Variable Capital Company – Review of new corporate entity from an administration viewpoint

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Singapore intends to launch a new corporate structure in 2019 in a bid to attract more investment funds and foreign private capital to Singapore and encourage more fund managers to domicile their funds in Singapore. This new structure would add to Singapore’s full service offerings for any type of fund to be based in this jurisdiction. The new corporate entity would be known as the Variable Capital Company (VCC) and it would be regulated by the Variable Capital Companies Act 2018 (VCC Act passed in Parliament on 1 October 2018). The new structure is tailored for collective schemes and would be open to both open-end and closed-end funds, traditional and alternative funds. It can be a stand-alone entity or an umbrella entity with multiple sub-funds. Although the VCC Act is expected to take effect in 2019, a specific date for commencement is yet to be notified at the time of this article.

(Background: MAS recently issued its Consultation Paper on the Proposed Framework for Variable Capital Companies Part 2 on 30 April 2019 to consult on, amongst other things, the proposed new regulations for the VCC framework. The Consultation closed on 30 May 2019.)

Nonetheless, this article seeks to review the VCC in comparison to that of a private limited company (which is regulated by the Companies Act Cap. 50 – CA) so that readers can be informed of the principal similarities and differences through an easy glance:

  Variable Capital Company Company
Legal Form

Body corporate incorporated under the VCC Act for investment funds and having a separate legal personality.

It can be set up as a stand-alone entity or an umbrella entity with multiple sub-funds. VCC will be a single legal entity, with its sub-funds operating as separate cells (each without legal personality).

A business form which is a legal entity separate and distinct from its shareholders and directors.

Legislative Framework

Variable Capital Companies Act 2018 for the incorporation, operation and regulaton of the structure (with certain provisions ‘borrowed’ from the Companies Act i.e. registration of charges etc)

Companies Act, Cap.50

Administering authority

Accounting and Corporate Regulatory Authority (ACRA) will administer the VCC Act.

(For matters relating to anti-money laundering and countering the financing of terrorism, the administering authority would be MAS.)

ACRA

Owned by

Subscribers to the constitution of the VCC and every other person who agrees to become a member of the VCC and whose name is entered in the register of members.

Exempt Private Company - 20 members or less and no corporation holds beneficial interest in the company’s shares

Private Company - 50 members or less

Public Company - more than 50 members.

 

Legal status

A separate legal entity from its members and directors, entity can sue or be sued in own name and also own property in own name.

  • For VCC, a sub-fund of an umbrella VCC is not a legal person separate from the VCC, but the VCC may sue or be sued in respect of a sub-fund. The property of a sub-fund is subject to orders of a court as it would have been if the sub-fund were a separate legal person.

Members have limited liability.

  • For VCC, the liability of a member of the VCC is limited to the amount, (if any) unpaid on the shares held by the member.
  • Members not personally liable for debts and losses of company.
Yearly statutory obligations

Annual returns must be filed after its AGM and within 7 months after the end of its financial year.

Annual returns must be filed after its AGM (a) in the case of a listed company, within 5 months after the end of its financial year; and (b) in any other case, within 7 months after the end of its financial year.

Accounting and governance

Wider scope of accounting standards to be used in preparing a VCC’s financial statements thus allowing more flexibility in financial reporting:

  • Apart from Singapore accounting standards and recommended accounting principles, the use of International Financial Reporting Standards and US Generally Accepted Accounting Principles would also be permitted.
  • Subject to audit by a Singapore based auditor
  • Accounting standards should be consistently applied across all the sub-funds
  • Umbrella VCC must also keep separate accounting and other records for each sub-fund that sufficiently explains the transactions and financial position of each sub-fund.

Singapore accounting standards and recommended accounting principles for companies which are consistent with Singapore Financial Reporting Standards

Re-domiciliation

Foreign corporate fund structures similar to VCCs can re-domicile as VCCs in Singapore.

  • This will encourage fund managers with funds domiciled in offshore jurisdictions such as Cayman Islands, to shift fund domiciliation with their fund management activities to Singapore.

Inward Re-domiciliation Regime in Singapore: Foreign corporate entity can re-domicile to Singapore and become a Singapore entity (provided the host country recognises or authorises re-domiciliation).

Appointment of company secretary and auditors

Company secretary: Must appoint at least 1 company secretary within 6 months of incorporation.

Auditor: Must appoint an auditor within 3 months after incorporation, unless the company is exempt from audit requirements.

Requirement for fund manager

VCC must appoint a fund manager that is regulated by MAS to manage its investments.

  • This will facilitate supervisory oversight on the use of the VCC, including to prevent a VCC from being abused for unlawful purposes and to help ensure that it is not used as an offshore vehicle without actual investment management activities in Singapore.

No requirement for fund manager.

Number of shareholders and directors

Shareholders: At least one shareholder. (Note: s16 and s17 VCC Act states that any person may incorporate a VCC and the subscribers to the constitution of a VCC are considered to have agreed to become members of the VCC)

Director:

  • Must have (a) at least one director who is ordinarily resident in Singapore; and (b) at least one director (who may be the same as (a)) who is either a director or a qualified representative of the manager of the VCC.
  • Directors of a VCC must also be “fit and proper persons”.
  • At least one Singapore resident director for non-authorised schemes and at least 3 directors for authorised schemes

Shareholders: At least one shareholder.

