Oon & Bazul’s Head of Mergers & Acquisitions contributed Singapore Chapter of ICLG – A Practical Cross-Border Insight into Private Equity Law
1.1 What are the most common types of private equity transactions in your jurisdiction? What is the current state of the market for these transactions?
The most common types of private equity transactions in Singapore are venture capital, buyout transactions, and minority investments in portfolio companies.
The volume of private equity activity in Singapore remained robust in 2020, although at a lower value of approximately US$5.2 billion from December 2019 to November 2020, compared with US$6.5 billion in 2019. Singapore continues to be at the forefront amongst its neighbours in driving private equity deals – the energy and technology sectors, in particular, have been generating keen interest.
Noteworthy private equity transactions in Singapore in 2020 include: Equis Development Pte Ltd, which raised US$1.25 billion in its 2020 funding round with Abu Dhabi Investment Authority and other investors; Grab Holdings Inc, which raised US$706 million in its 2020 funding round with Mitsubishi UFJ Financial Group Inc; and the Ontario Teachers’ Pension Plan Board’s US$360 million investment into Singapore-based Princeton Digital Group Pte Ltd.
1.2 What are the most significant factors currently encouraging or inhibiting private equity transactions in your jurisdiction?
Singapore is one of the most developed markets in Southeast Asia and is known for its low taxes and tax incentives for foreign investors, its stable political-economic environment, and for being home to a skilled pool of working professionals. Singapore has also recently introduced a new corporate structure for investment fund vehicles, the variable capital company (“VCC”), which took effect on 14 January 2020. As at March 2021, at least 250 VCCs have been incorporated in Singapore. These factors and regulatory developments continue to draw private equity investors and make Singapore a natural entry point for investment activities in the region.
1.3 What are going to be the long-term effects for private equity in your jurisdiction as a result of the COVID-19 pandemic? If there has been government intervention in the economy, how has that influenced private equity activity?
COVID-19 has had varying effects across different industries in the private equity market, naturally dampening growth in traditional sectors like tourism and aviation while causing a surge of activity in sectors such as fintech, technology and healthcare.
Private equity firms are now particularly focused on investments into sectors that are expected to grow including digital health, e-commerce, e-learning and cybersecurity, although valuation of assets in sectors dampened by COVID-19 will remain a challenge until the effects of COVID-19 are more fully understood.
Distressed mergers and acquisitions (“M&A”) activity has not taken the limelight primarily because of extensive government intervention in the economy. For example, Singapore small-to- medium enterprises were permitted to defer performance of their contractual obligations under the COVID-19 (Temporary Measures) Act. Further, the government has extended its temporary bridging loan programme, which provides borrowers with access of up to S$3 million for business needs, with interest rate capped at 5% p.a. and Enterprise Singapore taking a 70% risk share, until 30 September 2021.
These governmental measures have provided businesses with short-term relief and are perhaps one of the reasons that Singapore was the only South-east Asian market to see growth in private equity deals and deal value in 2020.
1.4 Are you seeing any types of investors other than traditional private equity firms executing private equity-style transactions in your jurisdiction? If so, please explain which investors, and briefly identify any significant points of difference between the deal terms offered, or approach taken, by this type of investor and that of traditional private equity firms.
According to data from the Monetary Authority of Singapore, the number of family offices in Singapore increased by five times between 2017 and 2019. These family offices have typically invested in funds or co-invested alongside fund managers as shadow capital, although some larger family offices are now managing direct investments. Unlike traditional private equity firms, family offices generally have a network of connections, which allows them to have the first pick when it comes to smaller-to-medium business transactions.
The presence of shadow capital is also becoming increasingly prominent across South-east Asia.
2 Structuring Matters
2.1 What are the most common acquisition structures adopted for private equity transactions in your jurisdiction?
Private equity investments are commonly structured with an off-shore holding company acting as the pooling vehicle, which will then own a Singapore-incorporated master fund. However, Singapore’s fund management landscape is changing as more private equity fund managers are now leveraging on the attractive features available via the incorporation of a VCC, e.g., the ability (which is unavailable to traditional Singapore companies) to pay dividends out of capital.
