AMALGAMATION — NEW METHOD TO MERGE AND TAKE-OVER COMPANIES
| Author | WEE Meng Seng LLB (National University of Singapore), BCL, D Phil (Oxford); Advocate & Solicitor (Singapore); Assistant Professor, Faculty of Law, National University of Singapore. |
| Date | 01 December 2008 |
| Published date | 01 December 2008 |
Adopting the New Zealand model, the Companies (Amendment) Act 2005 allows two or more companies to amalgamate, which is a fusion of the companies and the vesting of all their assets and liabilities in the amalgamated company, out of court. This provides an effective method of fusion which is not available hitherto due to the restrictive court practices under s 212. It however raises issues of rights of third parties and minority shareholders. This article explains what is involved in an amalgamation and argues that the provisions fail to provide adequate protection to unsecured creditors and shareholders of the amalgamating companies.
1 At common law the words “merger” and “amalgamation” are not terms of art and have no precise meaning. “Merger” is usually understood in Singapore as a coming together of two companies through one acquiring control of another, ie, a take-over. Take-overs in Singapore are governed by the Singapore Code on Take-overs and Mergers (“Code”). In a successful take-over under the Code, the target company becomes a subsidiary of the bidder company.1 There is no fusion of the companies. Another way to acquire control is by a s 210 scheme of arrangement of the Companies Act (“the Act”).2 Section 210 sets out a statutory procedure by which a scheme of compromise or arrangement can be
effected.3 Two companies may agree that one, the bidder company, will take-over the other, the target company, through a scheme whereby the shareholders of the latter are offered shares in the former or cash or a combination of both in exchange for the transfer or cancellation of their shares. If the scheme is approved by the shareholders and the court, it is binding on the company and its shareholders and the target company becomes a subsidiary of the bidder company. Again, there is no fusion of the companies.
2 Unlike a take-over under the Code, it is possible to achieve a fusion in a successful s 210 scheme of arrangement by taking the further step of applying to court for various vesting orders under s 212(1). It is however extremely rare for a scheme to be used for this purpose.4 In practice, it is usually immaterial that the corporate existences of companies are not fused. If a subsidiary is wholly-owned by its parent company, the latter is in complete control of the former without being embarrassed by the presence of minority interests, and if minded may run the former together with other companies in the group as a single economic entity. In fact, it is sometimes necessary to maintain the separate existences of companies in a group to ensure that the risks fall on certain companies in the group rather than others.5
3 Nevertheless, companies may want to fuse together for good reasons. Subsidiaries may be kept alive for no good reason other than to avoid the expense and problems associated with getting rid of them.6 When one company acquires control of another, it may be important that the entire business undertaking of the latter be transferred to the former to achieve economy of scale, a more efficient organisational structure, brand consolidation or various other business objectives.
4 In Canada and especially America, fusion of companies has been part of the corporate scene for many years.7 New Zealand adopted Canadian legislation in 1993.8 English and Australian company legislations, on the other hand, have to date no effective mechanism to fuse companies. Recent attempts in both jurisdictions to introduce such a mechanism have failed. The UK Company Law Review Steering Group (“CLRSG”) in its recent review of English company law noted that the absence of such a mechanism is one of the items on a list of “irritants” which internationally operating companies wished to see corrected.9 It recommended introducing a merger procedure to allow wholly-owned group companies to merge with each other or with their holding company,10 but this was rejected by the Government.11 In Australia, the Companies and Securities Advisory Committee went further and recommended that non-group companies be allowed to merge as well, but to date those recommendations have not been implemented.12
5 Singapore’s company law has traditionally been based on English and Australian company legislation,13 and similarly did not have an effective mechanism to fuse companies. The Company Legislation and Regulatory Framework Committee (“CLRFC”), appointed by the Singapore government in December 1999 to undertake a comprehensive review of company law and regulatory framework in Singapore, noted that s 212 was originally intended to facilitate amalgamation of companies through wide powers accorded to the court to effect a transfer of assets and liabilities.14 However, due to the court’s restrictive
interpretation of s 212(1), the section has rarely been successfully invoked. The CLRFC recommended that in view of current business environment of mergers and acquisitions, Singapore should introduce a merger process that is clear, efficient and tax neutral.15
6 Consequently, the Companies (Amendment) Act 2005 (“Amendment Act”) introduced two methods of amalgamation into Singapore law, based on the New Zealand model.16 They are standard amalgamation17 and short form amalgamation, which is a simplified version of standard amalgamation.18 These mechanisms allow companies to amalgamate on the basis of shareholder approval and solvency statements of the directors. No approval of the creditors or court is required.
