Public Mergers and Acquisition (M&A)

Business firms make mergers and acquisitions to consolidate markets and gain a competitive advantage in the industry they operate.

Merger is the process in which two or more companies combine to form one single new entity, and it typically happens between companies of similar strength and size.

Acquisition occurs when a company of larger size takeover a smaller company. While in the former, merger is effected through a mere swapping of shares the latter involves cash or other consideration. In acquisition, just the ownership changes but the legal identity of the company may persist. 

In mergers, the ownership may not change distinctly, but the legal identity of the merging companies will alter. Acquisitions made by a receiver, liquidator, and an underwriter, mergers between parent and subsidiaries or between subsidiaries within the same group, acquisitions under intestacy or will, and acquisition by parties whose normal business activities include transactions and dealing with securities do not constitute merger.

In Singapore Mergers and Acquisitions are governed in general by Principles of Contract and Company Law as well as Singapore Code on Takeovers and Mergers (The Code) and the Competition Act. Laws and regulations applicable to M&A are also contained in the Securities and Futures Act, Chapter 289 of Singapore (“SFA”) and their relevant subsidiary legislation.

Other industry-specific legislation such as the Banking Act, Chapter 19 of Singapore, Insurance Act, Chapter 142 of Singapore, and the Financial Advisers Act may also come into play if the M&A involves entities governed by these legislations. The primary regulators are the Securities Industry Council (SIC), Monetary Authority of Singapore, the SGX-ST, and the Competition Commission of Singapore.

The Competition Act prohibits mergers, acquisitions of control that may result in a substantial lessening of competition within any market (or market segment) for goods or services in Singapore. While merger notification to the CCS is voluntary, the CCS requires all parties to mergers to conduct a self-assessment, in accordance with the methodologies in the guidelines published by the CCS. In case of doubt, the concerned party may apply to the CCS to seek clarifications.

The Code applies to the acquisition of voting control of public companies, listed registered business trusts and real estate investment trusts.  However, unlisted public companies and unlisted registered business trusts with more than 50 shareholders or unit holders and having net tangible assets of S$5 million or more must also observe the letter and spirit of the Take-over Code as set out in its General Principles and Rules.

Learn more about all the aspects involved in private mergers and acquisitions, including common structures, agreements and documents to prepare.

The process of M&A involving public listed companies differs widely from that of private companies. In this two-part article we will provide an overview of Public M&A and Private M&A.

Public Mergers and Acquisition (M&A)

Common Structures

Common Structures of M&A among Public Companies

• a takeover of a public listed company, by way of a general offer for all of the voting shares or units in the public listed company in accordance with the Code;
• a scheme of arrangement under section 210 of the Companies Act. The company may propose the scheme to its shareholders which, if approved by a statutory majority, is binding on all shareholders once sanctioned by the High Court of Singapore.
• a scheme of amalgamation under sections 215A-J of the Companies Act. Under this two or more Singapore incorporated companies amalgamate and continue as one company, or
• a trust scheme constituting an acquisition of units in a BT whereby the trust deed constituting the trust is amended following approval by unit-holders.

General Offer

General offers to take one of the following forms;

• Mandatory offers: These are triggered by the offeror acquiring shares which result in the shareholdings of the offeror in the target company, and concerts, crossing certain thresholds.
• Voluntary offers: These are made to be conditional on the offeror and its concert parties acquiring more than 50% of the target company. An offeror can stipulate a higher percentage acceptance threshold with the consent of the Securities Industry Council (SIC).
• Partial offers: This is where voluntary offers are made for a portion of the target company’s shares.

Scheme of Arrangement

It is structured in such a way that the outstanding shares in the target company are transferred from the shareholders of the target company to the offeror, in consideration for cash or/and new shares issued in acquiring company to the shareholders of the target company.

Alternatively, the target company cancels its existing shares and issues new shares in the target company to the offeror, but this method is not widely used. A scheme requires a statutory majority approval and the sanction of the High Court for it to become binding on all the shareholders.

Amalgamation

In this, the acquirer transfers to the target company assets and/or businesses in exchange for new shares in the target company. The acquirer may then be required to make a takeover offer for all the remaining shares in the target company. 

The effect of a reverse takeover is that the acquirer gains control of a listed company. Such transactions are subject to additional approvals and requirements by the SGX as well as the approval of shareholders. Consequent to the takeover the combined company must re-comply with the SGX listing requirements.

The Process

Due Diligence

Prior to making the offer, the acquiring company must perform due diligence on the target company to ensure that the acquisition is compatible and the consideration is adequate and just. However, the target company has no obligation to provide the information that the offeror would require, and it is under restriction imposed by the listing regulations that prohibit a listed company from providing any information to a person which would put that person in a privileged dealing position.

However, in the case of a recommended offeror, the level of information and documents provided varies depending on the nature of the transaction and the parties involved.  Publicly available information includes details on the directors, shareholders, the constitution of the company and published financial statements.

The target company is not supposed to reveal information that is forward-looking and price-sensitive in nature. The Code requires that absolute secrecy must be maintained before an announcement of a takeover offer is made. Information relating to a bid should only be passed to another person on a need-to-know basis.