2.2 What are the main drivers for these acquisition structures?
The main driver for these acquisition structures is tax efficiency, and in particular Singapore’s network of double taxation treaties. As for VCCs, the main attractions are the flexibility the vehicle provides in the issuance and redemption of its shares and the cost efficiencies that may arise from using common service providers across the umbrella and sub-funds.
2.3 How is the equity commonly structured in private equity transactions in your jurisdiction (including institutional, management and carried interests)?
Private equity investors typically invest through a combination of ordinary and/or convertible and redeemable preference shares and convertible debt. Management may be granted cash bonuses payable on the achievement of specified targets or phantom share option schemes.
2.4 If a private equity investor is taking a minority position, are there different structuring considerations?
When taking minority positions, private equity investors should consider governance issues (discussed in section 3 below) and methods of ensuring returns, e.g., through contractual targeted internal rate of return (“IRR”) provisions. Failure to meet the targeted IRR, for example, could trigger the investor’s option to compel the company to redeem its redeemable preference shares or to exercise a put option.
2.5 In relation to management equity, what is the typical range of equity allocated to the management, and what are the typical vesting and compulsory acquisition provisions?
Ten per cent to 20% of equity is typically allocated to management. Management equity vesting periods usually last three to five years. It is not uncommon for management equity to be subject to: (i) “good leaver” and “bad leaver” provisions; and (ii) a “drag-along right” to require management to co-sell its shares in the target to procure a sale of the entire share capital of the company.
2.6 For what reasons is a management equity holder usually treated as a good leaver or a bad leaver in your jurisdiction?
This will depend on the specific terms agreed upon in the contractual agreement between the management equity holder and the company. Typically, persons who are dismissed for cause will be treated as bad leavers and persons who cease to work for the company without cause will be treated as good leavers.
3 Governance Matters
3.1 What are the typical governance arrangements for private equity portfolio companies? Are such arrangements required to be made publicly available in your jurisdiction?
The governance arrangements of private equity portfolio companies are typically set out in the shareholders’ agreement but can also be included in the company’s constitution.
Typical arrangements include quorum requirements, reserved matters, and board or committee appointment rights. A company’s constitution is made available to the public upon incorporation with the Accounting and Corporate Regulatory Authority (“ACRA”). Shareholders’ agreements do not need to be filed with ACRA and confidentiality as to the terms therein is therefore preserved.
3.2 Do private equity investors and/or their director nominees typically enjoy veto rights over major corporate actions (such as acquisitions and disposals, business plans, related party transactions, etc.)? If a private equity investor takes a minority position, what veto rights would they typically enjoy?
Yes, private equity investors typically enjoy veto rights over major corporate actions, even if it takes a minority position. Such veto rights typically include major acquisitions, disposals, financing and new share issuances, winding-up, material changes in its business and related party transactions.
3.3 Are there any limitations on the effectiveness of veto arrangements: (i) at the shareholder level; and (ii) at the director nominee level? If so, how are these typically addressed?
Veto arrangements at both the shareholder and director level will typically be enforced by Singapore courts; however, with reference to directors, when exercising veto rights, they are still subject to their overriding fiduciary duty to the company (please see question 3.6 below for details on this duty). If there is concern about a potential conflict of interest between the director’s exercise of his veto rights and his fiduciary duties, this may be addressed by giving such veto rights to the shareholders instead.
3.4 Are there any duties owed by a private equity investor to minority shareholders such as management shareholders (or vice versa)? If so, how are these typically addressed?
No, private equity investors do not owe any duties to minority shareholders such as management shareholders (or vice versa).
