The Companies Act is undergoing a major overhaul and the first batch of changes came into force on 1 July 2015. Many of the changes are technical; here Forefront: By TSMP highlights how one change – the removal of the prohibition against financial assistance – has made leveraged corporate buyouts much easier.
Financial assistance – a perennial headache
The erstwhile financial assistance restrictions were a perennial headache for prospective purchasers of asset or cash-rich Singapore-incorporated companies. Buyers would take financing for the purchase but once the acquisition was completed, they would not be able to use the assets or cash of the target to repay or reduce the acquisition financing, without a whitewash process. This process invariably required each of the directors of the target company to give a sworn written statement of solvency of the target company (for which there are criminal sanctions), which many were loath to do.
Imagine this: the company you work for gets taken over and the buyer wants you to make a sworn statement that taking on the burden of this loan is a good idea for the company.
More than that, you have to swear that the company will be solvent for the next 12 months after taking on this obligation. You don’t know how the incoming buyer is going to manage the company. How do you give this statement without endless sleepless nights?
The Companies Act amendments – relief at last
Against this backdrop, the Companies Act has been amended to relax the rules.
First, private companies in general are no longer subject to the financial assistance prohibition. Second, even though public companies and their subsidiaries are still subject to the restriction, they come under a simpler whitewash regime. Under the new regime, financial assistance is allowed if (i) it does not materially prejudice the interests of the company, its shareholders or its creditors and (ii) a directors’ resolution is passed which satisfy certain requirements of the Companies Act – relatively easy conditions to meet. Directors do not have to swear a solvency statement.
Prospective acquirors will find that:-
– It is easier to secure funding from financial institutions when purchasing Singapore-incorporated companies. Debts can be “pushed down” with relative ease, meaning that acquisition financing can be obtained, or refinanced, at more favourable rates.
– Doing away with the solvency statement means that acquirors are no longer at the mercy of the directors of Singapore target companies; and that the directors are similarly not laboring under a Sword of Damocles wielded by their new bosses.
– Under the old regime, any refinancing of the original acquisition financing would itself require a fresh whitewash. This meant that future restructuring of past facilities required a repeated whitewash. Under the new rules, these cumbersome requirements are relaxed.
– International M&A transactions, involving the acquisition of a Singapore-incorporated company as part of the target group, will have one less timing and cost hurdle, as the pushing down of debt to the group would not have to satisfy whitewash provisions in Singapore. This brings the local position in line with international jurisdictions such as the United Kingdom and Australia.
– Even where the target is a public company or one of its subsidiaries and financial assistance prohibitions still apply, acquirors will enjoy reduced acquisition time and decreased legal costs due to the newly relaxed rules. The threshold is set lower: the target company can proceed with the financial assistance if the board is of the view that it causes “no material prejudice”. Listed companies will also be spared the cost and delay of obtaining shareholders’ approval.
Some acquisitions that would have benefited from the relaxed rules
Based on public filings, some notable acquisitions in Singapore that required whitewash approval included:-
(i) The S$3.65 billion acquisition of Senoko Power Limited, the largest power generation company in Singapore, by a Marubeni-led Japanese consortium in 2008. The target group undertook whitewash procedures to provide financial assistance in the form of, inter alia, guarantees, a share charge, a mortgage and a debenture to secure bridge facilities amounting to S$2.9 billion.
(ii) Perennial Real Estate Holdings Limited’s S$1.17 billion acquisition of 31.2% in Raffle AXA Tower Pte. Limited in 2015. The target company undertook a whitewash to provide security for the S$869 million acquisition financing at closing.
If these acquisitions took place today with the benefit of the amended rules, they could have been done faster and at a lower cost.
The amendments – Panadol or Cure?
With this amendment to relax its financial assistance provisions, Singapore has moved into alignment with other major jurisdictions such as the UK, New Zealand and Australia. The amendment is a commercially advantageous one for international corporate purchasers seeking to acquire Singapore-incorporated companies, and makes Singapore a more competitive place to do business.
One word of caution however – the latest changes do not give directors carte blanche to sign their companies up for more debt, to guarantee indebtedness or to provide security. Directors are subject to overarching fiduciary duties and must be satisfied that the transaction will benefit the company. This is still a significant hurdle when the company is being asked to voluntarily take on debt. If the transaction only helps to alleviate the acquiror’s financial burden, without any clear and tangible benefit for the acquired company, then the latest legal changes may only be a painkiller – and not a cure – for the financial assistance headaches that target companies face.