7 This article seeks to achieve two purposes. First, as amalgamation is a new creature in Singapore and it seems that very little has been written on it,19 it will be useful to discuss their salient features. This will be done in two sections. The next section will analyse the rules overning a short form amalgamation followed by the additional rules governing a standard amalgamation. An important issue here is the approvals required in a standard amalgamation. It will be argued that there is some uncertainty on this issue but it is probable that separate class meetings are required just like a s 210 scheme of arrangement. Thereafter the third section discusses the effect of an amalgamation where it will be argued that the best approach on this issue is to give effect to Parliament’s intention of facilitating the merger of companies without getting entangled in metaphysics.
8 The second purpose of this article is to assess whether the provisions offer satisfactory protection to the creditors and shareholders of the amalgamating companies, which will be discussed in the fourth and fifth sections. The fourth section looks at the protection of creditors. It will analyse the solvency statements and the effect of a breach thereof in great detail and conclude that the current provisions, whilst imposing onerous demands on the directors, fail to provide adequate protection to unsecured creditors. It will also analyse two other provisions meant to
protect creditors and argue that they are generally ineffective to achieve that purpose. The fifth section looks at the protection of members. Weaknesses in the provisions will be highlighted, in particular, the absence of the right of a minority shareholder who opposes a proposed amalgamation to exit the company at a fair and reasonable price, ie, a buy-out right, and suggestions made for their improvement.
9 A short form amalgamation may be either an amalgamation between a company with one or more of its wholly-owned subsidiaries (a vertical amalgamation),20 or an amalgamation between two or more wholly-owned subsidiary companies of the same corporation (a horizontal amalgamation).21 In the latter, the parties are free to choose one of the amalgamating companies to be the amalgamated company; in the former the holding company will be the amalgamated company.22 The amalgamating companies, except for the one that has become the amalgamated company, will be removed from the register of companies.23
10 The first stage in a short form amalgamation is for every amalgamating company to give notice and make a solvency statement. The directors of each amalgamating company must give not less than 21 days’ written notice of the proposed amalgamation to every secured creditor of the amalgamating company.24 Next, they are required to make a s 215J solvency statement, in the form of a statutory declaration, in relation to the amalgamated company.25 Every director who votes in favour of the making of the solvency statement is required to sign a declaration stating that in his opinion the solvency tests are satisfied and the grounds for that opinion.26 There is no requirement that the declaration must be made before the general meetings, but it would be convenient for it to be made together with the solvency statement.
11 The next stage in the process is to obtain the approval of the members. There is no need to prepare an amalgamation proposal. Each amalgamating company just has to pass a special resolution to amalgamate on the following basis.27 Firstly, the shares of the amalgamating companies, other than the amalgamated company, will be cancelled without any consideration. This makes sense as in a vertical amalgamation the holding company will be vested with the businesses of the subsidiaries28 and it is the only shareholder in the subsidiaries; and in a horizontal amalgamation the holding company will end up being the only shareholder in one subsidiary in which will be vested the businesses of all the other amalgamating subsidiaries. Secondly, the memorandum of the amalgamated company will be the same as that of the amalgamating holding company in a vertical amalgamation and the amalgamated company whose shares are not cancelled in a horizontal amalgamation. Thirdly, the directors of all the amalgamating companies are satisfied that the amalgamated company will be able to pay its debts as...
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