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Need for growth

o Organic growth internal susceptible to slow rates
o Inorganic growth external - through combinations and acquisitions with a view to
increase pace
Determinants of growth
o Size/revenues
o Profitability
Pinning down the optimal level of growth
o Maximise returns to shareholders
o Preserve or increase shareholder value
o Agency theory of corporate law
Managers may have contrary incentives
Growth prospects depend on type of industry
o Old-economy (brick-and-mortar)
o New-age (knowledge, technology)


Leadership in an industry
o Dominant position
o Confers several advantages
o Creates barriers for new entrants
o Philosophy followed by GE Fix, sell or close strategy


The 2 + 2 = 5 phenomenon
o he profitability of the combined business to be greater than the sum of both parts
Types of synergies
o Operating synergy Cost reduction through economies of scale
o Revenue-enhancing synergy Complementarities in offerings of the companies
Synergistic Benefits
o NAV = VAB [VA + VB], where VAB = combined value of two companies, VA = value
of A on its own, VB = value of B on its own
But, there are transaction costs too
o NAV = VAB [VA + VB] E, where E = expenses/costs in the M&A process
o Integration costs may be significant but not taken into account at the initial stage.
Opportunity costs too
Other Forms of Synergy
o Taxation benefits
Net operating losses (NOLs)
Unabsorbed depreciation

Financial benefits
Access to capital



To achieve greater market power (i.e. to increase market-share)
Acquisition of R&D capabilities
Deregulation in an industry
Telecommunications, Airline industry, Banking industry
o Privatisation and disinvestment by the Government in state-owned enterprises
Core Competence and Diversification
o Core Competence - Focusing on core competencies creates unique, integrated
systems that reinforce fit among your firms diverse production and technology
skillsa systemic advantage your competitors cant copy
o Diversification
Creation of a portfolio
De-risking strategy - Dont put all your eggs in one basket
Research on benefits of diversification
Vitiates portfolio theory of investments
Benefits only companies in related sectors
Availability of targets at low prices
o Usually a recipe for hostile takeovers
o Hostile takeovers usually do what boards with poor corporate governance cannot do
Low prices could be either due to:
o Poorly managed companies
o Poor market conditions, e.g. financial crisis
Market for corporate control
o Prices of shares are low in companies that do not realise potential or those that are
o This is assuming that markets are efficient (i.e. efficient capital markets hypothesis
o Makes it cheap for acquisitions by raiders (e.g. if stock is trading at a low P/E
compared to its peers)
Improved management hypothesis
o New management may be better able to realise potential
On the other hand, this forces existing managers to step up their act if they are to protect
their jobs
o This may lead to existing managers to adopt practices that look good in the short
term but not in the long term. In the extreme, there may be fraudulent activities
such as forgery of accounts


Managerial hubris hypothesis (Propagated by Richard Roll (1980))

o Hubris, or managerial pride, plays a role in explaining takeover activity
o Behavioural analysis
Managers of bidders are afflicted with over-optimism bias and irrationality

They tend to bid at valuations that are substantially higher than those
determined more objectively
Hubris hypothesis is also supported by empirical evidence
o Studies show decline in market value of acquirers shares post-announcement
whereas targets shares tend to appreciate in value
Empire-building by managers of acquirer All of these benefit managers more than
shareholders of acquirer
Winners curse
o Due to informational disparities
o Seller/target has more information about itself than the acquirer
o The issue is more acute in bidding / auction situations
How can these motivational factors surrounding managers be addressed?
Is corporate governance a solution?
o Independent financial analysis is preferred
Problems with integration
o Organisational issues
o Cultural issues
These are soft intangible factors. Proof of the pudding lies in dealing with these
However, in practice, a number of obstacles need to be surmounted in this process. Note
that the law is of very little help in this area


Usually difficult to measure

Cannot come to definitive conclusions
Transactions are not homogenous
Empirical evidence tends to be mixed
o Event studies
Returns to shareholders, based on movement in market price upon
announcement of the transaction
o Accounting studies
Financial performance of companies pre- and post-transaction
Case Study AOLs merger with Time Warner
o Context
Combination of Internet and media companies
AOL acquired Time Warner by issuing its own highly-valued stock
However, merger failed to achieve any of the intended business objectives
and synergies
A text-book case
o Endogenous factors
Complexity of the companies, their businesses and the deal itself
Inadequacies in strategic thinking on business prospects
Suggestions of managerial hubris
Failure of proper integration
o Exogenous factors
Bursting of the Internet bubble
Recession and stock-market crash
Case Study SGXs failed proposed merger with ASX


Combination announced in October 2010

Various reasons set out in statement to shareholders
To create the premier international exchange in Asia Pacific
But, deal failed before it could be consummated
Keep in mind the role of national interest in cross-border M&As


Are M&A transactions always beneficial to:

o Shareholders (of acquirer and target)?
o Other stakeholders (e.g. creditors/employees)?
How do we optimise value from transactions?
How do we curb value-reducing deals?



M&A generally involves transfer by a company of its

o Assets; or
o Control
Possible through numerous ways (structures)
Different legal structures may be used to achieve a single commercial goal
Topic is replete with jargon
Understanding of terms may vary depending on various factors
o Relevant jurisdiction, Business/commercial vs. legal/statutory, Tax considerations,
Time, Regulations changes, Competition laws


A transaction or series of transactions;

An acquirer individual, company or group;
Acquires control of:
o The assets of a company by becoming the owner of the assets
o The management of the company (and obtaining indirect control over its assets)
Sometimes referred to as an acquisition
Is there a difference between acquiring control over asset and acquiring control over
o Liabilities
o Agency costs
o Control over management is all-or-nothing cannot pick and choose which assets to
o Consolidation (from an accounting perspective) they are different from each other
A takeover generally involves a larger company taking control of assets or management of
a smaller company
o But, the contrary is possible too, and does occur in reality (e.g. reverse takeovers)


Absolute 100%; Dominant 90% (Compulsory Acquisition); Supermajority 75%

(Pass Special Resolutions); Majority - >50% (Control over Board Composition);
Effective - <50% (Depends on Remaining Shareholding); Management Dispersed
50% is the threshold for legal control of the company can control composition of
entire board
Pyramid structures
o Provide for greater control rights with limited economic risk
E.g. majority at top-level holding company is sufficient to control all entities


Assets (and liabilities) of one or more companies become vested in a single company
o One of the companies surviving;
o Or a new company established;
Shareholders of each company become collective owners of the combined company
A combination of assets and ownership (e.g. Pooling of interests)
Generally a merger of equals Companies tend to be roughly of same size
But, difference tends to be one of intent and degree
E.g. same result as a merger can be achieved through a takeover involving a stock-swap


A technique for effecting either a takeover or merger

In case of a merger it requires concurrence of target
o Between acquirer and company
In case of a takeover it can either be friendly or hostile
o An offer is made to all shareholders to acquire their shares in the company
o Between acquirer and shareholders only.
Fundamental rule a takeover bid is fundamentally a contractual offer between the
acquirer and the shareholders.
o However, increasingly, this is vitiated by companies getting interested in the
movement of its shareholdings
Companies are interested because it may result in:
o A change in management
o A change in company direction
o The breakup or liquidation of the company if the offer goes through
Strategy and result will depend on shareholding structure of the target
o Widely dispersed shareholding - Greater possibility of hostile bids
o Existence of controlling shareholders - Need to obtain concurrence of large


Broadly of 3 kinds:
o Asset / Business Acquisition
o Statutory Merger / Amalgamation
o Share Acquisition / Takeover


One of the simpler types of transactions

Acquirer purchases from the seller
o The sellers business or undertaking
All or substantially all of the assets
o Select assets only
Since the seller is foregoing assets, it is required to obtain corporate approvals

Liabilities, which are usually deducted from price paid, may not be known or, if known,
o Possibly mitigated by insurance but it comes at a cost
Purchaser may discharge consideration through either:
o Payment of cash
o Issue of its own shares
This may trigger requirement of corporate approvals on the part of the


Two or more companies merge into one of them or into a new company
The undertakings (business, assets, liabilities) of the merging companies are transferred to
the surviving company
The merging companies are dissolved in the process
The surviving company may discharge consideration by either:
o Issuing its own shares to the shareholders of the merging companies
o Paying cash to the shareholders of the merging companies (cashout merger)
To squeeze out minority shareholders?
Shares held by those shareholders in the merging company are cancelled
Most companies legislation contain specific provisions for mergers/amalgamations
These transactions require shareholder approvals (and sometimes the sanction of a court)
Once approved, they are binding on all shareholders
o A perceived advantage of this arrangement
Cash-out mergers can be used to eliminate minority shareholders
o Expropriation of shares?
Certain types of schemes of arrangement, e.g. reduction of capital can also be utilised for
this purpose
Squeeze-outs / Freezeouts


The acquirer obtains control of the target

o Usually by acquisition of voting shares
The business of the target continues as previously
o There is no alteration to the targets corporate structure (except shareholding)
Acquirer may discharge consideration either by:
o Paying selling shareholders cash
Similar, from a financial and commercial standpoint, to a cash-out merger
o Issuing its own shares to the selling shareholders


Triangular Mergers
o These are usually undertaken to avoid corporate processes involving large
companies processes such as:
Shareholder approval
Appraisal remedies

Right of dissenting shareholders to get a fair value for their shares

Rationale for giving such a remedy to such events they go to the
heart of the business/corporate structure (unlike takeovers, mergers
bind minority shareholders too)
Why not use s216 of CA? A general remedy not specific enough have to
prove oppression
These (i.e. triangular mergers) are popular in the U.S.


