COMPANIES (AMENDMENT) BILL

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COMPANIES (AMENDMENT) BILL: Order for Second Reading read.

The Second Minister for Finance (Mr Raymond Lim Siang Keat): Mr Deputy Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

Background

Sir, the Companies Act has been amended three times since 2002 to implement the recommendations of the private sector-led Company Legislation and Regulatory Framework Committee (CLRFC). The recommendations sought to simplify business regulations, reduce the costs of capital maintenance in Singapore, and update our corporate regulatory practices. The Bill will give effect to the following recommendations of the CLRFC:

(a) abolish the concepts of par value and authorised capital;

(b) reform the capital maintenance regime;

(c) introduce the concept of treasury shares; and

(d) liberalise the amalgamation process for companies.

Sir, I shall now highlight the main amendments proposed in the Bill.

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Abolishing the concepts of par value and authorised capital

Currently, all shares issued by a company must have a par value and the company is required to report its authorised share capital. Par value is the minimum value ascribed to a share in a company. It is the amount of money that the shareholder holding the said share is statutorily required to pay off for the new share issued to him. The authorised share capital is the maximum amount of share capital which a company is authorised to allot under its Memorandum. Calculation of paid-up share capital, based on par value, is an outdated concept that is no longer relied on by investors and creditors as an accurate proxy of a company's underlying value. In practice, measures, such as earning per share and net tangible asset backing, provide a more accurate guide to the economic value of a company.

Not only is the concept of par value not an accurate proxy of a company's value, the rule that shares cannot be issued at a discount to par value also serves to prevent a company from raising new funds when the market value of its shares has fallen below par value.

Clause 8 amends section 22 to abolish the concept of authorised share capital, thus removing the upper limit to the number of shares that companies may issue, a limit which serves no prudential purpose. Clause 15 introduces new sections 62A and 62B to abolish the par value concept and provides for the transition provisions for the treatment of share capital. Clause 18 repeals sections 67 to 69F which are no longer applicable as the concepts of share premium and share discount will cease to apply.

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For shares issued after the abolition date, the measure of liability of a shareholder shall be the consideration agreed to be paid on or price of the shares. This includes the amount that would previously have been classified as share premiums. The notion of issued and paid capital will continue to be relevant even after the abolition of par value, but they will no longer be measured against the par value of shares. Instead, they will be measured against the amount of capital issued and actually paid up.

As a consequence, ACRA will also amend the Eighth Schedule to the Companies Act shortly. The Eighth Schedule prescribes the requirements for the Annual Return to be submitted by a company having a share capital.

Reforming the capital maintenance regime

The Bill also reforms the current capital maintenance regime by introducing greater flexibility to how companies raise and maintain their capital. The Bill seeks to achieve this by:

(a) introducing an alternative capital reduction regime;

(b) liberalising financial assistance restrictions;

(c) reforming the share buy-back regime; and

(d) allowing the redemption of preference shares.

I will now briefly explain each of the amendments.

Alternative capital reduction regime

Currently, a company is required to obtain the High Court's approval before it can reduce its share capital. Clause 28

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introduces new sections 78A to 78K, which would allow companies to reduce their share capital through a special shareholders' resolution, without the need for approval from the Court. Creditors' interests will continue to be protected.

First, companies will be required to support the special resolution with a solvency statement, which is a declaration from the company's directors that the company is able to pay its debts as they fall due and that the company's assets will exceed its liabilities after the transaction.

Next, public companies undergoing capital reduction will be required to publish in advance in a national newspaper a notice of reduction of share capital, while private companies can choose either to publish the notice in a newspaper or send a notice to inform all their creditors. To provide greater flexibility, the publicity requirements will be provided in the Regulations, with the Minister being statutorily empowered to prescribe other modes or channels of public communication.

The shareholders' resolution and solvency statement have to be made available for public inspection. Consistent with the existing practice, creditors with valid claims will be allowed to object to the capital reduction if they can show good cause.

