Proposed Amendments to the Companies Act of Singapore (July 2020)

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In light of the evolving business environment, the Companies Act Working Group (CAWG) set up by the Accounting and Corporate Regulatory Authority (ACRA) in January 2018 conducted an extensive review of Singapore’s corporate laws and regulatory framework and made recommendations in six key areas:

  1. Facilitating digitalisation;
  2. Refining financial reporting criteria;
  3. Matters relating to directors and company secretaries;
  4. Safeguarding shareholders’ interests;
  5. Share capital and financial assistance; and
  6. Updating outdated provisions.

On 20 July 2020, ACRA published a consultation paper on the proposed amendments to the Companies Act (CA). The consultation period for the public consultation ends on 17 August 2020.

This article sets out, from a corporate administration viewpoint, key recommendations made by the CAWG and incorporates our comments on these recommendations:

1. Facilitating digitalisation

Proposed Recommendation

Details

A. The CAWG proposed dematerialising physical share certificates.

To enhance operational and market efficiency and to provide greater regulatory oversight, both public and private companies would no longer issue physical share certificates to shareholders.

For all SGX-listed companies, the CDP shall be the centralised registrar for all dematerialised shares. And for non-listed companies, their records shall be maintained by ACRA.

Our Comment: A physical share certificate is presently evidence of title to the shares and a necessary closing requirement in various corporate transactions.

It appears therefore that if this recommendation is accepted, then it should be made clear that an entry in the register of members would suffice to show evidence of ownership of shares. The authors also welcome this move as (a) the process of share transfer would be made more efficient too by doing away with the preparation and signing of physical share certificates and (b) e-certificates can then become the new norm and reduce the need for keeping track of physical certificates.

B. The CAWG proposed digitalising general and board meetings.

This recommendation, if accepted, would allow companies great flexibility to decide whether and how to hold digital meetings.

This proposal is in line with other jurisdictions’ legislation including that of Australia, Hong Kong, Malaysia, New Zealand and the UK.

One concern that companies may have would be having to counter shareholders’ claims of invalidity for reasons such as ineffective audio quality or a system glitch during electronic voting. However, the CAWG is of the view that since the threshold for invalidation under section 392 of the CA applied by the Court is a high one, potential cases of abuse by shareholders may not be a cause for concern.

Our Comment: This recommendation is timely given the ongoing COVID-19 situation and need for distancing measures to be in place during meetings.

Companies would however be required to specify whether and how they intend to hold digital meetings in their constitutions.

It would also be helpful if ACRA were to provide guidance or illustrations on how general meetings can be convened such that shareholders’ right to vote is protected too.

C. The CAWG recommended the mandatory acceptance of proxy instructions given by electronic means.

Presently, section 181 of the CA does not prescribe how the instrument for appointing a proxy should be submitted to the company. The default position is having shareholders deposit physical proxy forms at the company’s registered office inconveniences shareholders’ appointment of proxies.

Accepting proxy instructions via electronic means would be in line with the initiative to enable companies to use technology to hold digital meetings and provide greater clarity to section 181 of the CA.

Our Comment: This recommendation is welcome as it then avoids any need to deliver physical proxy forms physically to a Company. Companies also need not then specify the mode of acceptance of proxy instructions in their constitutions. We suggest however that time frames be retained (e.g. forms to be received by the Company not less than 24/48 hours before the meeting).

2. Refining financial reporting criteria

A. The CAWG proposed replacing the current terms and criteria of public interest company and non-public interest company in the CA with the terms and criteria of publicly accountable and non-publicly accountable company for the purposes of financial reporting.

This would align the terms and criteria used for premature auditor resignation with that used for financial reporting, and enable a single term and criteria of publicly accountable company to be applied across the board to (a) financial reporting and (b) premature auditor resignation under the CA.

“Publicly accountable company” is to be defined as:

  • a company that is listed or is in the process of issuing its debt or equity instruments for trading on a securities exchange in Singapore;
  • a company the securities of which are listed on a securities exchange outside Singapore;
  • a financial institution; and
  • a Company Limited by Guarantee (CLG) registered under the Charities Act.

B. The CAWG recommended a new concept of a ‘micro non-publicly accountable companies’ that can be allowed to prepare reduced/simplified financial statements.