Do these transaction structures provide too much leeway to parties and their lawyers to
devise options that go against the interests of minority shareholders?
How have the courts in the U.S. dealt with this?
Have courts applied a substance over form approach? Or vice-versa?
What do you think of the ability of courts to re-characterize transactions?
What about the concept of de facto mergers?



Business/Assets Sale
o Direct purchase/ownership
o Assets move out of the seller and into the purchaser
Share sale
o Purchase/ownership of shares of the target company
o Targets legal position is not altered in any way
o Ownership of business/assets continues unabated
Considerations for choice of structure
o Taxation acquirer/seller
o Existence of other non-related businesses that the acquirer is not interested in
o Sellers responsibilities in the business
o Allocation of liabilities of the business
o Formalities of transfer
o Consents and permissions necessary for transfer
Comparison between an asset sale and a share sale
Asset Sale
Sale of a business as a going
identified in functional terms
o i.e. all that is required to
ensure continuity of business
with the acquirer
Lump sum consideration
o Concepts of net worth and
goodwill buyer is willing to
pay more than net worth of
company forecast of future
Liabilities relating to the business
would go along with it
o Unless expressly excluded

Share Sale
Sale of assets on a piecemeal basis
o Usually required in situations
such as insolvency or distress
identified through specific listing
Individual consideration for each
Liabilities (if any) would remain with
the seller
o Unless expressly transferred


Depends on nature of assets or obligations involved

Land and buildings
o What if they or other assets are mortgaged, charged in favour of banks?
Creditworthiness, alternative forms of security, repayment
Movable assets
o Plant and machinery

o Furniture and fixtures

o Usually transferred by delivery
Mixture of both constructive delivery


May require consent of the granting authority

o Identity, qualifications


Rights choses in action?

o Consent, privity, novation, assignment
o Are these assignable in nature?
o If so, do they require consent of the contracting party?
Assignability depends on the nature of the contract
o Rights are usually assignable
Unless there is an express prohibition, or stipulation in the contract which
requires contracting partys consent
If there is a breach of no-assignment clause, the 3P can sue the seller but
may not be desirable when the seller is dissolved or has no assets remaining.
Remedy may be limited
o Obligations cannot be assigned without consent of the beneficiary
Novation of contract
Tri-partite arrangement
Contracts that are personal in nature cannot be assigned
o Employment contracts are personal in nature
In common law, they cannot be transferred. However, this position has been
modified by statutes. (Look at section on employees)
o What is the nature of a licence granted by contract?


Inequality of bargaining power
Pre-disclosure of information, especially when a public company is involved


Position under common law

o Effect of a sale of business
Original contract is terminated
Employee is not obliged to work for the new employer
Break in length of service and conditions
Common law position significantly altered by statute
o UK: TUPE Regulations
o Singapore: Employment Act, s. 18A
Previous tests in the UK for transfer

o Sale as a going concern

o Whether there is goodwill, whether seller will discontinue the activity
Later tests adopted in the UK
o Following ECJ influence
o Not whether there is a disposal as a going concern
o But, whether the undertaking retains its identity with the acquirer
Singapore Employment Act, s. 18A
o undertaking includes any trade or business
o transfer includes the disposition of a business as a going concern and a transfer
effected by sale, amalgamation, merger, reconstruction or operation of law
o If an undertaking is transferred
It shall not operate to terminate the contract of service
It shall be effective vis--vis the transferee as if employment contract was
originally with it
Period of employment with transferor shall be counted, without a break in
period of employment
Terms and conditions of service of the employee shall be preserved
Notification and consultation with trade unions
Comparison between SG and UK/EU:
o A going concern seems to be more concerned with the means rather than
the end?
o Retention of identity more concerned with the end
o First test employees seem to bear the loss resulting from the takeover/merger
while company/shareholders get the gains should this be the case? Policy point of


Sale of a business undertaking is significant business transaction Requires

shareholder approval
Companies Act (Cap 50, Sing.), s. 160
o (1) the directors shall not carry into effect any proposals for disposing of the
whole or substantially the whole of the companys undertaking or property unless
those proposals have been approved by the company in general meeting
Delaware General Corporation Law, 271
o (a) Every corporation may at any meeting of its board of directors sell, lease or
exchange all or substantially all of its property and assets, as its board of
directors deems expedient and for the best interests of the corporation, when
and as authorized by a resolution adopted by the holders of a majority of the
outstanding stock of the corporation entitled to vote thereon
Do these apply to asset sale or business sale or both?
o Sing: the whole or substantially the whole of the companys undertaking or
o Delaware: all or substantially all of its property and assets
Hollinger v. Hollinger International (Del, 2004)
o International sought to sell the Telegraph newspaper and magazine, held by an
indirect (6th tier) wholly owned subsidiary
o Question: Whether the approval of International shareholders is required under 271
o Court

Trigger of 271 depends upon particular qualitative and quantitative

characteristics of the transaction
Quantitative approach simple, objective, certainty, but fails at
borderline cases
Qualitative approach effect on remainder less capable of
manipulation (substance over form) lack of certainty
Transaction must be viewed in terms of overall effect on the corporation
There is no necessary qualifying percentage
Contextual approach over definitional approach whether:
Assets quantitatively vital to operation of corporation
Out of the ordinary
Substantially affects the purpose and existence of the corporation
On facts
Considered quantitatively and qualitatively
Telegraph sale does not amount to a sale of substantially all of Internationals
Remaining assets were substantial and profitable


How will a situation such as Hollinger turn out under the Singapore Companies Act?
o Will it make a difference that it is assets of the subsidiary that were sold?
What is the position if assets are merely charged or mortgaged without a sale?
o Selling = affecting shareholders immediately
o Mortgaging = intention to carry on business of company


Companies Act (Cap 50, Sing.), s. 160

o (2) The Court may, on the application of any member of the company, restrain the
directors from entering into a transaction in contravention of subsection (1)
Restrain suggests before and during the transaction
o (3) A transaction entered into in contravention of subsection (1) shall, in favour of
any person dealing with the company for valuable consideration and without actual
notice of the contravention, be as valid as if that subsection had been complied
with extension of indoor mgmt rule
K.J. Kim Company v. Buck & Company (SGHC, 1996)
o 2 shareholders in a company
o Only asset was a piece of property
o Company entered into an option to sell the property to option holder
Contract signed by managing director (MD) on behalf of company
o Later reneged on the contract, citing lack of shareholder approval under s. 160
o Court
Option was signed by MD. Option holder had the right to assume MDs
Even if MD did not have authority, option holder had no actual knowledge
There was valuable consideration (option fee)
Contract remains valid due to s. 160(3)
o Other aspects

Whether mere option is disposal? Doubted

For certainty option subject to SH approval
Option fee amount to valuable consideration
Whether asset sale is part of business activity? (E.g. a real estate company)
For purchaser
o Cash consideration no shareholder approvals are required generally
o Issue of shares as consideration dilution concerns
E.g. Singapore Companies Act, s. 161
(1) the directors shall not, without the prior approval of the
company in general meeting, exercise any power of the company to
issue shares
Such resolution is valid until the next annual general meeting


Statutory mergers are sometimes structured as asset sales to avoid certain shareholder
requirements, i.e.
o Shareholder approval of acquirer
o Appraisal rights to acquirers shareholders
These are stock-for-asset acquisitions
Often, the seller company becomes a shell entity and is then liquidated
End-result is the same as a statutory merger

Heilbrunn v. Sun Chemical (Del, 1959)
o Suit brought by minority shareholders of Sun
o Sun to buy over all of Ansbachers assets and liabilities
o Sun to issue shares of common stock to Ansbacher
o Ansbacher will dissolve and distribute assets (including Sun shares) to its
o Although the transaction was taken to Suns shareholder (due to managers conflict
of interest), they were not given appraisal rights
o Court
No injury inflicted upon Sun stockholders
Sun has merely acquired property and paid with stock
Transaction has not changed the essential nature of the enterprise of the
purchasing corporation
There is no basis for granting of relief in equity on the theory of a de facto
Hariton v. Arco Electronics (Del, 1963)
o Arco agreed to sell all assets to Loral in consideration for issue of shares by Loral
o Arco to undergo dissolution thereafter
o Plaintiff, a minority shareholder of Arco sought appraisal rights invoking the de facto
merger doctrine
o Court
The plan of dissolution and distribution is legal
Sale-of-assets and merger provisions in statute are independent of each other

