SINGAPOREAN UPDATE – Proposed Changes to Singapore’s Guidelines for Merger Control
Highlights:
- Changes have been proposed to the Competition Commission of Singapore’s Guidelines on Merger Procedures.
- The changes give parties greater guidance on the self-assessment of mergers, obtaining a confidential opinion, and the treatment of confidential information.
MAIN ARTICLE
On 20 February 2012, the Competition Commission of Singapore (“CCS”) issued a consultation paper (“Consultation Paper”) proposing various changes to its Guidelines on Merger Procedures (“Guidelines”). The Guidelines essentially set out the procedures that are followed by the CCS in its review of notified mergers. This set of proposed changes (“Proposed Guidelines”) are intended to update the Guidelines to reflect the experience in merger control gained by the CCS over the last four and a half years. The CCS is not proposing any changes to the Guidelines on the Substantive Assessment of Mergers at this juncture
The main changes to the Guidelines that have been proposed are as follows:
- A new section provides parties with guidance when considering whether their merger is likely to be a prohibited merger under section 54 of the Competition Act and should therefore be notified to the CCS for approval;
- The CCS’s approach to market intelligence and the role of complainants and third parties in the context of merger control is clarified;
- A new procedure for obtaining a confidential opinion from the CSS on the parties’ proposed merger is set out; and
- Guidance is provided on what constitutes confidential information for the purposes of providing information to the CCS for its assessment of the merger.
Guidance for the Self-Assessment of Mergers
By way of background, it should be noted that the Competition Act does not require the approval of the CCS before a merger may be undertaken. However, where a merger results in a substantial lessening of competition (“SLC”) within any market in Singapore for goods or services, that merger is prohibited. If the CCS has reasonable grounds for suspecting that a merger has infringed, or that an anticipated merger if carried into effect will infringe, this prohibition, it may open an investigation on its own initiative. Ultimately, if the CCS determines that there has indeed been a SLC, it can require parties to split up the merged entity and/or impose financial penalties on them.
Because notification of a merger is voluntary, parties have to assess for themselves whether the merger is likely to result in a SLC and would hence need to be notified to the CCS. To enable parties and their counsels to engage in this self-assessment, the Proposed Guidelines provide guidance on the types of mergers that would raise concerns.
On the one hand, a new minimum threshold is introduced. The Proposed Guidelines indicate that mergers involving small companies are unlikely to give rise to a SLC. Small companies, in turn, are defined as companies who, in the financial year preceding the transaction, had a turnover in Singapore below S$5 million, and a turnover worldwide below S$10 million.
On the other hand, merger parties are strongly encouraged to notify the CCS where the following two conditions are met:
- The merger parties supply goods or services of the same description to customers in Singapore. In this regard, the Proposed Guidelines advise that the merger parties should have regard to the narrowest reasonable description of goods or services. Furthermore, there is no need for merger parties to consider the degree of supply and demand side substitution in order to define the relevant market.
- In addition, the merger parties’ combined share of the supply of the overlapping goods or services in Singapore exceeds 40%. In relation to determining whether or not the 40% share is met, the parties can refer to sales by value, volume, number of (retail) outlets, number of bids won, etc.
It should be noted that the Proposed Guidelines refer to a test based on the parties’ share of the supply of goods or services and not the parties’ share of the market.
Market Intelligence and Role of Third Parties
Where a merger is not notified, the Consultation Paper reminds parties that the CCS may conduct an investigation if there are reasonable grounds for suspecting that a merger has infringed, or that an anticipated merger if carried into effect will infringe, the prohibition against mergers that result in a SLC. Such reasonable grounds may be provided from the CCS’s own market intelligence or as a result of complaints received.
The Proposed Guidelines also clarify the role of third parties and complainants. They explain that the CCS is under no obligation to follow-up or investigate all complaints relating to non-notified mergers. This is in line with the voluntary nature of the merger regime in Singapore, and also aims at discouraging speculative complaints. As regards third parties, the Proposed Guidelines reiterate the position that they can express their views on notified mergers and on commitments, and can also apply to the courts for review.