However, aggrieved minority shareholders may seek recourse under Section 216 of the Companies Act if the affairs of a Singapore company are being conducted in a manner oppressive to it. If the court finds that oppression is proved, the court may make orders as it deems fit, including orders regulating the future conduct of the company or a winding-up.
3.5 Are there any limitations or restrictions on the contents or enforceability of shareholder agreements (including (i) governing law and jurisdiction, and (ii) non-compete and non-solicit provisions)?
As shareholder agreements are private contracts governed by the usual contractual principles, Singapore courts will generally uphold the provisions of a shareholder agreement, and its breach may be remedied via damages, injunctions and specific performance, subject to the usual constraints of illegality – for example, non-compete and non-solicit provisions are restraint on trade clauses, which are unenforceable unless the party seeking enforcement can show that the restraining provision is reasonable and is intended to protect a legitimate proprietary interest.
3.6 Are there any legal restrictions or other requirements that a private equity investor should be aware of in appointing its nominees to boards of portfolio companies? What are the key potential risks and liabilities for (i) directors nominated by private equity investors to portfolio company boards, and (ii) private equity investors that nominate directors to boards of portfolio companies?
Singapore companies must appoint at least one director who is ordinarily resident in Singapore. Certain persons (e.g., an undischarged bankrupt or a person who has been convicted for offences involving fraud or dishonesty) are prohibited from acting as directors of Singapore companies. As fiduciaries, directors also have duties owed to the company. Such duties include the common law duty to act bona fide in the interests of the company and statutory duties under the Companies Act to: (i) declare any conflicting interests at board meetings (Section 156); and (ii) at all times act honestly and use reasonable diligence in the discharge of his duties (Section 157). Non-compliance with these statutory duties is an offence punishable by fines and/ or imprisonment.
These directors’ duties must be carried out not only by persons formally appointed as directors, but also by “shadow directors” (persons who direct or instruct the board despite not being a board member – this could potentially refer to the private equity investors who nominate board directors of portfolio companies).
3.7 How do directors nominated by private equity investors deal with actual and potential conflicts of interest arising from (i) their relationship with the party nominating them, and (ii) positions as directors of other portfolio companies?
Directors should disclose the nature of any actual or potential conflicts they may be facing to the board, as soon as is practicable after the relevant facts have come to his knowledge, and abstain from voting on the resolution.
4 Transaction Terms: General
The Singapore Code on Takeovers and Mergers (“Takeover Code”) applies to public-to-private transactions. As such, the major issues affecting the timetable of such transactions include the timelines imposed under the Takeover Code and the approvals that must be acquired from the Securities Industry Council, e.g., in relation to any proposed break fee arrangements.
Privatisation transactions subject to the Singapore Takeover Code generally take between two to three months to complete, assuming no other regulatory clearances are required. Where the privatisation is subject to shareholders’ approval, the timetable will be stretched by an additional five to seven weeks to include the time needed for clearance by the Singapore Exchange (“SGX”) and the notice period for the shareholders’ meeting.
Public-to-private transactions are further subject to certain funding requirements, e.g., the financial adviser to the acquirer is required to issue a confirmation of financial resources, and this may take some time as the financial adviser will need to conduct financial due diligence in this respect.
Certain industries are also regulated (e.g., payment services, telecommunications) and acquiring specific approvals in such instances may impact the timetable. Further, anti-competition agreements or M&A that may result in a substantial lessening of competition within Singapore markets are prohibited under the Competition Act and must be assessed and approved by the Competition and Consumer Commission Singapore (“CCCS”). The timeframe for assessment is approximately 30 working days (for a Phase 1 review) and 120 working days (for a Phase 2 review).
4.2 Have there been any discernible trends in transaction terms over recent years?
Warranty and indemnity insurance has become increasingly common in recent years. Another key trend is that private equity investments are being held for longer periods, which has resulted in increased negotiations between parties on, e.g., extending maturity dates.