[F]ramers of a reorganization plan may resort to either type of corporate

mechanics to achieve the desired end
Not only in M&A but also other areas courts are reluctant to recharacterise and
substitute the parties judgements with their own judgements re-characterisation only
occur in extreme situations


o In an asset sale, the acquirer is not liable for the debts and obligations of the seller
But, exceptions Acquirer may be held liable if
o It expressly or impliedly assumed sellers liability
o There was a consolidation or merger of the seller
o Acquirer was merely a continuation of the seller
o Transaction entered into fraudulently to escape liability
Schumacher v. Richards Shear Co (NY, 1983)
o Injury caused by shearing machine
o RSC, who manufactured machine, sold substantially all assets to Logemann
o Whether Logemann is liable for tortious conduct of RSC or for its own conduct
subsequent to the acquisition
o Court
The transaction did not fall within any of the exceptions
As regards continuity of the enterprise, it usually applies when the seller
corporation is dissolved. Here, that was not to be the case
o Here, it seems to give too much leeway for parties to structure transactions to avoid
Brandon v. APM Associates (7th Cir, 2005)
o Plaintiff the holder of judgment in a diversity suit
o Defendants owned APM
o But, they formed another company St. Clair to squirrel away assets of APM and
avoid recovery in favour of plaintiff
o APM was left as a shell entity
o Court (Judge Posner)
The evasive purpose of creating St. Clair is plain and supports our
interpretation of the rules scope. The rule that a corporation cant have a
successor if it hasnt been dissolved, is not intended to deprive the victim
of a fraud of his legal remedy, as the defendants attempted to do here by
preserving a ghostly existence for APM
APM is brain dead, but is being kept on corporate life support in order to
prevent [the plaintiff] from getting hold of any of St. Clairs assets
[the plaintiff] is entitled to ignore the formation of St. Clair and treat its
assets as if they were APMs
National Labour v. Inn Credible Caterers (2d Cir., 2001)
o Duty imposed on successor of business to bargain with employees
Substantial continuity test
Successor has hired a substantial and representative complement of
However, a more narrow interpretation adopted in other cases
o Semenetz v. Sherling & Walden (NY 2006)

Gallenberg v. Argomac (Wisc. 1998)


Courts seem more open to impose successor liability in asset sale transactions compared
to treating them as de facto merger for purposes of protecting minority shareholder
o What might be the reason for this?
SHs have remedies under company law
Creditors have rights under insolvency regimes; their interests have to be
taken into account when bordering insolvency
o Can we deduce any policy rationale?
To protect involuntary creditors who may not have the contractual rights that
voluntary creditors possess courts have to step in to protect the interests of
these involuntary creditors
Objectives that sometimes conflict
o Deterrence for tortfeasors
o Facilitate asset transfers that are value-generating for the economy
Difficulties with current position
o Inadequate deterrence because transfer of assets permits tortfeasor to escape
o Uncertainty in amount of liability prevents efficient asset transfers
Proposed model (Harv. L. Rev. Note)
o Presumption in favour of successor liability
Successors will be held generally liable for predecessors torts
Acquirer will tend to reduce the price to absorb costs of liability taken over
Or seek indemnity from seller what happens if seller has no more assets
seek guarantees of assets/parents?
Settlement prior to the deal
Incentives to sellers to prevent liability in the first place
o Mandatory-litigation class action prior to transfer
To aggregate all current and future tort claims
Pay estimated damages
Then, transfer assets free and clear of all tort liability
Discussion Questions
o Is this a workable model?
What happens to unascertained future claims?
Class actions workable in other jurisdictions?
Incentive of US law firms to bring suits (contingency fees)
Time cost valuation of business/assets may change
Information asymmetry between buyer and seller
o What are the practical issues in its implementation?




Acquisition of shares
o Cancellation scheme
o Transfer scheme
o Binding on minority no choice but to comply
Especially good when buyer wants 100% of company
Statutory - initiator - target CO, other parties are acquirer & SHs
o As opposed to takeover where minority has option whether to exit or not
Takeover code - the initiator is the acquirer, other parties are SHs
Statutory amalgamation / merger
o Through court process
Outcome of amalgamation
Absorption of the entire undertaking of one or more companies into a surviving company
o Surviving company may be an existing company or a new company
Consideration is paid by the surviving company
o Usually in the form of issue of its own shares, sometimes in the form of cash or both


Traditionally used (and currently exists) in the Commonwealth

o Sing. CA, ss. 210-212
o UK Companies Act, 2006, Part 26 (previously ss. 425-427 of Companies Act, 1985)


Scheme of Arrangement
o Wide scope
o Distinguish from compromise
Generally a transaction between CO and creditors where latter agree to
forego something in return for letting CO stay afloat
o A company and its members or a class of them (E.g. Equity, Preference)
o A company and its creditors or a class of them


Process begins with approval of scheme by boards of companies involved

Application to court for convening meetings of members (and, if applicable, creditors)
Class meetings to be held
o Why is classification of members necessary?
Interests, understanding (consultation, deliberation), information


All these should take place among people who share similar interests so that
they wont be persuaded to vote against that by people who dont share the
same interest
o What is the rationale?
Rationale: to promote consultation among persons with common interest
What is a class?
o must be confined to those persons whose rights are not so dissimilar as to make it
impossible for them to consult together with a view to their common interest:
Sovereign Life Assurance Co. v. Dodd
Tests for commonality of interest
o Similarity of rights as shareholder
o Similarity of effect under scheme
In re Hellenic & General Trust (1975, UK)
o Scheme of arrangement Shares to be cancelled and new ordinary shares to be
issued to H, which will pay off other shareholders.
o Forced exit of other shareholders
o Issue Whether subsidiary of H, as a shareholder of the company, constitutes a
separate class?
o Court found that subsidiary of H had an interest that was different from other
o Discussion:
Why do courts adopt such a paternalistic approach?
What criterion is used for classification?
Similar approach followed in Singapore (Wah Yuen Electrical, TT International)
Danger of overprotection of minority
o Obstructs deals
Discuss the level of detailed classification required
o Benefits vs. costs
o In Singapore (TT International), issues of classification is to be dealt at the very


Dissemination of information
o Essential for shareholders to be in a position to make a reasoned decision
o Courts place significant reliance on this factor
Element of transparency
Wah Yuen Electrical (2003,SG)
o Court would take into account the adequacy of information provided in determining
whether to sanction the scheme
o Scheme of compromise between company and its creditors
o Certain related party creditors voted commonly with other creditors
o Court found lack of transparency with respect to related party debts
It prevented the court from making a competent assessment of the bona
fides of the related party votes
Creditors were not in a position to assess the fairness and reasonableness of
the scheme
o Insufficient information on whether returns in proposed scheme were greater than in

Issue - Is proper and adequate disclosure of information more important

than classification?
Re Econ Corp (2003,SG)
o Under the scheme, creditors were to receive shares of parent company EIL in return
for foregoing debt owed to them
o However, disclosure regarding EIL and its financial position (losses) was found
Creditors are entitled to this information before deciding something
intrinsically relevant
o Court refused to approve the scheme


Approval of classes of shareholders

o Majority in number representing three-fourths in value
2 requirements
50% of the number of shareholders; AND
>= 75% of share value
Usually minority SHs are greater in number
o S. 210(2), Sing. CA


Role of the court in sanctioning a scheme

o Supervisory in nature
o To ensure compliance with statutory provisions and procedure
o No substantive review or appellate jurisdiction
o Fairness
Procedural fairness or encroaching into substantive fairness? To what extent
can they encroach?
Reasonable person court substituting its judgement?
Courts should not go into commercial aspects
What about distributive fairness vis--vis creditors? Impact on 3Ps
o Why are there so few court-based amalgamations?
o Time factor
o Why do courts adopt a restrictive approach?
Effect of court sanction
o Where does the scheme of arrangement derive its efficacy from?
Statutory contract
Order of court
o Importance of legal effect
Vesting of undertaking (property and liabilities)
From transferor to transferee company (S. 212(1)(a), Sing. CA)
Difference between asset/business sale and amalgamation
o Asset/business sale is accomplished through contract
The transfer is pursuant to contract
o Amalgamation is effected through a court order granted pursuant to statutory

The transfer takes place pursuant to law

Statutory contract or court order?
o Whether such a sanction draws its power from the former or latter
Statutory K courts cant vary it; court order can vary it
SGCA case of Reliance General Asia
o Differing views among jurisdictions. However, Singapore takes the position that
the scheme draws force as an order of the court



Introduced more recently in the Commonwealth

o Sing. CA, ss. 215A-J
o UK Companies Act, 2006, Part 27
Mainstay in Delaware (DGCL, 251,253)


Short-form amalgamation
o Vertical amalgamation
Wholly-owned subsidiary (WOS) into parent
Couldve different 3P interests (creditors etc)
o Horizontal amalgamation
Among 2 or more WOSs of a common parent
Standard amalgamation
o Those that do not qualify for short-form amalgamation


Approval of directors
Solvency statement
o As it relates to the amalgamated company
Shareholders special resolution of the amalgamating companies
Lodging of requisite documents with the Registrar
No requirement to prepare an amalgamation proposal


Certain additional requirements apply

o Because third party interests are involved (e.g., minority shareholders)
Apart from special resolution of shareholders, the scheme has to be approved:
o by any other person, where any provision in the amalgamation proposal would, if
contained in any amendment to the memorandum of an amalgamating company or
otherwise proposed in relation to that company, require the approval of that
person. (s. 215C(1)(b))

Query: Whether class meetings are required in a standard amalgamation?

o Lack of guidance from courts
o But, academic view is that it could be tantamount to a requirement for class
Does it make the out-of-court process too onerous?
What about risks associated with class meetings? Uncertainty in classification
o Class meetings a form of minority shareholder protection?