Confidential Opinion from the CCS
The Proposed Guidelines set out a new process whereby merger parties may obtain a confidential opinion from the CCS whether a merger is likely to raise anti-competition concerns. It is proposed that parties may approach the CCS for such an opinion in the following circumstances:
- The merger must not be completed but there must be a good faith intention to proceed with the transaction, as evidenced to the satisfaction of the CCS by the party or parties requesting the confidential advice.
- The merger must not be in the public domain. In exceptional circumstances, the CCS may consider giving confidential advice in relation to mergers that are no longer confidential, but the requesting party or parties must provide good reasons why they wish to receive confidential advice.
When confidential advice has been sought, the CCS reserves the right to investigate the merger situation where the statutory test for doing so is met. The Proposed Guidelines also clarify that the requesting party or parties are expected to keep the CCS informed of significant developments in relation to the merger situation in respect of which confidential advice was obtained, for example, the completion date or the abandonment of the merger.
Confidential Information
The Proposed Guidelines set out the CCS’s practice of requiring parties to provide two versions of their notification filings: a version with confidential information redacted, and another setting out the confidential information. The redacted version may be used by the CCS to approach third parties, while the unredacted version will be kept confidential by the CCS.
The Proposed Guidelines warn, however, that the CCS can stop the indicative timeframe of its review if it considers the confidentiality claims made by the parties to be excessive or unreasonable. They also clarify that the following types of information are not likely to be considered confidential by the CCS:
- Information that relates to the business of any of the merger parties but is not commercially sensitive in the sense that disclosure would cause harm to the business;
- Information that reflects the merger parties’ views of how the competitivity effects of the merger could be analysed—this type of information can be produced by any reasonably well-informed market participants, trade analysts, or legal/economic advisors; and
- Information that is general knowledge within the industry, or is likely to be readily ascertainable by any reasonably diligent market participant or trade analyst.
Finally, the Proposed Guidelines state that while the CCS usually publishes only non-confidential merger decisions, it may disclose confidential information when necessary. This may occur, for example, in the context of third party enquiries or to explain the CCS’s reasoning in its final decisions.
SINGAPOREAN UPDATE – Proposed Changes to the Singapore Code on Takeovers and Mergers
Highlights:
- Changes have been proposed to the Singapore Code on Take-overs and Mergers (“Code”).
- The main changes include updating the language of the Code to incorporate current practices on the takeover of real estate investment trusts and business trusts, setting out when collective shareholder action amounts to acting in concert, and dealing with joint offers and the acquisition of derivatives.
MAIN ARTICLE
The Securities Industry Council (“SIC”) is the body that administers and enforces the Code. In October 2011, it issued a consultation paper, “Consultation Paper on Revision of the Singapore Code on Take-overs and Mergers” (“Consultation Paper”), for public consultation.
The Consultation Paper proposed various changes to the Code. These fell into the following four general areas:
- Expanding and clarifying the SIC’s powers to impose sanctions on offerors and their advisers;
- Rationalising the language of the Code to deal with the takeover of real estate investment trusts and business trusts, both of which have structures unlike that of a company;
- Codifying its practice statements on real estate investment trusts, trust schemes, and merger procedures by incorporating them into the body of the Code; and
- Proposing new rules to deal with developments in mergers and acquisitions over the last few years.
The new rules that have been proposed are the subject of this update.
Lending, Borrowing and Charging of Shares
In October 2008, the takeover of a Singapore listed company ran into problems when it transpired that the offeror had lent his shares to a third party that subsequently became insolvent and consequently failed to return equivalent shares to the offeror. The share lending was not disclosed by the offeror during the takeover bid. The takeover offer was subsequently aborted as the offeror was no longer able to fulfil its takeover obligations. To prevent a recurrence of such a situation, the SIC has proposed that the Code expressly stipulate that offerors must disclose if the offeree company shares that they hold have been charged as security, borrowed or lent.