5 Transaction Terms: Public Acquisitions
5.1 What particular features and/or challenges apply to private equity investors involved in public-to-private transactions (and their financing) and how are these commonly dealt with?
Public-to-private transactions must comply with the Takeover Code. The Takeover Code imposes rules that can materially alter a deal’s structure. For example, once the offeror has announced a firm intention to make an offer, it cannot withdraw the offer without the Securities Industry Council’s consent. This means that a firm announcement must only be made after deal financing is secured.
The Takeover Code further mandates that all shareholders should be treated equally, which prevents investors from offering equity sweeteners to key shareholders and in turn can result in higher purchase prices.
Public companies and their subsidiaries are also not permitted to provide financial assistance for the acquisition of their own shares unless doing so would not materially prejudice the interests of the company or its shareholders or the company’s ability to pay its creditors. To approve of the company providing financial assistance, steps that need to be taken include that the board must pass a resolution setting out the grounds for its conclusions that the company should give the assistance and that the terms for the giving of assistance are fair and reasonable to the company.
5.2 What deal protections are available to private equity investors in your jurisdiction in relation to public acquisitions?
Such protections imposed on a target include break fees and irrevocable undertakings.
A break fee must be a genuine pre-estimate of loss, not a penalty. The Takeover Code specifies that a break fee must be minimal, i.e., no more than 1% of the value of the offeree company. The Securities Industry Council’s approval must be sought for break fees and any break fee arrangement must be fully disclosed in the announcement and offer document.
The acquirer will often obtain irrevocable undertakings from key shareholders in order to secure votes in favour of the offer.
6 Transaction Terms: Private Acquisitions
6.1 What consideration structures are typically preferred by private equity investors (i) on the sell-side, and (ii) on the buy-side, in your jurisdiction?
While private equity investors on the sell-side tend to prefer locked-box mechanisms, consideration structures with postcompletion audits and subsequent working capital adjustments are more commonly seen in the sale of private companies.
Unlike corporate buyers, private equity buyers are generally less inclined to provide protection guarantees for the purchase price.
Depending on whether the parties desire a clean break after the acquisition, earn-outs may be used. Specifically, a seller would not be inclined to accept earn-outs if it wishes to divest at the end of its funding round. On the other hand, private equity buyers commonly use earn-outs to incentivise key management sellers.
6.2 What is the typical package of warranties / indemnities offered by (i) a private equity seller, and (ii) the management team to a buyer?
Private equity sellers will usually provide fundamental warranties on title, capacity and authority. Management is generally expected to give the buyer extensive warranties and the seller representations as to management matters if it holds substantial equity in the company. If management only holds a minority stake, sellers may increase the scope of warranties, subject to limited liability caps of between 10% and 30% of the consideration.
6.3 What is the typical scope of other covenants, undertakings and indemnities provided by a private equity seller and its management team to a buyer?
Private equity sellers typically agree to limited material adverse change clauses, which provides assurance that the business will continue in the ordinary course between signing and completion.
Agreements also usually provide for a long-stop date – if closing conditions imposed upon both parties are not fulfilled by this date, the agreement will terminate. These closing conditions are usually subject to robust negotiations as parties are generally determined to achieve deal certainty.
6.4 To what extent is representation & warranty insurance used in your jurisdiction? If so, what are the typical (i) excesses / policy limits, and (ii) carve-outs / exclusions from such insurance policies, and what is the typical cost of such insurance?
The use of warranty and indemnity insurance is now common practice and is a prerequisite for many private equity investors. Sellers use it to fill any gaps in the extent of protection and coverage, while buyers use it to improve the likelihood of their bid being accepted in competitive situations.
Typical excesses range from 0.5% to 1% of the enterprise value and typical policy limits range from 10% to 30% of the purchase price. Typical carve outs/exclusions include forward-looking warranties (e.g., that the target will achieve certain profit targets post-completion), penalties or fines, purchase price adjustments, known issues, certain tax risks (e.g., transfer pricing), certain environmental risks, fraud and anti-bribery/corruption liabilities. The typical cost of such insurance is around 1.5% of the insured amount.