Rationale for solvency requirement in out-of-court amalgamations

Solvency statement
o Required in the case of amalgamated company and each amalgamating company
o Cash flow solvency + balance sheet solvency
Cash flow is indicative of short term debts
Balance sheet is indicative of a longer term
o Also, that company will continue to pay its debts for 12 months
o How does this impact the ability of companies to implement out-of-court
o What is the effect of the solvency statement requirement on directors?
Does it make a difference if they are independent directors?
o Are the liability provisions a deterrent?
Why does scheme of arrangement have no such requirements? Creditors
have approval rights + courts approval is required
o Will this have a chilling effect on out-of-court amalgamations?


S. 215G, Sing. CA
o (c) all the property, rights and privileges of each of the amalgamating companies
shall be transferred to and vest in the amalgamated company
Transfer by operation of law
o Both rights and obligations can be transferred
Statutory contract no court order involved
o Achieves the same effect as a vesting order under s. 212

Affected shareholders and creditors may approach the court per s215H
o To deny effectiveness of amalgamation, to modify the terms, etc.
o Need to show unfair prejudice difficult to prove s216
But, there is no buyout right to minority shareholders (i.e. no appraisal rights in Singapore)
o Only burden of proof is that plaintiff voted against proposal
Only other cause of action is unfair prejudice under s. 216, Sing. CA oppression action
o To bring this action, you need to be a member of the final company
More rights to minorities = Rule by minority = increase risks of hold-outs?


Essentially follows the out-of-court amalgamation process

Includes both short-form and standard mergers
o Short-form only require 90% shareholding in subsidiary no need for parent SH
approval rmbr that minority has appraisal rights not only present and voting all
of those entitled to vote, present or not
Shareholder majority threshold more onerous
o majority of the outstanding stock of the corporation entitled to vote thereon
Shareholder approval not required for amalgamated/surviving company, if:
o No amendment to certificate of incorporation
o If shares of amalgamating company become identical shares of surviving company
o Shares issued by surviving company do not exceed 20% of stock immediately prior
to effectiveness of the merger
Shareholding dilution is not significant
Not possible in a reverse merger



Background of squeeze-outs
o To make the company a wholly-owned subsidiary
To avoid the cost of maintaining and servicing small shareholders
For operational ease no need to continue dealing with arms-length
o Minority shareholders are offered an exit from otherwise illiquid investments
o Squeeze out usually follows a takeover offer (and delisting in the case of previously
listed companies)
o Shares provide a bundle of rights in a company (E.g., s. 121, Sing. CA)
Movable property, transferable in the manner provided by the articles of the
o Property right available to shareholder
Fairness versus efficiency
Procedural fairness
o Any denial of the right of holding or disposal raises issues
Arguably amounts to expropriation
But, such right is not unconditional it is subject to statute


Compulsory acquisition, e.g. s. 215, Sing. CA

Scheme for reduction of capital
Scheme of arrangement, e.g. s. 210, Sing. CA
Amalgamation procedure, e.g. s. 215A-J, Sing. CA
Alteration of articles of association
All of these are available under English law, subjected to minor modifications


Sec. 215, CA
o The only statutory provision that directly recognises squeeze out of minority
Procedure established
o Scheme or contract for transfer
o To be approved within 4 months of offer
By 90% in value of the shares whose transfer is involved
If buying remaining 50%, need to acquire 90% of the remaining 50%
(i.e. 45%) for a total of 95% shareholding
o Notice of compulsory acquisition can be given within 2 months thereafter
o Acquirer is entitled to acquire shares of dissentient shareholders as well
o Two way-right (i.e. minority can require the majority to buy as well)
No requirement of prior court approval
o However, if dissenting shareholders approach court, then the squeeze out is subject
to court order
This mechanism imposes onerous conditions
o Needs to be preceded by a general offer
o 9/10th of independent shareholders is a steep majority requirement

Hence, the provision has been rarely used

Parties have attempted to overcome the onerous nature of the provision
o By having a related party make the first offer, so as to obtain 90% majority
o However, courts have been quick to plug the loophole
In re Bugle Press (ECA, 1960)
Doesnt satisfy fairness requirement not done in good faith mere
technical compliance is insufficient a sham transaction
o This adds to the practical difficulties in using this provision


Companies legislation provide for schemes involving reduction of capital

o E.g. ss. 78A-I, Sing. CA
o Special resolution of shareholders
o Sanction of the court (in some cases)
Comparison with s215 compulsory acquisition
o Can be selective in cancelling shares
Note that there are some forms of reduction that must be pro rata
o Doesnt involve transfer of shares (side note: no stamp duty?)
o Financial outlay comes from the company, not the majority SH(s)
o Through selective reduction of capital
o Minority shareholders shares are bought back by the company and cancelled
o Majority shareholders shareholding will thereby increase to 100% to achieve
Courts are generally open to allowing such schemes, subject to compliance with:
o Process
o Fairness in pricing
General propositions in relation to use of reduction of capital for squeeze-outs
o Selective reduction of capital is possible s78A allows the company to reduce its
capital in any way
Courts are deferential to the companys decision as to whose shares are to be
reduced and by how much
o Separate class meetings need not be held for majority shareholders and minority
(who are being squeezed out)
However, in UK, the case of Robert Stevens Holdings stated that this may be
needed. Indias position is that it is unneeded as the Act did not explicitly
state so. Singapores position is unsettled.
o Court performs only a supervisory role while sanctioning a reduction scheme


The expression arrangement is wide enough to cover squeeze-out transactions

Exemplified in Hellenic & General Trust
o The purpose of the scheme was precisely to squeeze out minority shareholders
o Court-convened meetings of shareholders
o Class meetings are mandatory

Why use scheme of arrangement? Many takeover documents in Singapore are structured
as schemes of arrangement because:
o It allows the acquirer to squeeze out minority shareholders, possibly without their
o It allows the acquirer to obtain 100% control
Other considerations
o Whether majority and minority shareholders will be treated under the same class?
No. See Hellenic & General Trust
o Onerous shareholder approval requirement
Majority in number and 3/4ths in value
o Sanction of the court
Fairness to shareholders
Process + price (valuation)


Cash-out mergers
o Indirect method for achieving squeeze outs
o Target company is merged with the holding company
o Minority shareholders in the target are paid cash in exchange for the shares held by
o The business of the target becomes vested in the holding company with minority
shareholders having exited
o Alternatively, holding company could issue shares to the shareholders of the target,
especially if it is a listed company
Prof Wan Wai Yee opines that this is potentially a method to squeeze out minority
shareholders although it was not intended by the legislature to do so
Approval of shareholders
o Special resolution at general meeting
o Class meetings?
Statute does not require, but some contrary academic opinion exists
Solvency requirements
o Do not impact squeeze-outs directly
o As they are catered towards protection of creditors
Objections by dissenting shareholders
o S. 215H, Sing. CA
Scrutiny of court in case of objections
o Deny effectiveness to scheme
o Modify scheme
o Direct companies to reconsider the scheme
No appraisal rights under Singapore law
o Academic critique
o Compared with New Zealand (also US, Canada)
Note that this amalgamation procedure was based on New Zealands and yet
there were appraisal rights in New Zealand.
But, buyout of shares is a remedy in an oppression action
o S. 216, Sing. CA. However, onerous requirements to demonstrate unfair prejudice

Is the amalgamation procedure too lenient towards majority shareholders in

squeezing out minority?


