Introduction
The Singapore Companies Act (Cap. 50) (the Act) draws its roots from the UK Companies Act 1948. Since its inception, the Act has been amended 16 times but these have largely been piecemeal changes rather than a comprehensive review and overhaul of the Act. The most recent review of the Act took place in 1999 and it was widely acknowledged that there was a need to update and refine the Act to ensure it continued to provide for an efficient and transparent corporate regulatory framework to support Singapore’s pro-business strategy. To this end, a Steering Committee (Committee) was commissioned in 2007 and it has recently released its report by way of a consultation paper.
In its opening observations, the Committee remarked that the Act should contain only core company law; provisions which applied more specifically to different companies (e.g. foreign companies, listed companies) or to specific industries (e.g. securities and futures) were more appropriately dealt with in other legislation. While the majority of the Committee’s proposals represented an effort to rationalise the working of the Act (for instance, through the refining of definitions and removal of archaic provisions), the Committee also dealt with a number of fundamental proposals. This briefing summarises the Committee’s recommendations in relation to some of these key proposals.
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Key recommendations
Shadow directors - although recognised at general law, the Act currently does not provide a definition for ‘shadow directors’. The Committee opined that a separate definition was unnecessary in light of the current definition of ‘director’, which includes anyone in accordance with whose directions or instructions the majority of the board is accustomed to act.
Corporate directorships - the Committee considered but rejected a proposal to introduce corporate directorships. The inherent difficulties in identifying the actual corporate controller and consequential director accountability were compelling reasons not to introduce this concept.
Mandatory training for directors - the Committee was of the view that the Act need not mandate training for directors, preferring instead the current position that training is available and recommended outside of the legislative framework, for instance, through the Singapore Institute of Directors.
Codification of director duties - while there were some proponents of adopting the UK approach of codifying director duties on grounds of certainty and accessibility, the Committee has declined to follow this approach at this juncture in Singapore’s jurisprudence. The Committee was of the view that it is more appropriate to monitor developments in the UK in this area to ascertain if codification is in fact useful for business efficacy. Currently, section 157 of the Act prescribes that directors have a broad obligation at all times to act honestly and use reasonable diligence in discharging their duties. This statutory statement is not exhaustive and is complemented by common law fiduciary duties. A breach of section 157 renders a director open to criminal liability.
Extension of duties to key executives - a fundamental recommendation is the extension of certain statutory duties which are currently imposed on directors to other key executives of a company. The Committee recognised that in today’s context, management of a company often lay with key management and not necessarily with the board. In this regard, the Committee has proposed extending (a) the disclosure requirements for directors in relation to their conflicts of interests with the company (in relation to company transactions or through the holding by a director of an office or property or otherwise); and (b) the section 157 obligation to act honestly and to use reasonable diligence in discharge of duties, to the CEO of a company. The Committee had considered if extending these duties to other key management officers (including the CFO) was appropriate but decided to cast its net only over the CEO as the person at the apex of management.
Multiple proxies for members providing custodial or nominee services - currently, a member is only allowed to appoint up to 2 proxies to attend and vote at shareholder meetings, unless the articles of association provide otherwise. Consequently, many fund managers and institutional investors who hold shares via nominees or custodians have expressed dissatisfaction at often being prevented from attending shareholder meetings. The Committee has proposed that, subject to the company’s articles of association, shareholders falling within certain categories be allowed to appoint more than two proxies. These would include banks offering nominee services and licensed custodians. In addition, the Committee has also proposed that members who have purchased their shares using funds in their Central Provident Fund be given express shareholder rights. With these amendments, historical voting patterns can no longer be taken for granted and management will be wise to consider the effect this amendment may have with regards to future voting patterns at shareholder meetings.
Electronic transmission of notices - the Committee considered that the current rules regulating when a company could resort to electronic transmission of notices and documents are too prescriptive and has recommended that companies should generally be permitted to employ electronic transmission, subject to certain safeguards including the right for members to ‘opt out’ and to require delivery of physical correspondence instead.