Liberalising financial assistance restrictions

Currently, a company is generally prohibited from providing financial assistance to third parties to acquire its own shares, as this might lead to an improper depletion of the company's assets to the detriment of its creditors. Clause 23 liberalises the restrictions on the giving of financial assistance by a company to third parties, if the amount of

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assistance does not exceed 10% of the paid-up capital and the reserves of the company, or if all the shareholders approve the giving of the financial assistance. The financial assistance has to be supported by a solvency statement.

In response to feedback that the current statutory formulation relating to financial assistance is unclear, clause 23 amends section 76 of the Companies Act by clarifying that representations, warranties and indemnities given by an issuer or vendor, in good faith and in the ordinary course of commercial dealings, in the context of an offer to the public to subscribe for its shares, will not be construed as financial assistance.

Share buy-back regime

Currently, share buy-backs can only be funded out of distributable profits. Clause 25 will amend section 76B to allow companies to buy back shares or redeem its preference shares out of profits or paid-up capital. This will provide greater flexibility to the companies. Again, as a safeguard, a solvency statement is needed before a company can fund its share buy-back or redeem its preference shares out of its capital.

Introducing the concept of treasury shares

Today, all shares repurchased by a company must be cancelled immediately upon re-acquisition by the company. Clause 26 introduces new sections 76H to 76K, which will allow a company to hold re-purchased shares in treasury instead of cancelling them. The introduction of treasury shares will make it easier for companies to restructure their capital through share buy-backs and facilitate any future capital raising without having to issue new shares. As a safeguard against possible abuse, the voting and dividend rights of the re-purchased shares will be suspended so long as these shares are held in treasury.

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Liberalising the amalgamation process for companies

Under the current regime, section 212 of the Companies Act provides for the amalgamation of companies by according the Courts the power to effect a transfer of assets and liabilities of the companies and their undertakings. This provision is however seldom used in practice, given the high costs involved and its restrictive application by the Courts.

Clause 49 introduces new sections 215A to 215J to allow amalgamation of companies, including holding companies and their subsidiaries, without a court order. To protect creditors' interests, the amalgamation has to be supported by solvency statements from the directors of each amalgamating company as well as the amalgamated company. As an additional safeguard, the new provision also empowers the Court, on application by a member or creditor of the amalgamating company, to make an order against a proposed amalgamation, eg, directing that the amalgamation proposal must not be effected, if it is satisfied that it would unfairly prejudice a member or a creditor of the amalgamating company.

_Conclusion
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Mr Deputy Speaker, Sir, the Government will continue to look into implementing the few remaining CLRFC recommendations that require amendments to the Companies Act, such as the recommendation to adopt the UK's statutory restatement of the general principles for directors. We will also continue with our regular review of the provisions in the Companies Act to keep pace with developments. The current amendments will give companies the flexibility to design appropriate capital

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structures which best suit their needs, at a lower cost, provided that there is full disclosure. We have also balanced the granting of flexibility with safeguards. This is consistent with our overall policy to make Singapore a good and progressive place for business.

Sir, I beg to move.

Question proposed.

Mr Inderjit Singh (Ang Mo Kio): Mr Deputy Speaker, Sir, I support the Bill.

Sir, my focus today is on section 76 of the Companies Act, which covers financial assistance. Specifically, my opinion is that this financial assistance clause in the Act is a stumbling block for mergers and acquisitions for both the company that is acquiring, as well as the company that is being acquired.

Sir, the Action Crucible for Financing of ACE has been looking at improving financing and funding activities, and we have looked at not just direct financing issues but also indirect issues, eg, ways to make an asset work for a company by the company using the asset to raise funds for itself. One of the significant issues that we uncovered was section 76, which makes it very cumbersome for companies to make acquisitions. We already have many struggling companies in Singapore, many of them small companies, and one way out for them to survive is to acquire other companies, merge with others or to get acquired. If we look around, the M&A activities in Singapore are relatively insignificant, compared to more developed economies.

Sir, it is also quite natural for an acquiring company to make use of all the assets that it has at its disposal to finance its activities, and this includes the assets of the company that is being acquired. The way section 76 stands now, this

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constitutes financial assistance and requires a whole series of things to be done before it becomes legal to use the assets of the acquired company for financing the transaction. For many smaller companies, they will have little chance of navigating through some of these processes, and therefore resulting in them not being able to go the M&A route effectively.