The CAWG suggested the concept of a “micro” company which would be one that fulfils the requirements of total annual revenue and total assets each are not more than S$500,000 for the previous two consecutive financial years.

Allowing micro companies to prepare reduced/simplified financial statements (e.g. only the statement of comprehensive income, statement of financial position and specific key disclosures) would help them reduce their business costs without compromising their accountability to stakeholders.

Our Comment: This new concept would be welcome by small companies and start-ups that may be in the process of growth but not at a stage to incur costs of audit when simple book-keeping would suffice to prepare their financial statements.

C. The CAWG recommended removing the “small group” concept for the purposes of the small company audit exemption.

This would provide companies with certainty as to their audit obligations, as opposed to leaving the assessment to the auditing standards and group auditors.

Further, the potential for abuse by a company structuring itself in the form of multiple small companies to avoid audit would be mitigated by the requirement to consider the parent company’s audit exemption based on the figures in the consolidated financial statements.

Our Comment: It would be helpful to groups of companies to understand that the criteria for small company audit exemption would apply on a consolidated basis to parent companies (whilst avoiding any confusion caused by ‘small group’ definition that is proposed to be removed).

D. The CAWG proposed refining the small company audit exemption criteria by removing the criterion of number of employees from the current small company definition.

A small company is therefore to be defined as a company which meets both of the following requirements for the immediate past two financial years: (a) total annual revenue not exceeding S$10 million; and (b) total assets not exceeding S$10 million.

Our Comment: This recommendation recognises that companies may outsource work and/ or automated operations and thus not require several employees – thus removing one of the qualifying criteria of ‘small company’ that employees not being more than 50.

E. The CAWG recommended separating the filing requirement of the annual return and financial statements of the company but retaining the current time frames for the filing of the annual return and financial statements.

This would benefit companies that are in a position to file the annual return but may require more time to file the financial statements due to the lack of information (for example, the records are overseas with a foreign shareholder or director).

This is also in line with the legislation of jurisdictions such as the UK, Hong Kong, Australia, New Zealand and Malaysia, which have all delinked the obligations for filing of annual return and financial statements.

Our Comment: It would be helpful to company secretaries to be able to file the annual returns first whilst the financial statements can be filed separately when ready (within existing time frames for relevant filings).

3. Matters relating to directors and company secretaries

A. The CAWG proposed removing the prohibition against a sole director of a company acting or appointing himself or herself as the company secretary.

The CAWG believed that the CA subjects company secretaries to few obligations and therefore sole directors could competently act both as a director and a company secretary. Therefore, removing the prohibition would not necessarily compromise the proper maintenance of statutory registers and records and would also help sole-director companies reduce their costs of doing business.

Our Comment: This recommendation, whilst helpful to small entities with sole directors, may not be practical given that few (if any) directors would be aware of company secretary’s obligations which help a company to comply with filing obligations under the CA. If this recommendation is accepted, then the authors would suggest the director undergo some training in order to understand and fulfil the obligations of a company secretary.

4. Safeguarding shareholders’ interests

A. The CAWG recommended mandating a variation or abrogation of class rights to be approved by at least 75% of the class-rights holders, unless the constitution of the company states otherwise.

This provides greater clarity to shareholders’ rights and helps to avoid potential disputes as to what should be the appropriate threshold of approval for the variation or abrogation of class rights.

Our Comment: This mandate does not mean that companies enjoy less flexibility. The proposed amendment also includes a carve-out which allows the constitution to provide for the appropriate threshold of approval for variation of rights, notwithstanding the threshold set in the law.

B. To better protect the rights of the shareholders within a class of shares, the CAWG recommended having two tiers of approval by (a) the shareholders of the company; and (b) the shareholders of the class of shares for selective off-market purchases within a class of shares.

The percentage threshold for both tiers of approval is recommended to be 75% and for both tiers of approval, no votes are to be cast by the shareholders whose shares are proposed to be purchased or acquired and their associated persons.

Our Comment: It is helpful to understand that there would be two tiers of approval required – of all shareholders and of the particular class of shareholders being affected. Advisors would take note of this recommendation which, if accepted, could impact the approval thresholds when drafting investment related agreements with respect to share buybacks.