Collective Shareholder Action
It is proposed that where shareholders have an agreement or understanding to requisition or threaten to requisition resolutions at a general meeting that have the purpose of seeking control of the board, they may be presumed to be acting in concert. Once the presumption arises, subsequent acquisitions of interests in shares by any member of the group could give rise to an obligation to make a general offer.
Joint Offerors
In some takeover offers, it is proposed that certain offeree company shareholders (other than management) are to retain an interest in the offeree company following the offer through the exchange of their offeree company shares for shares in the bid vehicle. In order to determine whether such arrangements would be regarded as a special deal under the Code, the SIC has proposed that they would not be considered as such if the offeror and the offeree company shareholder had come together to form a consortium on such terms and in such circumstances that each of them can be considered to be a joint offeror.
It has further proposed stipulating the following factors as being factors relevant to determining whether a person is a joint offeror:
- The proportion of equity share capital of the bid vehicle the person will own after completion of the acquisition;
- Whether the person will be able to exert a significant influence over the future management and direction of the bid vehicle;
- The contribution the person is making to the consortium;
- Whether the person will be able to influence significantly the conduct of the bid; and
- Whether there are arrangements in place to enable the person to exit from his investment in the bid vehicle within a short time or at a time when other equity investors cannot.
Definition of “Associate”
Currently, one of the categories of persons listed as associate is a holder of 10% or more of the equity share capital of the offeror or offeree company. The SIC has proposed lowering the threshold to 5%.
Options and Derivatives
While as a matter of practice the SIC requires persons who acquire long options or derivatives which might cause them to cross the mandatory offer thresholds to consult it before entering into such transactions, the Code itself does not currently address the question. It has proposed that Code stipulate that all acquisitions of long options or derivatives (i.e. without offsetting the value of short positions) would normally be regarded as acquisitions of shares for the purposes of determining whether the specified thresholds for making an mandatory general offer have been crossed. In addition, it is also proposed that the Code require disclosure of dealings in long options and derivatives during the offer period by persons holding 5% or more in the offeree company’s issued share capital.
Share Buy-backs
When a company buys back its shares, any resulting increase in the percentage of voting rights held by a shareholder and persons acting in concert with him is treated as an acquisition for the purpose of triggering the obligation to make a mandatory general offer. Currently, however, parties may apply for an exemption from the SIC provided they can demonstrate that the share buy-back meets certain specified conditions. As the grant of such exemptions have been routine and straightforward, the SIC has proposed streamlining the process by dispensing with the requirement for parties to seek an exemption so long as they comply with these conditions.
SINGAPOREAN UPDATE – Court Held That Terminology “Subject to contract” Indicated Intent Not to Be Bound Until a Formal Agreement Was Negotiated and Executed
Highlights:
- Offer and acceptance letters’ inclusion of phrase “subject to contract” was , in the context of the factual matrix, found to make clear the intent of the parties that they were not to be contractually bound until a formal agreement was negotiated and executed.
- While the Court in this case found that no contract had arisen, it is important to note that the phrase “subject to contract” is not a magic formula; merely including it on a document does not automatically preclude a binding contract from arising. Ultimately, a Singapore court will look at all the facts of the case and the presence of the phrase is only one factor, albeit an important one, that a court will take into account.
Facts
In Norwest Holdings Pte Ltd (in liquidation) v Newport Mining Ltd [2011] SGCA 42 (Singapore, Court of Appeal, 23 August 2011)), the liquidator of the plaintiff company, Norwest Holdings Pte Ltd, sought to sell the entire share capital of its wholly-owned subsidiary, Norwest Chemicals Pte Ltd (“Norwest Chemicals“).
Norwest Chemicals was the holding company of Sichuan Mianzhu Norwest Phosphate Chemical Company Limited (“Norwest Sichuan“). Norwest Sichuan’s assets were:
- the mining rights to two phosphate rock mines (“Mines“) for a period up to 2015; and
- production facilities for the production of sodium and potassium phosphate and phosphoric acid (“Facilities“).