My committee therefore felt that there was an urgent need for a revision of section 76 to make it less cumbersome for companies to apply for financial assistance. As I understand it, many countries have either eliminated the issue of financial assistance or made it a lot more flexible, so that companies will not have the restriction of financial assistance as we see it here in Singapore. We made a few recommendations to the Ministry, proposing an amendment to section 76 of the Act. I am glad to note that we have made some progress today which makes the process a little simpler, but I would like to say that the Bill does not go far enough and there are still many issues that restrict the M&A activities and these will still remain with the changes that have been put in place so far. We are missing an opportunity to allow our companies to go the M&A route, something which is very common in most developed economies.

Sir, the first issue is that section 76, which has a general prohibition against companies providing financial assistance directly or indirectly to another company for the acquisition of its shares, still stands with the changes. I actually wish that we could have taken this part out completely and then the section could have focused on some guidelines on how to go about applying for financial assistance for M&A activities. Instead, we continue to use exceptions, as section 76, Part 10, shows. This section calls for the requirement of a special resolution of

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the company and a court approval is still needed. There is also a requirement of unanimous shareholder approval in the new proposed section 76(9B). The whole process

is quite a difficult one and it is quite difficult for small companies to make it work for them. Of course, the Committee would have preferred that the financial assistance should be left completely as a commercial decision, rather than requiring the process of going to the court and going through special exceptions.

Sir, we also made a proposal for a majority decision of the board to be sufficient for an M&A activity where financial assistance is immaterial, ie, less than 10%. But with the changes, we still require an unanimous approval of all directors. This again, for the immaterial type of situation, was something that we could have gone a bit further by taking out the unanimous decision process completely. I do note that there are some concessions by way of new exceptions like in the event of immaterial financial assistance. (This is the proposed section 76(9A)).

Sir, on the whole, I feel that the Bill is the first good move. As I have mentioned, we could have gone a lot more further. I do not think this will spur on the M&A activities that we would like to see. Neither is it going to help the acquiring companies to navigate around the financial assistance problems that they are facing. But in anticipation of further changes down the road, as the Minister has mentioned, I support the Bill.

Mr Raymond Lim Siang Keat: I would like to thank Mr Inderjit Singh for his comments and also for the work of the ACE's Action Crucible for Financing. They have made recommendations to the Committee, and quite a number of their recommendations have been accepted. I also agree that we need some flexibility in section 76 and that is why we have introduced this in the current Bill.

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Mr Inderjit said that he wished that we could have got rid of section 76 completely. Let me explain why we did not do so. Here, the issue is not just the interest of the acquiring company, for speed, like he has said. But you need to take into the account the interests of two other parties, ie, the shareholders of the acquired company and the creditors of that acquired company. You need to balance this off. What section 76 has done is to seek some form of balance here. This is also reflected in other jurisdictions in Australia, New Zealand and also the United Kingdom. They have that.

What we have done, in terms of flexibility, is when it comes to less than 10% of the capital, you need a majority decision at the board. Mr Inderjit Singh said that the recommendations put forward should be a majority decision, and we still need an unanimous decision. I just want to clarify that we do not need that anymore. With the amendment now, with a majority decision, you can provide the financial assistance, provided that you have a solvency statement, which you must have.

But if it goes beyond 10%, as I have said, there are other interests involved here, ie, the shareholders of the acquired company and the creditors. In this case, Mr Inderjit is quite right that one avenue, which is provided in the existing Act, is to have a special resolution and then court approval. What we have done in the

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amendment is to create another option which will help small companies. Basically, the option allows a small company, where all the shareholders agree, they can go ahead and provide the financial assistance. You do not have to go to court or to get a special resolution.

Like Mr Inderjit has said, this is the first step. We will continue to monitor this and review it. And as Members know, we have regular reviews of the Companies Act. We will see how, in terms of business efficacy, this latest set of amendments will help.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Mr Raymond Lim Siang Keat].

Bill considered in Committee; reported without amendment; read a Third time and passed.