REFLECTIONS ON THE COMPANIES (AMENDMENT) BILL NO. 36/98
| Author | TAN CHENG HAN |
| Citation | (1998) 10 SAcLJ 287 |
| Published date | 01 December 1998 |
| Date | 01 December 1998 |
The Companies (Amendment) Bill No. 36/98 (hereinafter “the Bill”) to amend the Companies Act1 was presented to Parliament on the 4th of September 1998. The Bill, if passed,2 will amend the definition of interests in shares found in section 7 of the Act, allow companies to buy back their own shares, lengthen the period for which employees can exercise share options granted to them, exclude franchises from the definition of “interest” in section 107 of the Act, repeal the provisons dealing with substantial property transactions between a company and its directors or persons connected with such directors,3 amend section 172 of the Act which generally prohibits companies from indemnifying their directors or officers from liability, and broadens the circumstances where a foreign company shall not be regarded as carrying on business in Singapore. These amendments will be outlined and considered in this article.
Section 7(4) of the Act states that where a body corporate has an interest in a share, another person shall be deemed to have an interest in that share if: (a) the body corporate is, or its directors are, accustomed or under an obligation whether formal or informal to act in accordance with the directions, instructions or wishes of a person, (b) a person has a controlling interest in the body corporate, or (c) a person is, the associates of a person are, or a person and his associates are, entitled to exercise or control the exercise of not less than 15% of the votes attached to the voting shares in the body corporate.
Section 7(4) in its unamended form allows extended or successive application in that it allows a deemed interest in a share to be extended indefinitely along a chain of companies. For example, if Company Y has a 5% interest in the shares of Company Z, and Company A in turn has
a 15% interest in the shares of Company Y, Company A will be deemed to have an interest in the shares of Company Z by virtue of its 15% interest in Company Y. Similarly, if Company B has a 15% interest in the shares of Company A, Company B will be deemed to have an interest in the 15% interest of Company Y held by Company A and therefore also has an interest in the shares held by Company Y in Company Z. Such a deemed interest will be extended indefinitely so long as the 15% threshold is met at each successive stage even though the degree of control may become ever more tenuous with each interposition of another company.
Clause 2 of the Bill draws a distinction between those cases where a deemed interest arises because either the body corporate or its directors are accustomed to or under an obligation to act in accordance with the directions, instructions or wishes of a person, or a person has a controlling interest in the body corporate, and those cases where the deemed interest arises as a result of a substantial but not majority interest in the voting shares of the company.4 In the former, the deemed interest in shares will continue to be extended indefinitely no matter how many companies there are in the chain, provided that the element of control is present at each successive stage. In the latter, however, the process of “looking through” companies joined by a 20% non-controlling interest applies only once by virtue of the words in parenthesis “apart from this subsection” in the proposed section 7(4A). Accordingly, where Company A has the relevant interest in Company Y, Company A shall be deemed to have the same interest in the shares of Company Z that Company Y has. However, Company B, even if it has the relevant 20% interest in Company A, will not by this fact alone be deemed to have an interest in the shares of Company Z unless the 20% interest amounts to a controlling interest. Company B will of course be deemed to have an interest in the shares of Company Y.5
When a company is incorporated, it is recognised as an entity separate from its members. Accordingly, the members of a company are not liable for the company’s debts.6 However, members of a company are under an obligation to contribute to the assets of the company in the event of the company being wound up.7 For a company limited by shares, the
obligation of a member to contribute to the assets of the company is limited to the amount unpaid on the shares in the name of such member.8 If the shares are fully paid, the member is under no further obligation to contribute to the assets of the company upon its winding up. The capital of a company is to be the fund which is used to pay creditors in the event of the company being wound up. For this reason, a company cannot return capital to its members as this would evade the statutory liability of members to contribute to the assets of the company upon its winding up. As Cotton LJ put it in Guinness v Land Corporation of Ireland:9
“From that it follows that whatever has been paid by a member cannot be returned to him.… [It] “is, of course, liable to be spent or lost in carrying on the business of the company, but no part of it can be returned to a member so as to take away from the fund to which the creditors have a right to look as that out of which they are to be paid”.
As a company cannot return capital to its members, it cannot purchase its own shares as such a purchase would have the same effect.10 This prohibition is also expressly found in section 76(1)(b) of the Act.11
Clause 5 of the Bill proposes to introduce new sections, namely sections 76B to 76G, that will allow companies to purchase their own shares where permitted by the articles.12 The proposed section 76B(10) expressly provides that nothing in these proposed sections shall be construed so as to limit or affect an order of court made under any section13 that requires a company to purchase or acquire its own shares.
Three types of share buy-backs are allowed, namely off-market purchases on an equal access scheme,14 selective off-market purchases,15 and purchases on a stock exchange.16 Only the issued ordinary shares of the
company may be repurchased.17 A company may not repurchase its preference shares.18
An off-market purchase on an equal access scheme is one where the offers made by the company19 under the scheme are to be made to every member to purchase the same percentage of their shares and the terms of all the offers are the same.20 The scheme must be authorised in advance by the company in general meeting21 and the notice of the meeting must specify the maximum number of shares or the maximum percentage of shares authorised to be purchased, state the maximum price which must be paid for the shares, specify a date on which the authority is to expire, being a date not later than the date on which the next annual general meeting is or is required by law to be held, whichever is the earlier, and specify the sources of funds to be used,for the purchase including the amount of financing and its impact on the company’s financial position.22
A selective off-market purchase is a purchase of shares otherwise than on a stock exchange and which is not made on an equal access scheme. A selective off-market purchase may only be made if the company is not listed on a stock exchange23 and the purchase or acquisition is made in accordance with an agreement authorised in advance.24 The terms of the agreement must be authorised by a special resolution of the company with no votes being cast by any person25 whose shares are proposed to
be purchased or acquired or by his associated persons.26 The notice specifying the intention to propose a special resolution to authorise an agreement for a selective off-market purchase must specify a date on which the authority is to expire,27 and specify the sources of funds to be used for the purchase.28 The authority conferred by the special resolution and the agreement which is entered into may, from time to time, be varied or revoked by another special resolution provided that no votes are cast by any person whose shares are proposed to be purchased or by such person’s associated persons.29 Where a person votes on a resolution authorising a selective off-market purchase as proxy for a member or any of his associated persons, this will be regarded as a vote by the member.30
To ensure that members are able to obtain sufficient information to decide how to exercise their votes, a copy of the agreement, or a written memorandum of its terms, must be made available for inspection at the company’s registered office for not less than 15 days ending with the date of the meeting at which the resolution is to be passed, and at the meeting itself.31 The rights of a company under an agreement for a selective off-market purchase which has been approved shall not be
capable of being assigned except by order of the Court made pursuant to any provision of the Act or any other written law.32
A listed company may make a purchase of its own shares on a stock exchange if the purchase has been authorised by the company in general meeting.33 Such a purchase is referred to as a market purchase.34 The notice specifying the intention to propose the resolution is to contain the same matters which are specified for resolutions authorising an equal access off-market purchase.35 The authority for a market purchase may be unconditional or subject to conditions36 and may be varied or revoked.37 A resolution to confer or vary authority may determine the maximum price for purchase by specifying a particular sum or providing a basis or formula for calculating the amount of the price in question without reference to any person’s discretion or opinion.38
The different procedural requirements for the three types of share buybacks is understandable. A selective off-market purchase should be subject to more stringent requirements such as a special resolution as it affects only certain members and may be used as a means to give...
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