Balancing investor protection and compliance for listed Singapore companies

Author: | Published: 1 Jul 2012
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The first half of 2012 saw two important developments to better protect investor interests in Singapore, when both the Code of Corporate Governance and the Code of Takeovers and Mergers were amended after a thorough consultation process which took into consideration the views of stakeholders.

Corporate governance

On May 2 2012 the Monetary Authority of Singapore (MAS) issued the revised Code of Corporate Governance, which supersedes the Code of Corporate Governance issued in 2005.

The key amendments to the Code are in the areas of director independence, composition of the board of directors, and others matters related to good governance practices at board level, remuneration practices and disclosures, risk management and shareholder rights and roles.

The company's annual report should set out the board's determination on whether each independent director is independent in character and judgement, and whether there are relationships and circumstances likely to affect the directors' judgement.

One factor which may affect independence is whether the director, in the current or immediate past financial year, is or was, a 10% shareholder, partner, executive officer or director of any organisation to/from which the company or its subsidiaries made/received significant payments or material services in the current or immediate past financial year. Here, a "10% shareholder" is a person who holds 10% of the total votes attached to the voting shares in the company.

A second factor is whether a director who is a 10% shareholder, or an immediate family member of a 10% shareholder, is directly associated with a 10% shareholder in the current or the immediate past financial year. A director will be considered directly associated with a 10% shareholder when the director is accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the 10% shareholder in relation to the corporate affairs of the corporation. A director will not be considered directly associated with a 10% shareholder by reason only of his or her appointment having been proposed by that 10% shareholder.

An independent director who has served on the board of a company for more than nine years would need to be subject to a particularly rigorous review, and the board should explain why any such director should be considered independent.

As a general rule, at least one-third of the board should comprise independent directors. Under the revised Code, however, independent directors should make up at least half of the board in situations where the chairman and CEO are the same person, immediate family members or part of the same management team, or if the chairman is not independent. Companies are given a period of five years to comply with this requirement.

Under the revised Code, the Nominating Committee is required to decide if a director is able to, and has, adequately carried out his duties as a director, taking into consideration the number of his listed company directorships and other principal commitments. The board should also determine the maximum number of listed company board directorships which any director may hold, and disclose such number in the annual report.

The board should not appoint alternate directors except for limited periods in exceptional cases such as when a director has a medical emergency. The Nominating Committee and the board should also ensure that an alternate director to an independent director would similarly qualify as an independent director.

With regard to remuneration practices and disclosure, the revised Code sets out five main points. The first is that the level and structure of remuneration should be aligned with the long-term interest and risk policies of the company, and should be appropriate to attract, retain and motivate directors and key management personnel to provide good stewardship and successfully manage the company respectively.

Secondly, companies are encouraged to consider the use of contractual provisions to reclaim incentive components of remuneration from directors and key management personnel in exceptional circumstances involving misstatement of financial results, or of misconduct resulting in financial loss to the company.

Thirdly, the Remuneration Committee should ensure that existing relationships, if any, between the company and its appointed remuneration consultants will not affect the independence and objectivity of the remuneration consultants.

Fourthly, the company should fully disclose the remuneration of each individual director and the CEO on a named basis. The company should disclose in aggregate the total remuneration paid to the top five key management personnel, in addition to the existing requirement of disclosure in bands of S$250,000 ($197,500) on a named basis.

Finally, the revised Code requires that companies should disclose information on the link between remuneration paid to executive directors, CEOs and key management personnel, and performance.

The remuneration of directors and management has always been a sensitive topic. This is therefore a welcome move, but also has its disadvantages in a relatively small market like Singapore. Some SGX listed companies have reservations as making detailed disclosures increases the risk of their senior management being poached by competitors.

The revised code also covers risk management and internal controls.

Principle 11 of the revised Code states that the board is responsible for the governance of risk. The board should ensure that management maintains a sound system of risk management and internal controls to safeguard shareholders' interests and the company's assets, and should determine the nature and extent of the significant risks which the board is willing to take in achieving its strategic objectives.

The guidelines to Principle 11 further clarify that the board should determine the company's levels of risk tolerance and risk policies, and oversee management in the design, implementation and monitoring of the risk management and internal control systems.

The board should, at least annually, review the adequacy and effectiveness of the company's risk management and internal control systems, including financial, operational, compliance and information technology controls. Such review can be carried out internally or with the assistance of any competent third parties.

The board should comment on the adequacy and effectiveness of the internal controls, including financial, operational, compliance and information technology controls, and risk management systems, in the company's annual report. The board's commentary should include information needed by stakeholders to make an informed assessment of the company's internal control and risk management systems.

The board should also comment in the company's annual report on whether it has received assurance from the CEO and the CFO firstly that the financial records have been properly maintained and the financial statements give a true and fair view of the company's operations and finances, and secondly regarding the effectiveness of the company's risk management and internal control systems.

