Covid-19 and the Privatisation of Companies listed on the Singapore Stock Exchange (“ListCos”)
The recent Covid-19 pandemic has thrown many industries into array, especially the hospitality industry. Drastic measures have had to be taken by governments in various jurisdictions to stem the wave of infections by way of community lockdowns, social distancing, imposition of travel restrictions and stay-home notices. These necessary measures, while draconian, have grounded airlines and left hotels empty.[1] Many ListCos based in major financial centres such as New York, London and Singapore have not been spared from the effects of the pandemic.
In 2020, for example, Singapore’s economy shrank by 5.8 per cent, which is Singapore's first annual contraction since 2001.In particular, the services sector contracted by 6.8 per cent in the fourth quarter of 2020 and 7.8 per cent for the whole year.[2]
Against this backdrop, the market capitalisation of ListCos may be much lower than its net asset value or business potential. Alternatively, the trading volume in the company’s shares could be low. Regulators may also take action against ListCos by suspending the trading of their shares if they are unable to meet capital adequacy requirements.[3] Hence, ListCos may find it difficult to raise funds by utilising their listing status and controlling shareholders may find it commercially sensible to take the ListCo private.
How can a public company go private?
In Singapore, there are four (4) common ways to take a public company private. They are: -
- by way of a Voluntary General Offer (“VGO”);
- by way of a Mandatory General Offer (“MGO”);
- by a way of a Scheme of Arrangement; and
- by way of a Voluntary Delisting.
What are the main sources of law that govern the privatization of ListCos?
In general, there are five (5) sources of law that one may wish to direct his attention to when considering a privatisation. They are as follows: -
Singapore Code on Takeovers & Mergers (“SCTM”)
The SCTM governs: -
- Corporations, including foreign-incorporated companies, with a primary listing on Singapore Exchange Securities Trading Limited (the “SGX-ST”). However, the Securities Industries Council (“SIC”) may waive the application of the SCTM to foreign incorporated companies with a primary listing on the SGX-ST.
- Registered business trusts, including foreign-registered business trusts, with a primary listing on the SGX-ST. However, the SIC may waive the application of the SCTM to foreign registered business trust with a primary listing on SGX-ST.
- Singapore companies not listed on the SGX-ST with more than 50 shareholders and net tangible assets of S$5 million or more. However, the SIC may waive the application of the SCTM.
- Business trusts not listed on the SGX-ST with more than 50 unitholders and net tangible assets of S$5 million or more. However, the SIC may waive the application of the SCT
- Real Estate Investment Trusts (“REITs”).
The SCTM applies to:
- all Offerors (individual or company, Singapore resident or not); and
- all acts done or omitted to be done in and outside Singapore. This is regardless of whether the acquisition is structured within or outside Singapore.
Companies Act (Cap 50) Rev Ed 2006 (“CA”) (where the ListCo is incorporated in Singapore)
The CA contain two material provisions, namely: -
- Section 210 of the CA which deals with schemes of arrangements and
- Section 215 of the CA which deals with compulsory acquisition.
Securities and Futures Act (Cap 289) Rev Ed 2006 (“SFA”)
Part VIII of the SFA contains legislative provisions relating to take-overs:
- Section 139 of SFA states that the SIC has the power to administer and enforce the take-over code;
- Section 140 of the SFA states that it is an offence to make a false offer to make a take-over offer where there are no reasonable grounds for believing that he could pay/take up the offer if the offer is accepted;
- Section 295A of the SFA deals with a compulsory acquisition in relation to REITs and
- Part VII of the SFA contains legislative provisions relating to insider trading.
Business Trusts Act (“BTA”)
According to the BTA: -
- Section 40A deals with a compulsory acquisition in relation to a business trust.
SGX-ST Listing Manual (“SGXLM”)
Chapter 7: Continuing Listing Obligations
- Rule 723 of the SGXLM – 10% free float requirement
Chapter 11: Takeovers
- Rule 1105 of the SGXLM-Suspension of trading in shares of listed company on offeror and concert parties obtaining 90% of total number of shares of listed company
Chapter 13: Trading Halt, Suspension and Delisting
- Rules 1307 and 1309 of the SGXLM– Voluntary Delisting
What is a VGO and what are the threshold requirements for privatisation by way of a VGO?
A VGO is an offer made by an Offeror for all the shares in the ListCo and this offer is not triggered by the MGO rules in the SCTM.
A VGO must always be conditional on the Offeror and its concert parties acquiring more than 50% of the shares in the ListCo.
In practice, other conditions may also be stipulated by the Offeror. For example, the Offeror may stipulate that the level of acceptances has to be higher than 50% or that shareholders’ approval or that certain regulatory approvals are required, where applicable. However, generally, the conditions attached may not be of a kind which fulfilment is dependent on the subjective interpretation or discretion of the offeror.
No approval of shareholders of the target company is required and the consideration for a VGO may be in cash, securities or a combination thereof.
The offer price for a VGO must not be less than the highest price paid by the Offeror or any of the parties acting in concert with it for any shares during the offer period and in the three months leading up to the beginning of the offer period.