To ensure you do thorough due diligence during an M&A activity, consult an experienced due diligence service provider.

Offer Announcement

For public takeovers, an offer announcement should contain, among other things:

• For public takeovers, an offer announcement should contain, among other things:
• the terms of the offer;
• the identities of the offeror, and where applicable, its ultimate holding company;
• details of existing holdings in the target company held by the offeror and its concert parties; (the parent, subsidiaries, fellow subsidiaries, associated companies of a company and any person who has provided financial assistance to any of the above for purchase of voting rights are referred to as concert parties)
• all conditions to which the offer will be subject;
• details of arrangements concerning the shares of both the offeror and the target company that may be material to the offer (if any); and
• where the offer is for cash or involves an element of cash, an unconditional confirmation that the offeror has sufficient financial resources to implement the offer in full. 
• It must be noted that no conditions can be imposed apart from the condition on the minimum level of acceptance in the case of a mandatory offer but condition of merger control clearance by the Competition Commission of Singapore is an exception. In the case of a voluntary or partial offer, conditions whose fulfillment are subjected to interpretation or the discretion of the offeror cannot be imposed. 

Offer Document

Subsequent to the offer announcement, an offer document must be issued to the target company stating in detail the terms and intentions of the offer, the shareholdings of the offeror and its concert parties in the target company, certain financial information relating to the offeror itself, the conditions attached to the offer and the acceptance procedure as well as the offeror’s arguments in support of the offer.

In order to ensure that the bid is successful, it is common for offerors to obtain an irrevocable undertaking from key stakeholders to accept such proposed offer and documents evidencing such undertakings must be made available for inspection by the offeror.  The circumstances under which the undertaking will not be binding on the stakeholders must also be published in the offer announcement and offer document.

Consideration can be cash or securities or the combination of the two in a voluntary and partial offer and in the case of a mandatory offer the consideration must be cash or cash alternative. Typically, SIC’s consultation will be sought regarding the valuation of the consideration where it involves securities or cash equivalent.

In the case of mandatory offer, the minimum price offered as consideration is the highest price paid by the offeror and its concerts for shares bearing voting right in the target company during the offer period and six months prior to the commencement of the offer period, and in the case of voluntary and partial offer it will be the highest price paid during the offer period and three months prior to the commencement of the offer period.

Offeree Board Circular

The Independent Directors of the offeree company advise the shareholders of their recommendations as to the acceptance or rejection of the offer. Such recommendations are based on independent and competent advice.

Acceptance Condition

A takeover offer must be conditional on a minimum level of acceptance, and exceptions are subject to approval from SIC:

• A mandatory offer must be conditional on an offeror obtaining acceptances, which will result in the offeror and its concerts holding shares carrying more than 50% of the voting rights of the target company.
• A voluntary offer must be conditional on an offeror and its concerts acquiring more than 50% of the voting rights of the target company, or, with the approval from the SIC, a higher level of shareholding of the target company. 
• A partial offer, which could result in an offeror and its concert holding more than 50% of the voting rights of the target company must be conditional on a specified number or percentage of acceptances by the target company’s shareholders.

The shareholders of the target company will receive the following documents

• Offer Announcement
• Offer Document and Acceptance Form
• Offeree Board Circular

Timeline

• The offeror can issue the offer document earliest in 14 days and latest in 21 days from the date of announcement of intention to takeover.
• The target company has 14 days after the issue of the offer document to post an offeree document to its shareholders.
• An offer must be open for at least 28 days after the date on which the offer document was issued.
• A potential competing bidder must clarify its intention within 53 days from the date of issue of offer document either by announcing its intention to make an offer or by making a no intention to bid statement.
• An offer cannot be kept open for more than 60 days after the day on which the offer document was issued unless the offer has previously become unconditional as to acceptances. However, SIC will grant an extension if there is a competing bid.

Minority Buy-Out

An offeror who acquires at least 90% of the issued shares in the target company pursuant to a takeover offer is entitled to acquire any remaining target company shares compulsorily. The offeror must notify the dissenting shareholders of the compulsory acquisition, and the dissenting shareholders have the right to ask for a list of other dissenting shareholders. Within one month of the notice or 14 days from the date of issue of the list, the dissenting shareholder can file an objection at the High Court. If there are no objections or if the objection is dismissed, all share certificates held by the dissenting shareholders are canceled and the corresponding value of consideration will be held in trust to be claimed by the dissenting shareholders and the consideration that is not claimed will be transferred to the official receiver.

Stamp Duty

Stamp duty is payable on transfers of shares at a rate of 0.2% on the higher of the actual price or the net asset value. This is typically borne by the offeror unless otherwise agreed. 

It must be noted that in a Scheme of Arrangement involving public limited companies, the type of information to be disclosed is similar to a public takeover but instead of a separate Offer Document and Offeree Board Circular, a composite scheme document is jointly issued by the offeror and the target company.

Under a scheme of arrangement, if the proposed scheme is approved by a majority in number representing at least three-quarters in value of the shareholders or class of shareholders present and voting either in person or by proxy, is binding on all shareholders or class of shareholders once sanctioned by the High Court of Singapore.