The board may establish a separate board risk committee or otherwise assess appropriate means to assist it in carrying out its responsibility of overseeing the company's risk management framework and policies.

Principle 11 should be viewed in light of Rule 1207(10) of the SGX listing manual, which requires the board of a listed company to opine on the adequacy of internal controls and risk management in the annual report. On April 16 2012, SGX issued an advisory note reminding companies that when providing this opinion, it is important that the board and the audit committee demonstrate that it has focused its attention in all three areas of risks, namely financial, operational and compliance when assessing the company's internal controls. The company should maintain proper documentation of the deliberations of the board and the audit committee. Where the board is satisfied that the company has a robust and effective system of internal controls, the disclosure would need to include the basis for such an opinion, which may include the scope of review by the board and the audit committee. Where the board and/or the audit committee is of the view that controls need to be strengthened or has concerns over any deficiency in controls, the board would have to disclose the areas of concerns and how it seeks to address and monitor the areas of concerns.

The onus is on the board to ensure that the listed company has the necessary structure and processes in place to ensure compliance with Principle 11 and Rule 1207(10).

With regard to shareholders' rights, companies should put all resolutions to vote by poll and make an announcement of the detailed results showing the number of votes cast for and against each resolution and the respective percentages.

In conclusion, the revised Code seeks to promote a high standard of corporate governance in Singapore listed companies. While the revised Code remains non-prescriptive, allowing companies the flexibility to adopt governance practices best suited to their circumstances, listed companies continue to be subject to the requirements of the SGX listing manual, the Companies Act and the Securities and Futures Act in Singapore.

The revised Code will take effect in relation to annual reports for financial years commencing from November 1 2012. However, the requirement for independent directors to make up at least half of the board of directors in specified circumstances will apply after the annual general meeting following the financial year commencing on or after May 1 2016.

Takeovers and mergers

As mentioned earlier, the other significant regulatory change in the first half of 2012 was in relation to the Code on Takeovers and Mergers. The MAS, on the advice of the Securities Industry Council (SIC), issued a revised Code on Take-overs and Mergers on March 23 2012. It became effective from April 9 2012.

The revised Takeover Code takes several steps to codify existing practices. Before the revised Takeover Code was implemented, the actions against an offender specified in the Code on Takeovers and Mergers were limited to private reprimand, public censure, or in cases of flagrant breach, actions designed to deprive the offender of its ability to enjoy the facilities of the securities market.

The revised Takeover Code has clarified that the SIC may have recourse to further actions against an offender and will enable the SIC to impose such sanctions as it deems appropriate taking into consideration the severity of the offence and its impact on the market. Sanctions which the SIC has imposed in the past in relation to breaches include delisting and disenfranchising the shares belonging to the offender and his concert parties and declaring that such shares are not acceptable as security, barring the offender from making takeover offers or declaring the offender to be unfit to be a director of a listed company in Singapore. Advisers who are in breach could be required to abstain from Code-related work and the revised Takeover Code clearly spells out that advisers who breach the Code may be barred from performing Code-related work for a specified period of time.

The revised Takeover Code sets out the rules which, if breached, might result in the SIC making a compensation order. These are rules which relate to an obligation to make an offer under the Code: Rule 10 (no special deals), Rule 14 (mandatory offer), Rule 15 (voluntary offer), Rules 16.4 (g) and (h) (relating to certain partial offers) and Rule 20 (revision of offers). The intention is to provide monetary compensation where necessary, but where shareholders do not have recourse to any civil remedy.

The SIC has also publicised the factors which it would consider in determining whether to permit an offeree company shareholder (who is not part of management) to invest in the bid company to the exclusion of all other offeree company shareholders.

Revisions to the Takeover Code also display an intention to keep pace with product innovation and market developments. For example, the SIC had previously issued a practice statement which required parties engaging in a takeover or merger transaction involving real estate investment trusts (Reits) to comply with the Code and required mergers or privatisations of business trusts via trusts schemes to be carried out subject to the Code. The revised Takeover Code now expressly provides that it applies to Reits and business trusts as well.

The SIC has also clarified that it requires persons who would cross the mandatory offer thresholds as a result of an option or derivative transaction to consult the SIC in advance. The revised Takeover Code states that for the purposes of Rule 14 (Mandatory offer), a person who has acquired or written any option or derivative which causes him to have a long economic exposure, whether absolute or conditional, to changes in the price of securities will normally be treated as having acquired those securities. Such options and derivatives would exclude instruments convertible into, rights to subscribe for and options in respect of new shares. Any person who would breach the thresholds stipulated in Rule 14.1 as a result of acquiring such options or derivatives, or, acquiring securities underlying options or derivatives when already holding such options or derivatives, must consult the SIC beforehand to determine if an offer is required, and, if so, the terms of the offer to be made.

