A company limited by shares incorporated under the Companies Act (Cap. 50) of Singapore (“Companies Act”) can take two forms: (i) a private company; or (ii) a public company. For a private company, the maximum number of shareholders is limited to 50 and transfers of its shares are restricted. A company not fulfilling these two requisites of a private company will be rendered a public company.
Consequently, whenever a Singapore private company implements or operates an ESOP or an ESAP, it is important to ensure that the ESOP or the ESAP will not inadvertently result in the company having more than 50 shareholders. If it does, then the Registrar of Companies in Singapore may declare that the company has ceased to be a private company and is henceforth a public company. Such an event is almost always unwelcome, as a public company is subject to a more onerous and stringent regulatory regime and more rigorous disclosure obligations than a private company. Compliance with the public company regime may well result in significant costs for the company concerned, so this potential issue should always be considered before an ESOP or ESAP is introduced.
Financial assistance by a company for the acquisition of its own shares
As a general rule, the Companies Act prohibits companies from giving financial assistance to any person, whether directly or indirectly, for the purpose of, or in connection with, the acquisition of shares in the company or its holding company.The prohibition against financial assistance is broad in scope and may potentially catch a wide range of transactions. For instance, an allotment or transfer of shares at a discount or without charge under an ESOP or ESAP could prima facie fall foul of the prohibition against financial assistance. The Companies Act contains an exception for companies to finance schemes to enable its employees to own shares in itself or its holding company. However, a careful review of the proposed transaction should always be undertaken to ensure that the exception applies.
Prospectus requirement under the Securities and Futures Act (Cap. 289) of Singapore (“SFA”)
All offers of securities made in Singapore, unless exempted under the SFA, must be accompanied by a prospectus that is prepared in accordance with the SFA and lodged with the Monetary Authority of Singapore.
This all-encompassing prospectus rule enacted under the Securities and Futures (Amendment) Act 2005 (“SFAA 2005”) was a departure from the old rule, which only required the issuance of a prospectus where the offer of securities was made to the public. As it was virtually impossible to define with clarity what constituted ‘public’, the concept of a public offering was removed under the SFAA 2005. Therefore, it is no longer possible to claim that an offer under an ESOP or an ESAP is a private offering that requires no prospectus. Accordingly, an offer of securities, such as shares and options, under an ESOP or an ESAP will now require the issuance of a prospectus, unless an exemption applies to the offer.
Fortunately, the SFA provides an exemption for offers of securities to employees if certain specified conditions are satisfied.
However, it will be vital for any industrial engineering company wishing to offer shares or options to its employees in Singapore to ensure that the conditions for this exemption are satisfied or that another exemption is available for the offer in question.
Other requirements for listed companies
In addition to the laws stated above, listed companies in Singapore that wish to implement an employee share incentive plan will be required to comply with the Listing Manual of the Singapore Exchange Securities Trading Limited (“SGX-ST”).
Chapter 8 of the Listing Manual sets out certain rules for the implementation of share option schemes, such as, the requirement for shareholders’ approval, the limits on the number of shares available for the share option scheme, the participants under the share option scheme, the size of the entitlements of the participants, the maximum discount that may be given and the exercise period of the share options granted.
Whilst the Listing Manual is not an enactment of Parliament, the requirements under it are binding on an issuer of securities listed on the SGX-ST. Failure to comply with the Listing Manual will attract disciplinary actions from the SGX-ST, such as a reprimand, fine and/or trading suspension.
In the competitive business environment of Singapore, the ability for industrial engineering companies to offer share incentive arrangements to employees is a highly important and effective tool for the retention and motivation of their workforces.
However, due to the regulatory regime in Singapore, as highlighted by the points raised above, companies wishing to establish and operate employee share incentive plans for their employees in Singapore should take care in order to not to contravene any Singapore law or regulation. Any such contravention may be costly and could undermine the effectiveness of the incentive arrangement.