C. As for compulsory acquisitions, the CAWG refined the current list of persons that should be excluded from the computation of the 90% threshold for compulsory acquisition.

This would ensure that the acquisition offer is accepted by 90% of the shareholders who are unaffiliated with the offeror and balance the need to protect minority shareholders who are unlikely to incur the costs and risks of commencing legal action to see any redress.

The following persons are therefore recommended to be excluded from the computation of the 90% threshold for compulsory acquisition under section 215:

a) A person who is accustomed or is under an obligation whether formal or informal to act in accordance with the directions, instructions or wishes of the transferee in respect of the transferor company;
b) A body corporate controlled by the transferee;
c) A person who is, or is a nominee of, a party to a share acquisition agreement with the transferee;
d) The transferee’s close relatives (i.e. spouse; children, including adopted children and step-children; parents; and siblings);
e) A person whose directions, instructions or wishes the transferee is accustomed or is under an obligation whether formal or informal to act in accordance with, in respect of the transferor company; and
f) A body corporate controlled by a person described in (e).

5. Share capital and financial assistance

A. The CAWG recommended allowing a company, if so authorised by its constitution, to alter its share capital by increasing its share capital or capitalising its profits without issuing new shares, and without the need for an ordinary resolution approving the alteration.

Our Comment: This recommendation is most noteworthy as it is aimed at providing greater flexibility to companies to raise capital without upsetting the agreed shareholding structures, and possibly at a lower cost as capital can be increased without need to issue additional shares. It should be noted that the company’s constitution should have provisions that provide the authorisation to alter the share capital. There may be an impact on fund raising as new shares may not have to be issued for each fund raise round.

6. Updating other outdated provisions

A. The CAWG recommended abolishing the requirement to lodge a statement in lieu of prospectus under the present circumstances prescribed in the CA.

Accordingly, a statement in lieu of prospectus would no longer need to be filed with the Registrar in the following circumstances:

a) Upon conversion from private to public company;
b) Upon ceasing to be a private company;
c) Prior to first allotment of shares or debentures; and
d) Prior to commencing any business or exercising any borrowing power.

B. The CAWG recommended having a single, consistent definition of a child under both the Securities and Futures Act (SFA) and the CA.

Presently, the CA defines “child” as a son, step-son, adopted son, daughter, step-daughter and adopted daughter of “less than 18 years of age” while the SFA defines “child” as a son, adopted son, step-son, daughter, adopted daughter or stepdaughter “below the age of 21 years”.

The CA’s definition is preferred as it is more recent than the SFA’s. This would align the disclosure requirements of interests in securities of directors and CEOs in the SFA with that in the CA.

Our Comment: It would appear more appropriate that definitions are standardised across legislation and that ‘child’ is one below age of 18 (as compared to 21 years of age).

C. Other proposed general updates

These updates include:

  • Updating Form 45 to provide for a statement in the prescribed form that he or she is not (a) disqualified from acting as a director under the CA; and (b) debarred from acting as a director;
  • Updating the two model constitutions in the Companies (Model Constitutions) Regulations 2015; and
  • Updating the model constitution for a private company limited by shares to facilitate the adoption of the model constitution.

As evident, the proposed amendments are significant in many ways from having greater shareholder protection to facilitating regulatory oversight. The recommendations above seek to balance shareholders’ rights with companies’ flexibility in governing the relationship they have with their stakeholders. At the same time, the recommendations attempt to find a balance between having an effective regulatory framework whilst reducing the compliance burden on companies. To support Singapore’s growth as a global business hub, these changes are necessary and welcomed by the authors. Furthermore, a robust regulatory framework and clear governing legislation is all the more important for a Singapore recovering from the global pandemic.

The authors however believe that the CAWG could have taken a bold step to increase the number of shareholders permitted for a private company from 50 to perhaps 100 shareholders in recognition of the growth of the early stage ecosystem in Singapore where more companies with various rounds of fund-raising could inadvertently cross the threshold of 50 shareholders and become public ‘unlisted’ entities. By increasing such thresholds, more potential ‘unicorn’ entities could be attracted to domicile in Singapore whilst those already in Singapore could continue to retain their ‘private’ company status. Perhaps this could be taken into account for future considerations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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