6.5 What limitations will typically apply to the liability of a private equity seller and management team under warranties, covenants, indemnities and undertakings?
A seller’s liability for fundamental warranties is commonly capped at an amount equal to or less than the consideration. For non-fundamental warranties, common caps are between 10% and 30% of the consideration. It is also common practice to include general limitations such as time limits on claims and a de minimis threshold. See question 6.2 above for typical management warranty limitations.
If, in the course of conducting due diligence, risks are identified, an amount of the purchase price will usually be set aside to satisfy claims arising from such risks materialising.
6.6 Do (i) private equity sellers provide security (e.g. escrow accounts) for any warranties / liabilities, and (ii) private equity buyers insist on any security for warranties / liabilities (including any obtained from the management team)?
Generally, it is rare for private equity sellers to provide any escrow amount as security, even where known risks are identified. Whether security is eventually provided for in the agreement will hinge on the respective bargaining power of the parties.
6.7 How do private equity buyers typically provide comfort as to the availability of (i) debt finance, and (ii) equity finance? What rights of enforcement do sellers typically obtain in the absence of compliance by the buyer (e.g. equity underwrite of debt funding, right to specific performance of obligations under an equity commitment letter, damages, etc.)?
For private acquisitions, equity commitment letters are often given by the buyer to the seller and are generally enforceable by the seller against the buyer. In most transactions, an acquisition is funded by a combination of debt finance and equity commitment – as such, the parties may include obligations on the buyer in the equity commitment letter, e.g., an undertaking that the buyer takes steps to ensure the advancement of debt finance.
6.8 Are reverse break fees prevalent in private equity transactions to limit private equity buyers’ exposure? If so, what terms are typical?
Reverse break fees are highly uncommon in Singapore.
7 Transaction Terms: IPOs
Prospectus Liability & Disclosure. A private equity seller in an IPO exit is responsible for ensuring, inter alia, that the prospectus for the offer of securities under the IPO contains all information that investors and their professional advisers would reasonably need to make an informed assessment of the rights and liabilities attaching to the securities. The Securities and Futures Act imposes criminal and civil liability for false or misleading statements in the prospectus.
Lock-ups. There may be applicable lock-up requirements under the listing rules of the SGX – please see question 7.2 below. Interested Person Transactions. If the private equity seller retains a shareholding of 15% or more post-listing, it will be considered an “interested person” under the listing rules of the SGX. Transactions between the private equity seller (or its associates) and the company are considered “interested person transactions” and under the listing rules, the issuer may be required to make announcements of such transactions and to obtain prior shareholder approval.
Takeovers. As a private company will become a public company through the IPO, shareholders will be subject to the Takeover Code, which mandates that an offer be made, to all voting shareholders of the company, by any person who, together with persons acting in concert, either: (a) acquires 30% or more of the voting rights of the company; or (b) holds at least 30% but not more than 50% of the voting rights of the company, and acquires within any six-month period additional shares carrying more than 1% of the voting rights. These thresholds should be kept in mind by any private equity seller considering an IPO exit.
7.2 What customary lock-ups would be imposed on private equity sellers on an IPO exit?
Moratorium requirements under the listing rules of the SGX apply in the following manner to private equity sellers:
- For those retaining a shareholding of 15% or more at the time of listing, the lock-up is for all their shares for a period of six months after listing, and potentially for an additional six months thereafter for at least 50% of the original shareholding, depending on the admission criteria that the company satisfies.
- For those retaining a shareholding of at least 5% but less than 15% at the time of listing, the lock-up is for the proportion of their shares representing a profit, acquired within the 12 months preceding the listing date.
7.3 Do private equity sellers generally pursue a dual-track exit process? If so, (i) how late in the process are private equity sellers continuing to run the dual-track, and (ii) were more dual-track deals ultimately realised through a sale or IPO?