Minority buy-out - a minority shareholder in a Singapore company currently has a right to relief where the company’s affairs are being conducted in an oppressive manner. Recognising that in most cases the only sensible solution is a buy-out of the minority shareholder’s (or in rare cases the majority shareholder’s) interests, the Committee considered but rejected a proposal to introduce an express minority buy-out right. The Committee felt that the status quo accurately reflected the balance of rights between majority and minority shareholders under Singapore law and to allow a dissenting minority shareholder who disagreed with fundamental changes to procure a buy-out was untenable.
Non-voting and multiple vote shares - the current regime provides that each equity share issued by a public company confers the right at a poll to one vote only. Recognising that this departs from the position in other major jurisdictions such as the UK, New Zealand and Australia, the Committee considered and accepted the proposal to allow public companies to issue both non-voting as well as multiple-vote shares, subject to appropriate safeguards including a higher approval threshold for the issue of such shares and ensuring that non-voting shareholders nonetheless have a say in winding up matters.
Financial assistance - the Committee has abolished the long-standing principle that, unless white-washed, private companies are prohibited from providing financial assistance in relation to an acquisition of its (or its holding company’s) shares. In doing so, the Committee acknowledged the commercial uncertainty often met in deciding if a particular transaction amounted to the provision of financial assistance. Adopting the UK approach, the financial assistance prohibitions will, if the Committee’s proposal is accepted, apply only to public companies. An additional exception will, however, be included to allow a public company or its subsidiary to provide financial assistance if such assistance will not materially prejudice the interests of the public company, its shareholders or the company’s ability to pay its creditors.
Payment of dividends - dividends are currently payable only out of company ‘profits’ which, for these purposes, is not defined in the Act. The Committee re-visited an earlier proposal by the Company Legislation and Regulatory Framework Committee in 2002 to amend this test to one based on ‘accumulated realised gains minus accumulated realised losses’ in light of the international movement away from the concept of ‘realised profits’ and remarked that the UK experience with the ‘realised profits’ test had not led to certainty. Considering Singapore companies do not face practical difficulty in applying the existing test, the status quo has been recommended.
Squeeze-out rights - presently, a squeeze-out can proceed with the acceptance of 90% of unaffiliated shareholders. The Committee considered - but declined - extending squeeze-out rights to situations whereby at least 95% of shareholders (affiliated or unaffiliated) accepted the proposal (available under Bermuda law), largely on the basis that no other leading jurisdictions have followed suit and there were no local calls pressing for this reform.
Company registers - the Act currently requires all companies to maintain certain registers at their registered office including members’ register, register of directors’ shareholdings, register of directors and key officers and register of charges. With the implementation of electronic filing by the Accounting and Corporate Regulatory Authority (ACRA) (equivalent of the UK Companies House), the Committee has proposed that the registers maintained by ACRA should be viewed as the main and authoritative database for private companies in Singapore.
Merger of memorandum and articles of association - the Committee has proposed the merging of the memorandum and articles of association into a single document. Two ‘model’ constitutions will be made available, one for private companies and another for companies limited by guarantee. Given the complex nature of public companies, a model constitution may be of limited use for those companies.
Registration of charges - under the current regime, a company is obliged to register charges falling within the list of registrable charges set out in section 131(3) of the Act. Noting the reform in this area in the UK, Canada, Australia and New Zealand, the Committee explored alternative approaches to the registration of charges including possibly expanding or replacing the list of registrable charges in section 131, the ‘negative list’ approach being considered in Hong Kong and the notice-filing systems adopted in the US. Acknowledging the current system has its flaws in that the prescribed section 131(3) list does not adequately deal with the myriad of instruments for which registration is often being sought, leading, in practice, to banks and legal practitioners often artificially ‘squeezing’ the security interests being registered into one of the prescribed items on the list, the Committee nonetheless decided to recommend maintaining the status quo but with a call for the section 131(3) list to be reviewed and updated.
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Conclusion
The public consultation exercise will run to 16 September 2011. Our Singapore office is looking to organise a round-table event in August 2011 to solicit comments from key stakeholders with a view to submitting the findings of the round-table discussions in response to the consultation paper.
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