Key issues

Preparation

What measures should be taken to best prepare for a corporate reorganisation?

Due diligence will have to be conducted on the assets, liabilities and contracts of the companies involved in the corporate reorganisation to ascertain if there are any prohibitions against the transaction or the transfer of such assets, liabilities and contracts. Even if the corporate reorganisation will be effected through the operation of law (for example, an amalgamation), due diligence will still have to be conducted, as there may be prohibitions on the rights and obligations of the companies involved transferring or vesting by operation of law.

Third-party approvals in respect of the corporate reorganisation should be obtained prior to the completion of the reorganisation. Such approval requirements usually arise out of contracts (such as financing arrangements and key customer contracts) or statutory licences or permits. In addition, parties should consider if government grants and tax incentives would be withdrawn or renegotiated following the corporate reorganisation.

Parties should consider upfront if shareholders’ approval is necessary for the corporate reorganisation. For example, under the Companies Act, the disposal of all or substantially all of the business undertaking of a company will require the approval of shareholders. Where the corporate reorganisation involves an entity or entities listed on the SGX, depending on the materiality of the corporate reorganisation, an immediate announcement may be necessary upon agreement on the reorganisation plan. If certain relative figure thresholds (pegged to various metrics such as net asset value, consideration and market capitalisation) are exceeded, shareholders’ approval may be required. Shareholders’ approval in respect of SGX-listed entities may take approximately two months to obtain, and that would have a material impact on timing and implementation.

Intra-group arrangements will also have to be considered upfront. For example, would intra-group debts have to be repaid or group charges or guarantees released? Are there any non-arm’s length or informal provision of facilities and administrative support (or even, insurance cover) to the entire group? Will such arrangements continue after completion of the corporate reorganisation? Will transitional services be necessary?

There are further preparatory issues in relation to employment and tax; see questions 8, 9 and 13.

Employment issues

What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?

Due diligence will have to be conducted on the affected employees and their terms of employment. This is to ascertain the types of employees affected by the corporate reorganisation (ie, whether they are covered under the Employment Act); and the benefits payable to the affected employees upon a termination or transfer of employment.

Where the corporate reorganisation involves the transfer of an undertaking or part thereof, section 18A of the Employment Act operates to automatically transfer, to the transferee, the contracts of employment of all employees covered under the Employment Act and engaged in such undertaking. For employees covered under the Employment Act, the transferor is required to engage in consultations with the affected employees and their trade union (if any) prior to the transfer of employment.

With effect from 1 April 2019, the Employment Act generally applies to cover all employees, with the exception of seafarers, domestic workers and any person belonging to any other class of persons whom the Minister of Manpower may from time to time declare not to be employees for the purposes of the Employment Act (currently, persons employed by a statutory board). Note that, prior to 1 April 2019, the Employment Act did not apply in particular to employees employed in managerial or executive positions who receive a salary exceeding S$4,500 a month.

Where section 18A of the Employment Act does not apply (for example, where the employees are not covered under the Employment Act, or the corporate reorganisation does not involve the transfer of an undertaking or part thereof), the employment of the affected employees will not be automatically transferred to the transferee. The transferor and transferee will have to obtain the consent of each affected employee to transfer the employment of such employee to the transferee (including consent to the terms on which the employee will be employed by the transferee).

The transferor and transferee may, therefore, wish to set aside sufficient time for engagement with the affected employees on the matters highlighted above.

Where the corporate reorganisation involves foreign employees, the work passes do not automatically transfer as part of the corporate reorganisation. Applications will have to be made to MOM for new work passes or for a transfer of work passes.

Corporate reorganisations may also result in redundancies. It would be necessary to consider how such redundancy would be implemented. Note that employers who employ at least 10 employees are required to notify MOM if five or more employees are retrenched within any six-month period. In addition, from 1 April 2019, the Commissioner for Labour may require an employer to furnish additional information on the retrenchment of any employee. Singapore law does not prescribe any statutory redundancy benefits and any redundancy benefits would be contractual.

What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?

Singapore does not have a statutory pension scheme. Instead, employees who are citizens or permanent residents of Singapore are members of the Central Provident Fund (CPF), a compulsory national savings scheme that is established by the Central Provident Fund Act, Chapter 36 of Singapore (the CPF Act). Foreign nationals cannot become members of the CPF.