Director: Must have at least one director who is ordinarily resident in Singapore.

Registration requirements

The registering party must submit to ACRA:

  1. the constitution of the proposed VCC and other prescribed documents;
  2. the name of the manager of the proposed VCC;
  3. the names of the director(s) of the proposed VCC;
  4. provide ACRA the last day of the first financial year of the proposed VCC and such other information as may be prescribed; and
  5. pay ACRA the prescribed fee.

Declaration by either a registered qualified individual engaged in the formation of the VCC or a director or secretary of the proposed that all requirements for formation of company have been complied with and identifies of subscribers and officers of the VCC has been verified.

The registering party shall submit to ACRA:

  1. the constitution of the proposed company and such other documents as may be prescribed;
  2. furnish ACRA with the last day of the proposed company’s first financial year and such other information as may be prescribed; and
  3. pay ACRA the prescribed fee.

Declaration by either a registered qualified individual engaged in the formation of the proposed company or a director or secretary of the proposed that all requirements for formation of company have been complied with and identifies of subscribers and officers of the proposed company has been verified.

Requirement for Annual General Meeting (AGM)

An AGM must be held at the end of a financial year within 6 months.

However, a VCC need not hold an AGM if:

  1. its directors give at least 60 days’ written notice to the members before the last date on which the AGM must be held; or
  2. the VCC has sent to all persons entitled to receive notice of general meetings a copy of the financial statements, or copies of the consolidated financial statements and balance sheet, relating to the relevant financial year, and accompanied by the auditor’s report on them, no later than 5 months after the end of the financial year.

However, one or more members with 10% or more of the total voting rights may by notice to the VCC require the AGM to be held.

An AGM must be held after the end of financial year within (a) 4 months in the case of a public company that is listed; or (b) 6 months in the case of any other company.

However, a private company need not hold an AGM for a financial year if:

  1. a resolution has been passed to dispense with the holding of AGM,
  2. the company has sent to all persons entitled to receive notice of general meeting of the company a copy of the financial statements, or copies of the consolidated financial statements and balance sheet, relating to the relevant financial year, and accompanied by the auditor’s report on them, no later than 5 months after the end of the financial year.

However, two or more members with 10% or more of the total number of issued shares of the company or, if the company has not a share capital, not less than 5% in number of the members of the company or such lesser number as is provided by the constitution may call a meeting of the company.

Taxes
  • Tax treatment remains the same as a Singapore company.
  • Enhanced Tier Fund (ETF) Scheme and Singapore Resident Fund (SRF) Scheme under the Income Tax Act will apply to a stand-alone VCC similar to how it would apply to a Singapore company.
Profits taxed at corporate tax rates.
Continuity in law A VCC has perpetual succession until it is wound up. A company has perpetual succession until it is wound up or struck off.
Closing the business

Winding up- voluntarily by members or creditors, or compulsorily by the High Court. When winding up a sub-fund, all shareholders of a sub-fund should redeem their shares (where appropriate) and the VCC shall be required to submit an application to the MAS to be de-authorised.

  • No striking off for VCC unlike for companies under the CA (Background: The provisions in the VCC Act relating to insolvency of a VCC and its sub-funds are adapted from the CA. It was mentioned in the April consultation paper that a VCC Amendment Bill would be tabled later in 2019 to replace these provisions with the provisions under the Insolvency, Restructuring and Dissolution Act 2018, which has not come into effect at the time of this article.)
  • Winding up-voluntarily by members or creditors or compulsorily by High Court.
  • Striking off

This author views the following points as worth noting by any party looking to set up a VCC:

  1. The VCC would be regulated by both ACRA and MAS;
  2. A VCC must have “VCC” as part of and at the end of its name;
  3. There would be a requirement for a Singapore-based licensed or regulated fund manager for a VCC (unless exempted under regulations);
  4. Directors of a VCC can dispense with need to hold an annual general meeting (AGM) with at least 60 days’ written notice to the members prior to the last date to hold AGM (thus lowering operating costs). In contrast, for companies, all members must pass a resolution at a general meeting to dispense with the need to hold an AGM;
  5. Another key difference between a VCC and a company from an administrative standpoint is that there is no need for shareholders’ approval for a VCC to redeem shares thereby providing flexibility in the distribution and return of capital. In contrast, companies under CA are subject to restrictions on capital reduction and can only pay dividends out of profits;
  6. Financial statements are not required to be made public; and
  7. Unlike companies, VCCs’ shareholder registers are not required to be made public (but open to inspection by a public authority) – thus offering privacy to investors.

The VCC is intended to complement the existing structures available for use by fund managers in Singapore (namely unit trusts, companies incorporated under the CA and limited partnerships governed under the Limited Partnerships Act). It is hoped that this new corporate structure with corresponding tax benefits and the attractiveness of doing business in Singapore would spur more funds to be domiciled in Singapore and enable Singapore to continue its growth as a full-service international fund management hub.

Dentons Rodyk acknowledges and thanks Practice Trainee Claudia Lee for her contributions to this article.

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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