Clause in the articles providing majority shareholder a right to require minority to sell
o Inclusion in the articles at the time of incorporation of company; or
o Subsequent inclusion through alteration of article
Alteration of articles
o Special resolution of shareholders
o Alteration must be bona fide for the benefit of the company as a whole
Allen v. Goldreefs
o Courts have allowed alteration in certain circumstances
Sidebottom v. Kershaw - Amendment that requires competitors to exit the
company is valid and was upheld
o Gambotto (Aust) opined that compulsory acquisition amounts to a form of
Whether this is applicable in the wider Commonwealth is questionable.
Question: In what type of companies will this option work?
o Listed
Listing requires some form of shareholdings held by the public.
Also, regulator may take action.
o Public Unlisted
o Private

The most appropriate option must be chosen depending on facts and circumstances:
o Available majority
o Willingness to adopt the court-route
o Appropriateness of an amalgamation
o Willingness to provide solvency certificate


Similar to the cashout mergers in Singapore

o Minority shareholders will be compulsorily bought ought through payment of cash
Traditional remedies under US state law
o Appraisal rights
o However, they are not entirely effective here
Transaction structures that avoid appraisal
Individual claims to be made not every SH will make such a claim more
likely to be institutional investors who have the motivation to make such
claims cost ineffective
Lack of recovery on future value upon merger
Need for fiduciary duty class actions
o Against controlling shareholders (owed to minority and C)
o Discussion Question: Does this raise any peculiar problem under corporate law?

Commonwealth Ds dont owe a direct duty to SHs; US Ds may owe a direct

duty to SHs
Alteration of articles majority has to ensure that alteration is bona fide
o Ultimately, have to be cognisant that r/s between majority and minority is
predicated on contract (articles or SHs agreement)
May have additional statutory duties such as no oppression and vote bona
Availability of class action mechanism no collection action problem?
Onus on company to show that transaction was entirely fair to the shareholders
Suitable remedy can be crafted by the court
o Appraisal rights
o Injunction against the merger
Weinberger v. UOP (Del SC, 1983) ***
o Signal owned 50.5% of UOP, and proposed a freezeout merger with UOP
o Feasibility studies for Signal conducted by Signal officials who were on UOPs board
(for the exclusive benefit of Signal)
Information asymmetry between S and minorities
o Plaintiff (minority shareholder) brought a suit for breach of fiduciary duties
o Delaware Supreme Court
Fiduciary duty class actions would be available to minority shareholders in
certain situations
Fraud, over-reaching
Fairness of transaction is crucial fair dealing and fair price (2-pronged
Set up an independent committee of directors (interested directors
should recluse themselves)
Kahn v. Lynch (Del, 1995)
o Extends the principle in Weinberger
Indicia of fairness
o E.g., an independent committee of directors to negotiate the transaction at arms
o Shifts the burden of proof to plaintiff to prove lack of fairness
Tender-offer freezeouts
o Further development of the law
o A more lenient approach followed by the courts



o Of shareholding info asymmetry for offeree
o Of information in a takeover bid (esp share-swap)
Appropriate to enable shareholders to make a decision whether to exit or stay
bidders financing options
To prevent false bids prospect of success
Future of company whether bidder may sell assets
Equality of Opportunity
o Right of shareholders to tender their shares
o Right to receive same price as other shareholders
Prevent 2-tier pricing that induces sub-optimal decisions
Historical approach is deference to market. However, recent approach is more of
Downside of disclosure may encourage institutional investors such as hedge funds in
buying shares in anticipation of a takeover which is short-term in nature for the funds own

City Code on Takeovers and Mergers

o Came into effect in 1968
o A system of voluntary self-regulation
Established and administered by market participants
Prominence of institutional investors in the U.K. context
o Rationale for a voluntary system lawyers no incentive to bypass the law
o Speed in action
o Flexibility
o Avoidance of enforcement mechanisms as a ploy
Structure of the City Code
o General Principles
statement of standards of commercial behaviour
o Rules
Procedure to govern specific forms of takeovers
Examples of application of the General Principles
Neither a statutory enactment nor subsidiary legislation
o Changing market conditions takeovers sensitive to market conditions; speedy
resolution is essential
o Strong institutional investor interests


Takeover Panel

Body which administers the City Code

Comprises generally of industry participants
Bodies of the Panel
Code Committee
Hearings Committee
Panel Executive (for day-to-day functioning)
Takeover Panel possesses subtle powers to ensure compliance
o Public censuring
o Cold shouldering
o Other powers
Refer the matter to DTI for investigation
Whether actions of the Panel can be challenged by aggrieved party? Refer to Datafin case.


Datafin Case (CA, 1987)
o Two bidders Norton Opax (NO) and Datafin made offers to take over McCorquodale
o NO was acting in concert with Greenwell Montagu which was in turn acting with KIO
Concert parties
o Question: whether NO was therefore acting in concert with KIO, as KIO had made
purchases of target stock that would have changed terms of the offer
o Panel concluded that they were not acting in concert
o Decision challenged by Datafin before lower court and then Court of Appeal
o Question: whether decisions of Panel are subject to judicial review
o Court of Appeal:
Panel is a body whose actions are subject to judicial review
Not a court of appeal; only a court of review
Panel operated as an integral part of a system which performed public law
Supported by public law sanctions
E.g., if there is excess of jurisdiction, lack of bona fides
Scope of judicial review is carefully and narrowly demarcated
Relationship between the Panel and the court has to be historic rather than
The court should allow contemporary decisions to take their course,
considering the complaint and intervening, if at all, later and in
retrospect by declaratory orders
Present parties cannot get immediate relief but declaratory orders will benefit
future cases voluntary nature of Panel
Reduce incentive to seek resource through courts no point spending
money litigating without any benefits
But, on facts, the Court of Appeal refused to overturn the ruling of the Panel
Powers of the Panel - Guinness Case (CA, 1990)
o Takeover bid by Guinness for Distillers plc.
o Pipetec AG alleged to have acted in concert with Guinness in purchase of Targets
o Ruling by Panel to increase the price in Guinness offer
o Guinness sought review of the decision
o Court of Appeal:

The Court would only intervene by way of judicial review where it was
satisfied that the outcome resulted in injustice
Emphasis on principles of natural justice
The need to give sufficient opportunity / hearing
G plc was a witness in inquisitorial proceedings rather than a
defendant to a disciplinary or criminal charge; and that, accordingly,
the panels decisions, while insensitive and unwise, were not such as
required the court to intervene by way of judicial review
The challenge did not succeed on facts


EU Takeovers Directive
o Made effective in 2006
o To bring about uniformity in takeover regime among EU countries
o Significant delay in implementation of the Directive
o Points of contention
Hostile takeovers and role of the targets board
Non-shareholder interests (e.g. employees)
Takeover Panel now has statutory status under the Companies Act, 2006
Additional powers
o To seek enforcement by court
o To order compensation
o But validity of transactions not affected
Discussion Question: What changes, if any, might there be to the operation of the City
Code and the Panel in practice?
o Even with the changes, it is likely that the current market practice will continue to
hold sway

Statutory form of regulation

o Securities Exchange Act of 1934
o As amended by the Williams Act of 1968
To introduce equality of treatment among shareholders
o State corporate laws the duties aspect, behaviour of parties
Regulation is often detailed
Enforcement by regulator (SEC)
US regulations involve checks and balances
o Finance and corporate professionals
o Federal regulators
Mandate for investor protection
o State legislators
Influenced by decision of corporate managers to incorporate in suitable
Level and extent of corporate duties in a takeover situation determined by
state law (e.g. Delaware)


Essentially tracks the pre-existing UK model

Regulation through a voluntary code rather than legislation
Singapore Code on Take-overs and Mergers
Securities Industry Council (SIC)
Discussion Questions:
o Do you think this approach is appropriate?
SIC more flexible, more suitable for a less-litigious environment, can give
light-touch sanctions (to affect the reputation)
o What is the impact of recent changes in the UK? Should it alter Singapores
Similar to the UK, the SIC has moved towards greater statutory recognition

Code now has statutory recognition

o SFA, s. 321
o But, not subsidiary legislation
SIC too has statutory recognition
o SFA, ss. 138-140
o S. 139(7) The Securities Industry Council may issue rulings on the interpretation
of the general principles and rules in the Take-over Code , and such rulings or
practice shall be final
Issue can SIC rulings be challenged judicially? Finality is important for certainty but is it
o Principles of administrative law may allow judicial review
SIC decisions are likely to subject to judicial review, similar to the UK
However, no specific court rulings yet in Singapore about reviewability of SIC decisions.
Other decisions under administrative law may provide some light
Petaling Tin (Malaysian SC, 1994)
o Panel issued public censure. Issue is whether that exonerated party from making a
mandatory takeover offer
o Exercise of powers beyond Panels jurisdiction
Panels decision subject to judicial review as it performs a public function
Public censure does not automatically release party from obligations to make
takeover offer
Other cases in the non-takeover context
o Stansfield Business (SGHC, 1999)
No ouster of jurisdiction if authority acts in breach of the rules of natural
o PSC v. Linda Lai (SGCA, 2000)
Court will not interfere if relationship between parties is not underpinned by
statute or subsidiary legislation.
Relief not granted: matter of pure contract
Companies Act, s. 159
o The matters to which the directors of a company are entitled to have regard in
exercising their powers shall include
(b) the rulings of the Securities Industry Council on the interpretation of the
principles and rules of and the practice to be followed under the Singapore
Code on Take-overs and Mergers