The defendant, Newport Mining Ltd, was interested in purchasing the shares. On 2 May 2008, it submitted a Firm Letter of Offer for S$10 million. This was followed by a second Firm Letter of Offer for S$10.25 million on 9 May 2008.
On 12 May 2008, an earthquake struck the region where the Mines and Facilities were located and they suffered extensive damage. Two hours after the earthquake, the liquidator accepted the offer. The letter accepting the offer also stated that a formal sale and purchase agreement was to be negotiated and executed between the plaintiff and the defendant. It was not disputed on the facts that at the time of acceptance, the liquidator had not yet found out about the earthquake.
The plaintiff claimed that a binding sale and purchase contract for the sale of the Norwest Chemical shares had arisen. The defendant claimed that there was no binding contract. It was argued that the offers and acceptance were clearly made “subject to contract”, and accordingly, as no contract had been entered into, none had arisen. Alternatively, it argued that the offer had been made and accepted on the premise that the Mines and Facilities were sold in substantially the condition that they had been in when the offer was made, and that the damage to the same therefore vitiated the contract.
Decision
The High Court had found in favour of the defendant. On appeal, the Court of Appeal also found in the defendant’s favour.
The Court of Appeal held that the inclusion of the stock phrase “subject to contract” was not conclusive of the intention of the parties. Instead, it held that the better view was that the question whether there is a binding contract between the parties should be determined by considering all the circumstances. These would include what was communicated between the parties by words or conduct.
The Court noted that the key documents exchanged between the parties (i.e., the Information Memorandum, the letters of offer, and the letter of acceptance) had all referred to any agreement being “subject to contract”. This made clear the intent that parties were not to be contractually bound until a formal agreement was negotiated and executed. In addition, there had been no subsequent conduct that indicated that parties had changed this position:
- While the plaintiff pointed to the defendant finalising funding for the purchase, the Court noted the finalisation of the funding had not been communicated to the plaintiff.
- The plaintiff also noted that the defendant, a listed company, had announced the purchase and declared a trading halt in trading in its shares. The Court, however, held that this was not indicative of an intent to proceed with the purchase as this announcement had also been accompanied by a subsequent statement as to the earthquake and the need for time to ascertain the extent of the damage.
- Finally, the plaintiff noted that the defendant had, upon the liquidator’s request, topped up the purchase deposit despite knowing by then about the earthquake. The Court noted that this payment had only been made to preserve the defendant’s position while the extent of damage to the Mines and Facilities was investigated.
The Court accordingly held that, for all these reasons, the plain meaning of the “subject to contract” provisions in the Information Memorandum, the First Firm Letter of Offer, the Second Firm Letter of Offer, and the Acceptance Letter should be applied in this case. In the circumstances, therefore, the Court held that there was no binding contract entered into between the parties.
Comment
While the Court in this case found that no contract had arisen, it is important to note that the phrase “subject to contract” is not a magic formula; merely including it on a document does not automatically preclude a binding contract from arising. Ultimately, a Singapore court will look at all the facts of the case and the presence of the phrase is only one factor, albeit an important one, that a court will take into account.
SINGAPOREAN UPDATE – Methods, Trends and Developments in Singaporean M&A
Executive Summary/Highlights:
- As at June 2011, overall M&A activity in Singapore was up 40.8 per cent to US$23.3 billion, making it the busiest half-year opening since 2008.
- The rise has been driven by various factors, not least the amount of capital funds flowing into South-East Asia.
- Singapore recently liberalized its banking regulations to allows banks to make a wider range of private equity and venture capital investments.
2011 has been a good year for mergers and acquisitions (“M&A“) in Singapore. As at June 2011, overall M&A activity in Singapore was up 40.8 per cent to US$23.3 billion, making it the busiest half-year opening since 2008 (“First-half M&A activity in S’pore surges 40.8%”, The Business Times, 24 June 2011). The rise has been driven by various factors, not least the amount of capital funds flowing into South-East Asia, which has been seen as an increasingly attractive region for private equity investment.