Compulsory Acquisition under Section 215(1) of the CA - Power to acquire shares of shareholders dissenting from scheme or contract approved by 90% majority
Threshold -90%
Section 215(1) of the CA states that
“Where a scheme or contract involving the transfer of all of the shares or all of the shares in any particular class in a company (referred to in this section as the transferor company) to a person (referred to in this section as the transferee) has, within 4 months after the making of the offer in that behalf by the transferee, been approved as to the shares or as to each class of shares whose transfer is involved by the holders of not less than 90% of the total number of those shares (excluding treasury shares) or of the shares of that class (other than shares already held at the date of the offer by the transferee, and excluding any shares in the transferor company held as treasury shares), the transferee may at any time within 2 months, after the offer has been so approved, give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares; and when such a notice is given the transferee shall, unless on an application made by the dissenting shareholder within one month from the date on which the notice was given or within 14 days of a statement being supplied to a dissenting shareholder pursuant to subsection (2) (whichever is the later) the Court thinks fit to order otherwise, be entitled and bound to acquire those shares on the terms which, under the scheme or contract the shares of the approving shareholders are to be transferred to the transferee or if the offer contained 2 or more alternative sets of terms upon the terms which were specified in the offer as being applicable to dissenting shareholders.”
Example
If an Offeror has 10% shares in the ListCo, then the Offeror may structure the VGO to be conditional upon him receiving acceptances amounting to 90% of the shares in ListCo other than shares owned him and its related corporations or nominees thereof. If the Offeror receives such number of acceptances, it will be entitled to exercise compulsory acquisition rights pursuant to Section 215(1) of the CA and compulsorily acquire all the remaining shares of ListCo.
What is a MGO and what are the threshold requirements for privatisation by way of a MGO?
A MGO is triggered under Rule 14.1 of the SCTM if the Offeror, together with persons acting in concert with it, acquires shares which carry 30% or more of the voting rights of a ListCo.
A MGO must be conditional upon, and only upon, the Offeror having received acceptances in respect of voting rights which, together with voting rights acquired or agreed to be acquired before or during the MGO, will result in the Offeror and persons acting in concert with it holding more than 50% of the voting rights in the target company.
The consideration for a MGO must be in cash or be accompanied by a cash alternative.
The offer price for a MGO must not be less than the highest price paid by the Offeror or any of the parties acting in concert with it for any shares during the offer period and in the 6 months leading up to the beginning of the offer period.
Example
Say for example, an Offeror holds 8% of a ListCo. If the Offeror acquires all or at least another 22% of the ListCo (eg. by way of a share purchase agreement) such that the Offeror and its concert parties will hold an aggregate of 30% or more of shares in MAL, then the Offeror would be required under Rule 14.1 of the SCTM to make a MGO for the rest of the shares in ListCo. The number of shares acquired would depend on the level of acceptances received for the MGO if it becomes unconditional.
How can a ListCo privatise under a Scheme of arrangement under Section 210 of the Companies Act (“SOA”)?
The Offeror can also acquire a ListCo by way of a SOA pursuant to which all shares held by the shareholders of ListCo are transferred to the Offeror in return for a specified consideration.
The SOA, if approved by the shareholders of ListCo in a scheme meeting and sanctioned by order of the Singapore High Court (“High Court”) after the SOA meeting, will be binding on all the shareholders of ListCo and all shares held by such shareholders will be transferred to the Offeror.
The SOA has to be approved by shareholders of ListCo at a scheme meeting convened by the High Court. The resolution to approve the SOA will only be passed if a majority in number of shareholders present and voting (whether in person or by proxy) representing not less than 75% of the shares voted at the scheme meeting vote in favour of it.
The Offerors and its concert parties will have to abstain from voting at the SOA meeting.
How can a ListCo make Voluntary delisting application followed by exit offer under Rules 1307 and 1309 of the SGXLM (“Voluntary Delisting”)?
The ListCo can convene a general meeting to obtain shareholder approval for the delisting.
The resolution to delist has to be approved by a majority of at least 75% of the total number of issued shares held by the shareholders present and voting, on a poll, either in person or by proxy at the general meeting and the resolution not being voted against by 10% or more of the total number of issued shares held by the shareholders present and voting, on a poll, either in person or by proxy at the general meeting.
In practice, the Offeror will offer a reasonable exit alternative which should normally be in cash, to the shareholders of the ListCo (“Exit Offer”).
As mentioned above, the Offeror may be able to compulsorily acquire the rest of the shares it does not already own in the ListCo under Section 215(1) of the Companies Act if it is able to receive acceptances amounting to 90% of the shares that it, its related corporations and their respective nominees do not already own at the date of the Exit Offer.
Conclusion
It is predicted that as the Covid-19 pandemic continues to have ripple effects on the economy, particularly with second waves of infections being reported around the world[4], the number of privatisations is likely to increase[5]. It is worth noting that in during such tumultuous periods, shareholders of ListCos and investors have various options available to them.
[3]https://www.mas.gov.sg/news/media-releases/2020/mas-orders-removal-of-eagle-hospitality-reit-manager