***This provision allows directors to follow SIC rulings without breaching

their fiduciary duties ***
Listing Manual of the SGX-ST (Chapters 10 and 11)
o For listed companies
o Disclosure and shareholder approvals




Factors to consider
o Likely attitude of the Targets board
Goes into formulation of strategy in making the offer
o Shareholder profile of the Target
F&N takeover Offeror bought shares directly from OCBC without going
through the board
o Arguments to be presented to Targets shareholders
o Arguments to be presented to Offerors shareholders (in a share offer)


Approach to the Target (UK: r. 1; Sing: r. 1)

o Offer should in the first instance be made to the board of Target or its advisors
Discussion Question: Why should the board be involved in a transaction
pertaining to the Offeror and the Targets shareholders?
Board can provide guidance to SHs
Board is more informed than SHs about the details/structure/fairness
Board will make decision in the best interest
Board can mount suitable defences if necessary
However, it may not be good for CO
Board may have a side deal (golden parachute) for a second-best offer
Board may block a good takeover offer if they are afraid of being
jettisoned not in best interest of company
Board may be closely related to offeror (real conflict of interest) e.g.
Satisfaction of the Board (Sing: r. 1.3)
o That Offeror is in a position to complete the offer
o Comfort/assurance from the Offerors financial advisor
o To prevent making of a false bid (distortion of share price/frivolous bids)


Containment and management of information is critical in an takeover situation

Information regarding a takeover is price-sensitive in nature relates to insider trading
o Recall previous discussion on Efficient Capital Markets Hypothesis
Secrecy is of utmost importance (UK: r. 2.1; Sing: r. 2)
o Flow of information must be channeled and timed carefully on a needs basis
o Early announcement attract rival bids, pre-mature offers
o Other than needs basis, enter into confidentiality K arrangement
Sharing of information by Target (UK: r. 20; Sing: r. 9)
o Information may be provided to Offeror (e.g. during due diligence)

It must be provided equally fully and promptly to any other competing

offeror, even if not welcome by the Target
Answers to specific questions
Risk of overbroad disclosure to initial Offeror


Trading on the basis of price-sensitive information (PSI) not known to the public
Impending takeover is generally price-sensitive
Use by Offeror of information gathered from Target to purchase shares in the market
o But, Offerors knowledge of its own activities and intentions to make an offer is not
a bar
i.e. safe harbour under Securities and Futures Act
o Why? Facilitates takeovers, allows for a premium (offerors less adverse to offering a
premium), uniformity of offer made to all SHs based on PSI
Various scenarios
o Scenario 1 offeror has PSI and made and offer safe harbour
o Scenario 2 offeror has PSI and purchases more than 2% of shares, be it privately
or on the market insider trading
o Scenario 3 offeror makes an offer without PSI privately safe harbour (s299) not
insider trading because the offer was not made on the basis of the PSI


False trading with a view to artificially inflate or deflate the market price of shares
Applies to both Target as well as Offeror (in the case of a share offer)
o Target to deter bid or angle for a better price
o Offeror to make its offer more attractive in case of share swaps
***Care must be taken to ensure that structuring of transaction and timing of
announcement comply with securities laws and regulations***


is an announcement of offer necessary (UK: r. 2.2; Sing: rr. 3.1-3.3)?

When a firm intention to make an offer is notified to the board of the Target
Acquisition of shares resulting in obligation to make a mandatory offer
When Target becomes the subject of rumour or speculation, or there is untoward
movement in price
o Extensive negotiations for a possible offer
o Purchaser being sought for a large shareholder (holding 30% or more)
Obligation (UK: r. 2.2; Sing: rr. 3.1-3.3)
o Initially lies with the Offeror (i.e. before the Targets board is approached)
o Thereafter with the Target (i.e. after its board has been approached)
Type of statement
o Definitive
o Holding announcement
Creates distortion in market uncertainty
Target and investors may not welcome the uncertainty
Time-bound requirements in the UK (r. 2.6)

Put up or shut up regime (changed after Kraft-Cadbury takeover)

intention has to be made clear within 28 days or offeror is prevented
from bidding for target for 6 months
Permitted in Singapore but need to be renewed every month. Can
theoretically be extended forever until SIC steps in
o Request to stock exchange to suspend trading in the stock
Discussion Question: What might be the reason for this requirement?
Prevents fluctuation of stock price
Prevents insider trading
Contents of offer announcement(UK: r. 2.7; Sing: r. 3.5)
o Terms of the offer
o Identity of the Offeror may be an SPV
o Conditions to which the offer is subject
o Confirmation by financial advisor as to availability of sufficient resources
to complete the offer
See Singapore case of Jade Technologies
o To shareholders, employees


Independent Advice (UK: r. 3; Sing: r. 7)

o Targets board to obtain competent independent advice immediately needs to be
fair and reasonable
o To communicate the substance of the advice to shareholders
o Independence of advisor (from target) is key
Impact of multi-service organisations
Strength of Chinese walls different departments are segregated and no
information flow between them
o Why the need for independent advice?
Overcome conflict of interests
Competence of the board helps the board better evaluate and communicate
advice to SHs
Board has to evaluate and advise the SHs upon receiving the
recommendations accept or reject usually on the basis of valuation
o Examples (from US) where independence has been questioned more recently
In re El Paso Shareholder Litigation
Advisors investment in offeror
Second opinion not effective
Transaction enjoined (i.e. instructed) by court a form of
injunction/court order?
Del Monte Foods Shareholder Litigation
Advisor to a takeover
Transactions with other parties
Involvement in buyer side financing
Treated as conflict on the part of advisor
Imposes onerous responsibilities on advisors and also boards appointing them
Targets Board
o Accept and support the bid

o Reject and oppose the bid

o Adopt a neutral stance
Communication to shareholders (UK: r. 25.1)
o To enable shareholders to take a decision on the offer
o A somewhat paternalistic approach towards shareholders
Regardless of level of sophistication (Query: are shareholders all


Tender offers
o Regulated by the SEC pursuant to the Williams Act
o Basic terms for shareholders
Offer period minimum 20 days
Minimum price
Shareholder withdrawal rights
Pro rata acceptances for oversubscribed offers
Information rights
o Tender offers: deliberately not defined by SEC


Offer made to SHs rather than board
Greater power of the board
However, boards power is exercised more tactically compared to the advisory approach in
o Note this difference in the context of defences US boards have more power to
mount defences in the face of hostile bids compared to UK/SG boards

Transparency is key to takeover regulation in all the jurisdictions being examined

Disclosure of acquisition of shares
o By Offeror
o By persons acting in concert
Discussion Question: What is the rationale for requiring disclosure of shareholding?
o If offeror has a large shareholding, the offer is more likely to succeed other SHs
need to know
Timing of disclosure
o During the offer period (UK: rr. 8.1-8.3; Sing: 12.1-12.3)
o Prior to any offer, upon exceeding prescribed limit of 5% (US: Securities Exchange
Act, s. 13(d)(1))


Greater role of hedge funds and other sophisticated financial investors in takeovers
o Tendency of speculative investments?

Use of derivative instruments (with underlying shares of Target) to mask

shareholding interests in companies
o Sudden launch of offers/disclosures upon unwinding derivative positions
Should acquirers of CFDs be compelled to disclose?
o One could argue that the acquirer is a beneficial owner
Some courts have went to the extent of characterising instruments as such
o However, the regulation of a takeover is about control (i.e. voting rights)
Here, the acquirer only has economic rights. It doesnt have voting rights.
o One could also argue that the CFD itself may give de facto control to acquirer
However, this doesnt amount to acting in concert because acting in concert
cant be done with respect to the same set of shares
o Settlement of contract how does the contract unwind at its termination?
If physical settlement (i.e. counterparty gives shares to acquirer), there is
grounds for disclosure


City Code in the UK has been amended to include derivatives within interest in securities
Singapore Code was amended in 2012 to recognise derivatives see notes 6(a)(iii) and 8
to r 12.3
In the US, specific rules being promulgated by SEC in connection with derivatives and
disclosure under Dodd Frank Act



General duties
o To make comparable offers where Target has multiple classes of shares
Only applicable to equity shares, not instruments convertible to equity shares
Recommended approach converting instruments into equity shares
Another option is to include holders of such convertible instruments in
the offer, at a different price
o To take into account conversion rights, options and subscription rights in Targets
o To offer uniform terms to all shareholders
To avoid side-deals with specific shareholders that are not applicable to
Types of side-deals
Additional premium/different price
Non-compete fees
Acquirers giving shares to management upon completion of deal
o What if it was given at a discount? Golden parachute?
o Arms length test + prevailing market rate
o Do the other SHs know about such terms?