In the last year, private equity investors from Europe and the United States have looked increasingly towards South-East Asia in preference to the traditional Asian investment jurisdictions of India and China. Within South-East Asia, Singapore, Indonesia and Vietnam are expected to see increased deal activity (“PE investors increasingly looking towards S-E Asia”, The Business Times, 3 August 2011).
Singapore itself was recently ranked fourth in terms of attractiveness to private equity investors in the 2011 Global Venture Capital and Private Equity Country Attractiveness Index, compiled by the IESE Business School. This placed Singapore just behind the United States, the United Kingdom, and Canada (“S’pore a magnet for VCs – or is it?”, The Business Times, 3 May 2011). Observers have noted that Singapore is considered an interesting place to invest in companies which have regional ambitions, and that between 2005 and 2010, Singapore accounted for half of the private equity investments by value into South-East Asia (“Indonesia gets thumbs-up from private equity funds”, The Business Times, 14 April 2011).
Over 2011 to date, significant M&A transactions in Singapore include the following:
- The voluntary conditional cash offer by Clean Water Investment Limited, a special purpose vehicle managed by CDH China Management Company Limited, to acquire all the issued and paid up ordinary shares in the capital of Singapore-listed water treatment company, Sinomem Technology Limited;
- The acquisition by Western Digital Corporation from Hitachi, Ltd. of 100% of the issued share capital of Viviti Technologies Ltd. (formerly known as Hitachi Global Storage Technologies Holdings Pte. Ltd., the hard disk drive arm of Hitachi, Ltd.);
- The joint venture between Singbridge Guangzhou Pte. Ltd., a subsidiary of Temasek Holdings, and Wing Tai (China) Investment Pte. Ltd to develop the entire residential component of the Sino-Singapore Guangzhou Knowledge City, a 123-square-kilometre sustainable city located in Guangzhou, PRC and jointly developed by Guangzhou Development District’s City Investment and Development and another Temasek Holding’s subsidiary;
- The conditional acquisition of and possible mandatory cash offer for Kim Eng Holdings Limited, a leading stock broker in the ASEAN region, by Aseam Credit Sdn Bhd, a wholly-owned subsidiary of Malayan Banking Berhad; and
- The acquisition by Nestlé S.A., the largest food and nutrition company in the world, of a 60% interest in Hsu Fu Chi International Limited, a company a company whose main business is to develop, manufacture and distribute candy, cookie and cake products in the PRC.
It is therefore timely to look briefly at the methods used for M&A in Singapore, as well as potential regulatory trends that will facilitate this growth.
M&A Methods
The principal and most popular method of effecting an M&A in Singapore would be by the acquisition of shares, whether those of a private company or those of a public company. The acquisition of shares in a private company involves a private share sale agreement between the shareholders of the target company and the acquirer. Such an agreement is usually in writing, and the agreement will set out terms that will govern the pre- and post-sale obligations of the parties. The transfer of shares is effected by way of a share transfer form, and (unless otherwise specified in the target’s articles of association) this is the only formal documentation required to effect the transfer.
An alternative way of acquiring control of a private company in Singapore is to subscribe for newly issued voting shares which, after taking into account already existing shares, make up over 50% of the entire issued voting share capital of a company (with the existing shareholders being diluted).
The acquisition of shares of a public company will require compliance with the Singapore Code on Takeovers and Mergers (“Takeover Code“) if certain percentage thresholds are crossed and is subject to substantially more formalities.
The other methods of acquiring a business are as follows:
- A buyer can purchase each separate business asset of a company in Singapore. Each asset has to be transferred subject to the particular formalities required. For some classes of assets, this will mean simply handing over the asset (i.e. delivery), although others will require transfer documents (such as real property). An asset sale can cause complications, particularly where consents are required from third parties (which will be the case for the assignment, technically a novation, of any liability under a contract). For example, the landlord’s consent to assign will be required for leasehold property.