Private equity sellers only undertake dual-track exit processes when unsure of which option is more likely to be consummated. Sellers will end the dual-track process once it is clear that the preferred option is likely to come to fruition, and usually as soon as possible once it is clear. Recently, most dual-track deals have been realised through a sale compared to an IPO.
8.1 Please outline the most common sources of debt finance used to fund private equity transactions in your jurisdiction and provide an overview of the current state of the finance market in your jurisdiction for such debt (particularly the market for high yield bonds).
The most common source of debt financing used to fund private equity transactions is bank financing through loans. Occasionally, and in particular for larger transactions, a combination of senior debt, mezzanine debt and high-yield bonds may be used. The financing market in Singapore remains fairly stable. In comparison, the bond market tends to fluctuate and is therefore less commonly used than traditional bank financing.
8.2 Are there any relevant legal requirements or restrictions impacting the nature or structure of the debt financing (or any particular type of debt financing) of private equity transactions?
A leveraged buyout involves acquiring a target company using a significant amount of debt financing. Such buyouts may involve a debt pushdown post-completion, whereby the target company assumes liability for the debt and grants a security over its assets to the lender. This arrangement constitutes giving financial assistance on the part of the target company, as the arrangement is for the purpose of or in connection with the acquisition of shares in itself. As such, if the target company is a public company or a subsidiary of a public company, the arrangement may have to first be whitewashed by its shareholders. Note that the restriction against giving such financial assistance does not apply if the target company is a private company, unless its holding company is a public company.
8.3 What recent trends have there been in the debt financing market in your jurisdiction?
Singapore’s debt market has been performing well, with bonds issued in 2019 amounting to more than S$95 billion, matching the record-high levels achieved in 2018. Further, in view of the increased interest in making environmentally friendly and socially responsible investments, Singapore’s Monetary Authority of Singapore has launched the Sustainable Bond Grant Scheme to encourage such issuances, pursuant to which issuers can offset their external review expenses, subject to certain prerequisites.
9 Tax Matters
9.1 What are the key tax considerations for private equity investors and transactions in your jurisdiction? Are off-shore structures common?
Private equity investors should note that all income that is earned in or derived from Singapore, or that is derived outside Singapore but received in Singapore, is subject to income tax in Singapore. However, subject to meeting prescribed qualifying conditions, a Singapore tax resident will enjoy tax exemptions on the following types of foreign income that is remitted into Singapore: (i) foreign-sourced dividends; (ii) foreign-sourced profits; and (iii) foreign-sourced service income. The qualifying conditions that need to be satisfied include that: (i) the foreign income had been subject to tax in the foreign jurisdiction from which it was received; and (ii) the highest corporate tax rate of the foreign jurisdiction from which the income is received, at the time the foreign income is received in Singapore, is at least 15%.
Singapore does not have any capital gains tax. Further, Singapore practises a single-tier corporate income tax system, whereby the tax a Singapore resident company pays on its income is the final tax and shareholders will not be taxed on dividends.
Stamp duty of 0.2%, calculated based on the higher of the actual price or the value of the shares, is payable on a transfer of shares.
If a private equity acquisition is financed (wholly or partly) through debt, any interest, commission or fees in connection with the debt that is payable by a person in Singapore and to a non-Singapore resident company would be subject to withholding tax in Singapore. However, the applicable withholding tax rates may be reduced by tax treaties.
In relation to funds in particular, certain tax incentive schemes may be available for funds managed by Singapore-based fund managers. Specified income derived from a prescribed list of designated investments may be exempt from tax under the tax incentive schemes, subject to compliance with several conditions.
Off-shore structures are quite commonly used – please see the discussion in question 2.1 above for more details.
9.2 What are the key tax-efficient arrangements that are typically considered by management teams in private equity acquisitions (such as growth shares, incentive shares, deferred / vesting arrangements)?