Under the CPF Act, every employer in Singapore is responsible for making monthly contributions at prescribed rates to the CPF accounts of eligible employees. Following a corporate reorganisation, these statutory obligations will apply to the transferee as an employer. This is similar to other statutory obligations that are imposed on employers in Singapore (for example, provision of statutory parental and childcare leave benefits, and work injury compensation).

Financial assistance

Is financial assistance prohibited or restricted in your jurisdiction?

The Companies Act contains provisions relating to financial assistance, which restrict a public company incorporated in Singapore, or a private company incorporated in Singapore whose holding company or ultimate holding company is a public company, from providing financial assistance. There is no restriction against private companies providing financial assistance, save for the private companies mentioned in the preceding sentence.

The restriction is broadly worded and covers direct or indirect financial assistance in the acquisition of shares or units of shares in the company providing the assistance, or the holding company or ultimate holding company of that company. For instance, if a party seeking to acquire shares in a target company procures the target company to charge its assets to refinance the acquisition loan taken by that party, this may constitute financial assistance.

Financial assistance is a restricted but not prohibited activity and it is possible to ‘whitewash’ such financial assistance. In addition, financial assistance may be given in certain circumstances, for example, where the amount of assistance is not more than 10 per cent of the company’s paid up capital and reserves, and the giving of the assistance does not materially prejudice the interests of the company or its shareholders, or the company’s ability to pay its creditors (subject to the satisfaction of certain prescribed conditions).

Common problems

What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?

See questions 7 to 10.

Accounting and tax

Accounting and valuation

How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?

All companies incorporated under the Companies Act are generally required to prepare accounts or consolidated accounts in accordance with the Singapore Financial Reporting Standards (FRS). The FRS is adopted from the International Financial Reporting Standards issued by the International Accounting Standards Board.

Accordingly, parties to the corporate reorganisation should, along with their auditors and financial advisers, ensure that their proposed treatment of the corporate reorganisation, and valuation of the target assets and businesses, are consistent and compliant with the FRS.

Tax issues

What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?

Stamp duty

Stamp duty would be relevant to corporate reorganisations involving business or share acquisitions. Stamp duty is generally levied on documents relating to the transfer or assignment of any interest in stocks, shares or immovable property.

Relief from stamp duty may be available under the Stamp Duties Act for transfers, pursuant to a reconstruction or amalgamation of companies or transfers between associated permitted entities, provided that the conditions stipulated in the relevant subsidiary legislation are met.

One main condition regarding relief for the transfer of assets, pursuant to a reconstruction or amalgamation of companies, is that, generally, the transferee company must increase its share capital with a view of acquiring no less than 90 per cent of the ‘reckonable’ share capital (as defined under the relevant subsidiary legislation) or the undertaking of the target company. Further, at least 90 per cent of the consideration for the acquisition must be satisfied by the issue of shares in the transferee company to the target company or the target company’s shareholders.

One main condition in relation to relief for the transfer of assets between ‘associated permitted entities’ is that the transferor and transferee entities must have been ‘associated’ with each other (as provided in the relevant subsidiary legislation) for at least 12 months prior to the transfer, unless the transferee entity had been incorporated specially to acquire the relevant assets.

The availability of relief under the stamp duty subsidiary legislation hinges on a formal application being made to the Commissioner of Stamp Duties for a grant of such relief. If granted, such relief will be subject to certain continuing obligations, the breach of which would result in the subsequent clawback of the relief granted and the imposition of interest at the rate of 6 per cent per annum from the date the duty is liable.

GST

GST is chargeable at the rate of 7 per cent (at the time of writing) on taxable supplies made by taxable persons in the course of furtherance of any business carried on by that person. A disposal of business assets or liabilities (whether or not in connection with a corporate reorganisation) is deemed to be a supply made in the course of furtherance of that business for GST purposes.

There may be GST payable by the acquiring entity if the corporate reorganisation involves the disposal of business assets by a taxable person under the GST Act. However, if the corporate reorganisation involves the transfer of business as a whole or part thereof as a going concern, such transaction is treated as an excluded transaction that is neither a supply of goods nor services. Such transfer is not subject to GST.