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.