As Singapore does not tax capital gains, one of the key considerations for private equity transactions is whether the gains from such a transaction constitute capital gains (which are not taxable) or gains of an income nature (which are taxable). The determination of whether a gain from disposal of shares capital or income is based on the relevant facts and circumstances in each case, and factors that will be considered to make this determination include the length of period of ownership of the shares disposed and the reasons for the disposal. Therefore, if a divesting entity is regarded as having acquired the shares to
dispose them for a profit, the gains from a sale of shares will be treated as gains of an income nature, which are taxable.
Certain rules have been enacted in Singapore to provide a tax exemption for gains derived by a divesting entity from its disposal of shares that meet certain conditions. These conditions include that: (i) the shares disposed must be ordinary shares, and not any other type of shares; (ii) the divesting company had held at least 20% of the ordinary shares in the investee company for a continuous period of at least 24 months prior to the date of the disposal; and (iii) the disposal was made between 1 June 2012 and 31 December 2027 (both dates inclusive).
9.3 What are the key tax considerations for management teams that are selling and/or rolling-over part of their investment into a new acquisition structure?
Singapore does not have tax-efficient structures for rollover equity arrangements. However, share-based equity plans may be implemented, the gains from which are generally taxable.
9.4 Have there been any significant changes in tax legislation or the practices of tax authorities (including in relation to tax rulings or clearances) impacting private equity investors, management teams or private equity transactions and are any anticipated?
Under Section 13H of the Income Tax Act, authorised investments made by approved venture companies may be exempt from tax for up to a maximum of 15 years. This incentive scheme was initially scheduled to end on 31 March 2020 but, in order to promote the local fund management industry, was recently extended until 31 December 2025. The scheme accommodates Singapore limited partnerships and VCCs as well as companies (incorporated in Singapore or elsewhere).
10 Legal and Regulatory Matters
In 2015, the Companies Act was amended to: (i) abolish the prohibition against financial assistance for private companies (unless its holding company is a public company); and (ii) introduce new exemptions to financial assistance for public companies. This facilitates leveraged buyouts involving private companies, as discussed at question 8.2 above.
Then, in 2017, the Companies Act was amended to introduce an inward re-domiciliation regime in Singapore, to enable foreign corporate entities to transfer its registration to Singapore and become a Singapore corporate entity.
Separately, a new Insolvency, Restructuring and Dissolution Act (“IRDA”) came into force on 30 July 2020. A concept introduced under the IRDA is that of super-priority rescue financing – to qualify, the financing must either be necessary: (i) for the survival of the company as a going concern; or (ii) to achieve a more advantageous realisation of the assets of a company than on a winding-up. If the rescue financing satisfies, inter alia, either of the aforementioned requirements, the court may make orders that include that the debt can be secured by a security interest over property of the company that is already subject to an existing security interest, of the same priority as or a higher priority than that existing security interest. This concept of super-priority rescue financing therefore provides a new option for distressed M&A targets to consider.
As discussed at question 1.2 above, the VCC is a new corporate structure for investment funds, which took effect on 14 January 2020. The key features of a VCC include that: (i) it can be set up as a single fund or as an umbrella fund with sub-funds, each of which holds its own segregated portfolio of assets and liabilities; (ii) it can be used for both open-ended and closed-ended funds, the former of which is open to new subscriptions by new investors at any time while the latter is not; (iii) it must be managed by a qualified fund manager; and (iv) fund managers may re-domicile existing overseas funds to Singapore by transferring their registration to Singapore.
A highly anticipated legal development expected to take effect later this year is the SGX’s introduction of regulations to allow the listing of Special purpose acquisition companies (“SPACs”) on the SGX. SPACs are essentially shell companies that raise funds via IPOs in order to acquire targets, and have gained considerable traction in the USA. The SGX plans to allow SPACs to list on the Exchange, but with safeguards in place to sufficiently safeguard investors’ interests. If SPACs are allowed to list on the SGX, it will certainly impact the structure of private equity transactions.