The SIC has further clarified that in determining if an offer is required, the SIC will consider, amongst other things, the time when the option or derivative is entered into, the consideration paid for the option or derivative, and the relationship and arrangements between the parties to the option or derivative.

With the revised Takeover Code come some enhanced disclosure requirements. The revised Takeover Code requires disclosure of dealings in long options and derivatives over offeree company shares during the offer period by associates who hold 5% or more in the offeree company.

It also requires the offeror to disclose the number and percentage of his shareholdings which have been charged as security, borrowed or lent. This requirement appears to be a regulatory response to the debacle of an offer for Jade Technologies, where the offer fell through due to a share lending arrangement which was not disclosed during the offer process.

The revised Takeover Code also requires an offeror and concert parties to disclose in the announcement of firm intention to make an offer, and in the offer document, the number and percentage of shares in the offeree company which it has granted a security interest to another person over (whether through a charge, pledge or otherwise), borrowed from another person (excluding borrowed securities which have been on-lent or sold), or lent to another person. The SIC has, however, clarified that borrowed shares which have either been on-lent or sold may be excluded from the disclosure of borrowed shares as a borrower who has on-lent or sold the shares to a third party would not be in a position to control such shares.

The revised Takeover Code has lowered the shareholding threshold for a shareholder to disclose dealings in the offeree company shares during the offer period from 10% to 5%. The revised Takeover Code includes a class exemption for shareholders triggering a mandatory offer as a result of the company buying back its own shares. It provides that shareholders who, pursuant to an agreement or understanding, requisition a general meeting on a board control-seeking proposal, will be presumed to be acting in concert with each other and with the proposed directors. The result is that any subsequent acquisitions of shares by any of them could give rise to the requirement to make a general offer.

The SIC has also set out the factors that it will consider in determining whether a proposal is board-seeking. These include, among others, the following:

  • the relationship between any of the proposed directors and any of the shareholders proposing them or their supporters;
  • the number of directors to be appointed or replaced compared with the total size of the board;
  • the board positions held by the directors being replaced and to be held by the proposed directors;
  • the nature of the mandate, if any, for the proposed directors;
  • whether any of the proposing shareholders, or any of their supporters, will benefit, either directly or indirectly, as a result of the implementation of the proposal other than through its interest in shares in the company; and
  • the relationship between the proposed directors and the existing directors and/or the relationship between the existing directors and the proposing shareholders or their supporters.

It can be concluded that the revised Takeover Code has not made big structural changes in this round of amendments. The focus has been on clarifying certain matters and consolidating the practice notes issued by the SIC. The new provisions relating to Reits and business trusts take into account the unique nature of the Reit and business trust structures.

Overall, the changes to the corporate governance regime and mergers and acquisition regime demonstrate a balance between investor protection and the burden of compliance on corporate entities. Although there is competition for business among international exchanges, Singapore seeks to maintain a reputation as a place where regulation is fair to investors and the company, and effective to achieve the aims of an efficient market.

Elaine Beh
  Colin Ng & Partners LLP

Elaine Beh heads the corporate and commercial practice and co-heads the corporate finance practice at Colin Ng & Partners. Her principal areas of practice are in corporate finance and mergers and acquisitions.

She has substantial experience advising on listings on the Singapore Exchange. Her other experience include corporate restructurings, cross-border joint ventures, and mergers and acquisitions in the region. She also regularly advises on Singapore Exchange requirements and corporate governance issues.

Her clients include listed Singapore and foreign companies from a diverse range of industries – from manufacturing, logistics, food, services to technology. She is also a regular presenter at seminars on topics on initial public offerings, mergers and acquisitions and corporate governance issues.

Beh is listed as a leading lawyer in the IFLR1000 2012, and is recommended by several other leading legal directories.

She graduated from the National University of Singapore in 1989, and was admitted to the Singapore Bar in 1990.

Bill Jamieson
  Colin Ng & Partners LLP

Bill Jamieson became an equity partner in Colin Ng & Partners on July 1 2008. He Is an English lawyer who is also registered to practise Singapore law. He assists asset managers, companies, entrepreneurs and financial institutions structure businesses and execute transactions, and he advises on regulatory issues. His experience includes eight years in the City of London and more than 18 years in Asia, based in Singapore. His areas of expertise include capital markets, debt finance and restructuring, investment funds, M&A and regulatory matters. He also has considerable experience in cross-border corporate and finance transactions in London and in Asia. Before joining Colin Ng & Partners in June 2004, he was a partner in a well-known international law firm.

Jamieson is recommended as a key individual in the IFLR1000 2012, as well as in other leading legal directories.

He received a first class BA (Hons) in Jurisprudence from Oxford University 1979, and was admitted as a Solicitor of the Supreme Court of England and Wales in 1982.