Greater flexibility to Offeror in the case of a voluntary offer


Offer to succeed only if Offeror has acquired (either in the offer or otherwise) 50% of
voting rights in the Target (not de facto but actual) not shares
o Offeror may prescribe a higher threshold: e.g. 90%
Discussion questions
o What is the rationale for such an acceptance condition?
Protects minority SHs by not letting Offerors to take effective control with a
lower price
If not, Offerors may take effective control and compel minority SHs to
accept lower price
o Is there merit in eliminating this concept?
Note: this applies to voting rights and not just shares (or mere interest in shares)
Discussion questions:
o How does this affect an Offeror who may hold derivatives (that represent interest
in securities in the UK)?
o Is it easier or more difficult for such a holder of derivatives to satisfy the acceptance

Should there be acceptance conditions for mandatory offers? (see below)


Permitted only in specific circumstances (UK: r. 13.1; Sing: r. 15.1)

o Objective test can be used to demonstrate satisfaction of condition
E.g. by an independent third party
o Satisfaction of the conditions must not be within the hands of the Offeror or its
o Parties must take necessary steps to achieve satisfaction of the conditions (e.g.
holding GMs)
o Regulatory approvals
o Shareholders approval of the Offeror
Sometimes required under the Listing Manual or for issuance of new shares
o Material Adverse Change (MAC) clause
Normally not entertained by regulators
Subjective in nature
General trends vs. events specific to Target
E.g. WPP Groups bid for Tempus Group in 2001
UK Panel said 9-11 attacks were a short term extraneous factor
Test is a material change that strikes at the heart of the deal
that almost akin to a frustration of contract
Internal regulators more inclined to allow such clauses
External regulators less inclined for such clauses
Decrease in industry prospects, Financial crisis (e.g. financing) huge
Regulatory approval
What if approval is given subject to conditions which may be too



Conditions under takeover codes linked with process of review by Competition

Multiple levels/phases of review
Consequences could be different for the takeover process



Study of Jade Technologies

Offer by Asia Pacific Links Ltd (APL) to shares of Jade Technologies Limited (Jade)
Offer disclosed that APL held 46.54% in Jade
Subsequently found that APL held only 16.06% in Jade
A pre-existing security over the shares was enforced by lenders of a stock
broking firm
o Hence, lack of financial resources to complete the offer

Action by SIC, against:

Dr. Soh
Announcing an offer without being able to implement in full
Misleading disclosures as to shareholding in Jade
Sale of shares in Jade during offer period
o Prohibitions from making a takeover offer, from buying and
selling on stock exchange, and from being a director on a listed
OCBC (financial advisor)
Failure to verify availability of funds shouldnt have really relied on Dr
Sohs verification
But, breaches were less culpable due to conduct of Dr. Soh
o Voluntary abstention from financial advisory work, and donation
of S$ 1 million
But, vindication of OCBCs claim in the High Court
Allen & Gledhill (solicitors)
Breach as to Offerors disclosures
Although primary obligation to disclose rests with Dr. Soh
Partners voluntary abstention from work relating to Takeover Code
SIC didnt:
Compel the completion of takeover lack of financial resources
Compensation of targets SHs doubt as to whether it had the power to
do so
Subsequent regulatory amendments expressly conferred such power
on SIC
Partly as a result of this case
Prof Umakanth believes that this case ups the standard for all players in an M&A
deal, especially in a situation where the Offeror has to pull out


In case of acquisition of, or change in, control

o Need to provide exit option to shareholders
o Part of the rule of equality of opportunity
Acquirer to mandatorily make an offer to all shareholders (UK: r. 9.1; Sing: r. 14.1)
o Concept does not exist in the US. Why?
Concentrated shareholding usually Offerors will just make an offer to the
controlling SH
Diffused shareholding (more prevalent in US) Offerors have to make a
partial offer to all SHs
Funnily, UK has requirement to make mandatory offers despite most COs
having diffused share holdings
Discussion Questions:
o What is the rationale for mandatory offers? (as above)

Need to provide exit option to shareholders

Part of the rule of equality of opportunity
These trumps Offerors choice
o Are they really required to maintain equality? Is equality necessary?
Control premium why should minority SHs receive control premium?
In reality, most minority SHs are just short-term SHs (e.g. hedge funds,
private equity funds). They are probably sophisticated enough to protect
Are mandatory offers an overkill?
o Prof Umakanth seem to think so but probably not a pressing issue of reform for


Definition of control
o Subjective criteria
Depends on facts and circumstances
Pattern of shareholdings generally in companies
o Objective definition (favoured in UK and SG)
Threshold fixed at 30% of voting rights
Discussion questions:
o Do you agree with having a percentage threshold?
Certainty (e.g. 29.9%)
However, may be prone to technical skirting/abuse
Prevent abuse by looking at the situation holistically
Places a bit of uncertainty
o What is the rationale for fixing 30%?
Does a small amount (e.g. 20%) mean no effective control?
Diffused shareholding more power than SH-ing (20% versus other
diffused SHs)
Articles allowing for effective control more than what SH-ing prescribes
Why 30%?
25% - used to be the threshold legal reason for blocking special
Why 30%? Probably after conducting a general study of SH-ing
structure in SG
o The lower the threshold, the more onerous for M&A market
o Looking at other jurisdictions
Not a fixed number but can be changed from time to time
Do derivatives/instruments count towards control?
o UK counted towards part of SH-ing (shares + derivatives)
o SG derivatives only counted towards disclosure purposes but for mandatory offers,
Offeror has to consult SIC
When acquirers current shareholding is between 30% and 50%

Certain acquisitions attract mandatory offer requirements

o UK: Any acquisition of voting rights by acquirer
o Sing.: Acquisition of more than 1% voting rights in any period of 6 months
But, beyond 50%, any acquisition will not trigger mandatory offer requirements
o As it does not alter control
SG approach may benefit controlling SHs
o To counter a rivals bid and increase controlling SHs leverage incumbent friendly


Acquisitions by persons acting in concert (PACs) will be aggregated with that of the
Parameters to determine PAC
o Agreement or understanding
o Formal or informal
o Co-operation
o To obtain or consolidate control or to frustrate an offer
General definition is accompanied by presumptions (unless the contrary is established),
o Company parent & subsidiaries
o Company directors
o Fund manager investment company
Scenario: 3 independent COs holding 10% each coming to a common agreement should
they make an offer?
o Which should come first? Acquisition or agreement?
o Literature and regulatory text seems to suggest agreement act of acquisition
triggers the mandatory offer


Set at 50% - cannot impose a higher threshold

o Hence, mandatory offers do not permit threshold such as 90% to prepare
for a squeeze out to follow
Discussion Questions:
o Should there be an acceptance condition for mandatory offers at all?
o Does it defeat the purpose? (see below)
No MAC clauses
If someone buys 35% and there is an acceptance condition
o Selling SH gets to exit but minority SHs gets their shares returned to them (disparity
and flies in the face of equality of treatment)
Mandatory offer
o Principle of equality of treatment/equal opportunity/free exit trumps Offerors choice
o Should mandatory offers be replaced with appraisal rights instead?
Limitation on imposing subjective conditions
o Limited exception for competition law matters
Hence, need to avoid a mandatory offer (through share acquisitions) during an existing
voluntary offer
o As more onerous requirements apply



Law and economics analysis (Easterbrook & Fischel)

o Premised on 2 counts
Efficiency of the capital markets
o Assuming markets are efficient, share price of a Target will reflect performance of its
o Agency costs in companies
Shirking by managers
Self-dealing by managers


Agency costs can be reduced by monitoring the managers in the interests of shareholders
But, who is to monitor?
o Managers: are insiders and may not monitor effectively; also, measurement
o Shareholders: ultimate residual beneficiaries of managers actions, but suffer from
collective action problems
o Hence, external bidder/raider acts as a corporate control check on managers
If stock price is languishing due to poor performance of managers
o Then premium offer by bidder will act to protect shareholders investment
Premium reflects bidders expectation of generating greater returns from the
investment than present management
o Alternatively, the possibility of a bid itself will force managers to act in the interests
of shareholders
However, this means that managers may spend more time and resources defending
against takeovers instead
o Leads to short-termism in terms of performance (quarterly) due to dependence on
share prices
o Distorted incentive to act fraudulent window-dressing of account
o Moves by managers to seek golden parachutes from would-be offerors


