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Review of the Companies Act

Earlier this year, Singapore's Minister For Finance Tharman Shanmugaratnam announced that the Ministry had set up a high-level Steering Committee, chaired by Attorney-General Professor Walter Woon, to review the Companies Act. It is part of the Government's efforts to keep pace with changes in the business environment and to improve the regulatory and governance framework that supports Singapore's growth as an international financial hub.

Australia's corporations law, codified in the Corporations Act 2001 (Cth), has undergone a series of reforms. The recent Corporate Law Economic Reform Program (Audit Reform & Corporate Disclosure) Act 2004 (CLERP 9) targets mainly corporate disclosure and the strengthening of the framework for financial reporting.

In respect of Hong Kong's Companies Ordinance, the public consultations initiated by the Standing Committee on Company Law Reform (SCCLR) have targeted (i) the accounting and auditing provisions, (ii) company names, directors' duties, corporate directorship and registration of charges, and (iii) share capital, the capital maintenance regime and statutory amalgamation procedure. The SCCLR's recommendations will be incorporated into a draft bill for further public consultation before being introduced into the Legislative Council, tentatively by the third quarter of 2010.

The UK carried out wide-ranging changes with the UK Companies Act 2006. The reforms were the result of a Company Law Review that commenced in 1998 to consider how company law could be modernised to provide a "simple, efficient and cost effective framework for British business", and the new provisions in the Companies Act 2006 testify to that fundamental concern.

Given that background, in Singapore while regulatory burdens on companies will be lessened or statutory requirements will be made easier to comply with, rules that ensure transparency and accountability will be made more robust. There may also be more use of subsidiary legislation to modify procedures and less use of rigid regulatory provisions, so that the Act remains relevant yet nimble to changes in the business environment.

We can also expect a codification of directors' duties – the principles of directors' duties are derived from common law rules and equitable principles. A rules-based approach would offer more clarity to directors as to their duties. The criticism of such an approach is that it may encourage a mere box-ticking mentality and prove to be inflexible in the light of evolving business practices and developments in the law. A principles-based approach, on the other hand, while flexible, may not be specific enough in terms of guiding directors' actions to ensure that the directors do not fall foul of the law.

The Steering Committee will also consider issuing practice directions and guidance notes, similar to how most professions are guided in their professional conduct. Directors of listed companies in Singapore already have the benefit of the Guidebook for Audit Committees, which contains FAQs, case-studies and best practices guides.

Restrictions on financial assistance may also be removed or modified. Under section 76, a company may not, unless certain procedures are followed, give financial assistance to any person for the purpose of the acquisition of shares in the company or its holding company. Although the legislative intent of such prohibition is to protect shareholders and creditors from unauthorised depletion of the company's capital, section 76 is a relatively complex section, and has been prone to different interpretations.

The concept of the exempt private company (one in which no corporation holds a beneficial interest and which has no more than 20 members) may be replaced with a small company definition. Based on the current definition of an exempt private company, large private companies are exempted from filing with the Registry of Companies a balance sheet and profit and loss account with its annual return if they are solvent. Their financial information is thus not available in the public domain to stakeholders such as creditors and customers. The proponents for legislative change view this as inconsistent with market expectations that larger corporations should be more transparent and accountable to the larger pool of stakeholders and not just their shareholders.

Lastly, the minority buy-out regime may be modified. This will allow a minority shareholder that dissents from certain fundamental changes or alteration of shareholders' rights to require the company to buy out his/her shares at a fair value.

While this may be heralded as a positive development for minority shareholders, the determination of fair value may become contentious. In jurisdictions such as New Zealand where such buy-out regimes exist, there have been suggestions to further refine the legislation to take into account the contentions that have been raised.

The Steering Committee will be issuing a public consultation paper on its recommendations next year. It behoves professionals and businessmen alike, to contribute their thoughts and experience to making the Companies (Amendment) Bill a piece of legislation that is cogent and relevant for our times.

Ch'ng Li-Ling

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