- A scheme of arrangement is a statutory procedure under the Companies Act pursuant to which a company may be restructured. The key feature of a scheme of arrangement is that it has to be approved by a majority (in number) of shareholders holding at least three-quarters in value of the shareholders or class of shareholders present and voting either in person or by proxy, and once approved, sanctioned by the courts. Once it has been sanctioned, it binds all the shareholders including those who dissented. The scheme will usually involve share transfers and/or transfers of business assets, and if it concerns a public company, it will be subject to the Takeover Code.
- The Companies Act provides that two or more companies may amalgamate and continue as one company, which may be one of the amalgamating companies or a new company. The amalgamation may be effected by the shareholders of the amalgamating companies by special resolution at a general meeting. There must be an amalgamation proposal setting out the terms of the amalgamation, and solvency statements must be made by the directors of each amalgamating company, in relation to the amalgamating companies and the amalgamated company. Companies can also be amalgamated without an amalgamation proposal if this involves a company and its wholly-owned subsidiaries, or two or more wholly-owned subsidiary companies of the same company, provided that certain requirements set out in the Companies Act are met. If the companies are public companies, the Takeover Code must also be complied with.
Recent Regulatory Trends
To better position Singapore as a financial hub, and to boost research and development, the Singapore Government conducts periodic reviews of the regulatory regime for financial institutions in order to encourage the growth of private equity and fund management. Among the changes implemented was a recent liberalisation of the banking sector towards private equity and venture capital investment. The move, effected in the middle of 2010, amended the Banking Regulations.
Under the Banking Act, banks are prohibited from carrying on any non-banking business. MAS is, however, empowered to prescribe exceptions to this rule. MAS, hence, issued the Banking (Amendment No 2) Regulations 2010 (“Amended Regulations“) which provide that banks may enter into any partnership, joint venture or any other arrangement to carry on any business which the bank has determined to have potential for high growth or value creation. This allows banks to make a wider range of private equity and venture capital investments.
The Amended Regulations issued also set out how any equity investment in a company is to be accounted for. This will be the cost of the equity investment. If revaluation results in a gain, the gain may be factored in but only recognised up to 45% of the revaluation gain; if the revaluation results in a loss, the entire loss and diminution in value must be factored in.
MAS has clarified that the exempted activities may not include any business engaging in property related activities. It also clarified, among other things, that options granted to banks and credit facilities extended by the bank to the investee company would, save in certain circumstances, be included as private equity/venture capital investments.
The Amended Regulations affect banks incorporated in Singapore. For banks incorporated outside Singapore, but have a branch office in Singapore, MAS also issued a Notice to Banks 630 on Private Equity and Venture Capital Investments. This Notice sets out MAS’s regulatory requirements as to how the branches are to deal with their private equity and venture capital investments. Among other things, the Notice requires banks to put in place appropriate procedures to manage risk by setting up internal controls and approvals. The Notice also prohibits banks from being involved with the management of the investments, as well as specifies the maximum duration of such investments and the frequency at which the branch offices are to carry out a valuation of the investments.
As alluded to above, Singapore is in the process of adapting to provide a more conducive yet stable legal and regulatory environment for M&A. Upcoming posts will look at other recent changes, as well as recently proposed changes that will facilitate this.
XBMA – Quarterly Review for Q1 2011
The attached slides summarize trends in cross-border M&A and strategic investment activity throughout the first quarter of 2011.
Highlights:
- Global M&A volume for Q1 2011 was US$671.8 billion, up 29.5% as compared to Q1 2010.
- Cross-border transactions have rebounded substantially from 2009: 38% of Q1 2011 global M&A was cross-border — up slightly from 37% in 2010 and up significantly from the low of 26.8% in 2009.
- Canada and Australia’s shares of global M&A each more than double their respective shares of world GDP, perhaps reflecting the large number of deals involving natural resources.
- Distressed deals have exceeded US$75 billion per annum since 2009.
- Energy M&A remains the most active among cross-border transactions – reflecting the ongoing pressure to acquire natural resources to fuel emerging economies and the churn created by political instability in the Middle East and by the widespread adoption of technological improvements in the natural gas industry – with Materials and Financials cross-border M&A in the second tier.
XBMA Quarterly Review for Q1 2011