10.2 Are private equity investors or particular transactions subject to enhanced regulatory scrutiny in your jurisdiction (e.g. on national security grounds)?
Generally, private equity investors are not subject to enhanced regulatory scrutiny, unless red flags such as money laundering, corruption and terrorism financing are raised.
One should note that while there are no general foreign investment restrictions in companies in Singapore, transfers of shares in companies operating in specific industries like broadcasting and newspaper companies are subject to foreign ownership restrictions.
Further, transfers of shares in companies operating in specified regulated sectors will be subject to regulatory approval – these include licensed banks and insurers, capital market services licence holders and designated telecommunications and electricity licensees.
Additionally, if an acquisition triggers competition concerns pursuant to the Competition Act, parties should notify the CCCS, to avoid the CCCS taking actions that include imposing financial penalties.
Lastly, takeovers and mergers involving listed companies should comply with the regulatory regime under the Takeover Code.
10.3 How detailed is the legal due diligence (including compliance) conducted by private equity investors prior to any acquisitions (e.g. typical timeframes, materiality, scope, etc.)?
Private equity investors usually engage external legal counsel to conduct legal due diligence on the target prior to any acquisition.
While the exact timeframe for conducting legal due diligence varies, depending on the scope of due diligence involved and the availability of documents, it generally takes between one to two months. While the scope of legal due diligence varies, such scope minimally includes investigations as to the due incorporation of the target and the proper issuances of shares from incorporation as well as whether the target is involved in any litigious proceedings or investigations. The scope may also include a review of material agreements and banking facilities and advising if they contain, inter alia, change of control clauses, and other areas including a review of the target’s existing intellectual property portfolio and its data protection policies.
10.4 Has anti-bribery or anti-corruption legislation impacted private equity investment and/or investors’ approach to private equity transactions (e.g. diligence, contractual protection, etc.)?
Compliance with anti-bribery and anti-corruption legislation is a precondition to private equity transactions in Singapore. If there is a risk of non-compliance with such legislation, investors will typically restructure the transaction to insulate from this risk.
10.5 Are there any circumstances in which: (i) a private equity investor may be held liable for the liabilities of the underlying portfolio companies (including due to breach of applicable laws by the portfolio companies); and (ii) one portfolio company may be held liable for the liabilities of another portfolio company?
It is a fundamental principle of company law that a company is a separate legal entity from its shareholders, and therefore that: (i) a private equity investor will generally not be liable for liabilities of the underlying portfolio companies; and (ii) a portfolio company will generally not be liable for the liabilities of another portfolio company. However, if exceptional circumstances such as fraud exist, the Singapore courts may pierce the corporate veil and hold: (i) a private equity investor liable for the liabilities of the underlying portfolio companies; or (ii) a portfolio company liable for the liabilities of another portfolio company. Nevertheless, piercing the corporate veil is a last resort remedy that is only invoked when no other effective remedy can be achieved.
11 Other Useful Facts
11.1 What other factors commonly give rise to concerns for private equity investors in your jurisdiction or should such investors otherwise be aware of in considering an investment in your jurisdiction?
Singapore is an investor-friendly jurisdiction, owing in part to its: (i) investor-friendly tax system – with its flat corporate tax rate of 17%, its extensive network of tax treaties and various tax exemptions and rebates available; and (ii) strong intellectual property regime that protects business interests, as a result of which Singapore has the highest number of registered patents in South-east Asia.
Singapore is consistently ranked as one of the simplest countries to do business, beating countries such as India, China and Korea. Our laws pertaining to private equity transactions are foreign investor-friendly, e.g., there are generally no foreign ownership restrictions for companies. Therefore, our laws should not cause too much concern on the part of experienced private equity investors.
This article was authored by Head of M&A, Ng Yi Wayn, and was first published in ICLG Private Equity 2021.