Authors argue for managerial passivity in the context of takeovers

o Managers are inherently interested in a takeover offer
o As their position / continuance is at stake
Discussion Questions:
o Do you agree with the authors analysis?
o Are there any alternative approaches?
Should managers have no role at all?
o Easterbrook argues to the extent of recommendation only
Should the directors owe its duty to the companies (incl. employees etc under s159 of CA)
or to the shareholders only?
o Note that under SG law, directors owe fiduciary duties to companies

Subject to duties to shareholders when faced with a takeover bid per the
Takeover Code
Can directors enter into a binding agreement with Offeror to positively recommend the bid
(even though the bid wouldve been recommended under independent due diligence)?
o Looks like it can be done, at least in the US, but on the condition of a fiduciary out
(i.e. directors can opt to rescind the recommendation if at some point in time they
are advised to do so by their independent advisers)




Differences among jurisdictions

o UK/Singapore
Takeovers are essentially a matters between offerors and shareholders
Board can only provide advice and information
But cannot take action to:
o Frustrate the offer; or
o Take away the ability of shareholders to make a decision
regarding their investment
Weighs in favour of a shareholder primacy approach
o US (Delaware)
Boards/directors are conferred a greater role in takeovers
Boards can decide the responses to an offeror
They may also set up various takeover defences
Greater freedom to board compared to UK/Singapore
Arguably weighs in favour of a director primacy approach



The board has limited powers to protect a company from an unwanted (hostile) offeror
The role of the board is determined by two sets of duties:
o Duties under the Takeover Code
To act in the interests of the company as a whole; not to deny shareholders
the opportunity to decide on the merits of a bid (UK: GP 3)
Not to frustrate an offer or to take other similar action without consent of the
shareholders (UK: r. 21.1; Sing: r. 5)
The duties under the Code come into play once an offer has been made
or is imminent
o Duties generally under company law
To act in the interests of the company
To act for proper purpose
The proper purpose duty usually arises in the case of issue of shares
by a target company in the wake of a takeover so as to dilute some
These company law duties are determined through a combination of statutory
provisions as well as common law


Some measures can be taken in advance to prevent takeovers (even before they become

When is it considered imminent? Possibly when rumours start and there is share
price movement
Examples are:
o Voting agreements between shareholders:
To obtain control of the company
Caution against parties to the agreement being treated persons acting in
o Interlocking or circular shareholdings
Combined with common board membership
o Pyramiding
Ability to obtain significant control with minimal economic ownership
o Issue or sale of shares to a friendly holder (similar to a white knight)
E.g. to an employee trust (with a company loan)
Whether this amounts to a proper purpose?
Will this amount to parties acting in concert?
See Hogg v. Cramphorn frustration of an offer?
Will this result in unauthorised financial assistance?
o Subsequent whitewashing?
Usually need to show that the trustee is independent from board
E.g. to a collaborator or business partner
o Defensive merger
o Differential shares
With no voting rights or limited voting rights (e.g. Bushell v. Faith)
Google stock post-IPO
However, restricted in the Singapore context s. 64 of the Companies Act
S. 64: Provides for a one-share one-vote rule on a poll
However, s64(5) limited to public companies
o Service agreements/ management contracts
With beneficial arrangements for employees upon termination (e.g. Golden
Protection for employees personally + defence against takeovers (as they
become costly)
Huge momentum in US/UK to exercise greater oversight over executive


Takeover Code imposes strict restrictions on ability of directors to defend a bid
Most defensive actions require shareholder approval
o Cannot be effected unilaterally by the board
Board cannot generally take a frustrating action on a bid; or deny shareholders
the decision-making powers
o UK: r. 21.1; Sing: r. 5
Such actions requiring shareholders approval include:
o Issue of shares/options on shares
o Issue of securities carrying conversion rights
o Disposal of assets (or agreement thereof)

Entering into contract, including services contract, outside the ordinary course of
Issue of timing lag may reduce efficacy of defence
Approval SHs may not approve of such defences.
o Even if SHs approve, they may not even accept such offers in the first place
In addition, there are certain company law requirements to obtain shareholders approval
for specific actions
o E.g. issue of shares (Sing: s. 161, Companies Act)
If the company is merely giving effect to pre-existing obligations, then Takeover Panel or
SIC must be consulted
o E.g. conversion of pre-issued securities
o Exercise of options previously issued
o Performance of contract previously entered into


Primary duties in the context of takeovers

o To act in the best interest of the company
Whose interests are represented by the company?
Do directors have to consider the interests of present shareholders or those
in future?
Should directors take into account short-term interests of shareholders or
long-term interests?
E.g. that offer price is fair and to consider competing bids
Short-term SH interest will never take into account other stakeholders
Over long term, there is an interest in sustainability particularly acute
o Other interests creditor interests / employee interests
A lot of SHs now are short-term SHs (e.g. hedge funds)
o Do they require such protections? Should such SHs be
o Should SHs be required to hold their shares for a minimum
period of time before being allowed to sell them
o To exercise powers for proper purpose
Need to be exercised for the purpose the powers were granted for not
dilution/altering control/minority
Howard Smith v. Ampol Petroleum (1974, UKPC (Aust))
o Rival takeover offer for target company, RW Miller (Holdings) Ltd
o Competing bidders were Howard Smith and Ampol (which already held 55% shares)
o Majority of Millers directors favoured Howard Smiths offer and decided to issue
$10m worth of new shares to Howard Smith
o Purpose of the share issuance:
For capital to finance its business
For diluting Ampols existing shareholding
o Ampol challenged the validity of the share issuance
o Privy Council:
It is necessary to begin with the exercise of power in question
Court must examine the substantial purpose for which it was exercised

Court will give credit to bona fide opinion of directors, and respect their
opinion as to matters of management
But, on trial, it was found that purpose of Millers issue of shares was to dilute
majority voting power held by Ampol
Directors cannot use the power for shifting control in the company
Hence, power was improperly exercised by the directors of Miller
Heron International Ltd v. Lord Grade (1983, ECA)
o Target company: Associated Communications
o Takeover bids from two companies, Bell and Heron
o Transfer of voting shares possible only to person nominated by the directors
o Court of Appeal
When directors have decided that the company be sold, the only duty of
the directors is to obtain the best price
Once the directors decide to hand over control of CO, the duty shifts
from towards the long-term SH interest to short-term SH
Where directors are to decide between rival bidders, the interest of the
company must be the interest of the current shareholders
o Note: Compare this with the position in Delaware: the Revlon Case (discussed later)



In a takeover situation, the board will be judged against one of three standards:
o Business judgment rule
o Enhanced standard (Unocal test)
o Entire fairness standard
Recall earlier discussion relating to freeze-out of minority shareholders
(Weinberger v. UOP)
Much of the Delaware jurisprudence on boards duties revolves around the appropriate
standard to be applied to a given case


In this case, generally the business judgment rule (BJR) is applied

Scope of the Business Judgement Rule (BJR)
o Business and affairs of a company are managed by its board of directors
o BJR exists to protect and promote the full and free exercise of powers granted to
directors - if not directors will act in a risk-adverse manner
o It is a presumption that in making a business decision, directors have acted in good
faith and honest belief that action was in the interests of company
o The party attacking the boards decision must show that the decision was not an
informed one
Smith v. Van Gorkom (1985, Del. SC)
o Class action suit by shareholders of Trans Union (TU)
o TU was seeking a cash-out merger with a Pritzker company
o Board of TU approved the merger
o But, the board:

Didnt adequately inform themselves of Van Gorkom s role in advising the

Unaware of precise terms of merger agreement
Did not obtain adequate information regarding valuation
No expert was appointed
Valuation exercise undertaken by CFO Romans was indicative and for
purpose of leveraged buyout
Mere premium over market price may not reflect the true worth of the
company in the future
Was negligent in approving the transaction at such short notice must give
at least some time for due diligences
Note: nowadays, COs usually employ an independent M&A team
Court held shareholders approval was obtained without providing sufficient


3 types of takeover defences

o Those that require shareholder ratification
o Those that can be adopted directly by the board
o Those that are based on corporate powers granted under corporate statutes


E.g. shark repellent charter document amendments

Staggered board
Limits on shareholder voting, caps on voting rights, etc.
Supermajority rights for back-end mergers


Poison Pill Plans

o Distribution of stock rights to shareholders (in the form of dividend)
Such plans usually found in charter document
o Granting shareholder the right to convert to common stock at substantial discount
When an acquirers holding crosses a threshold (usually 15%, but could vary)
o Poison pills usually alter the share capital of the CO (incl. adjusting share prices to
reflect the new share capital)
o Stock rights not available to such acquirer, who gets substantially diluted upon
conversion of rights
o Such poison pills chill the takeover market boards can effectively block such
The invocation of the pill makes it extremely expensive for acquirers
Hence, they will be compelled to approach the targets board to negotiate
and obtain a redemption of the pill
o Types of pills (Flip in, Flip over, Chewable, TIDE provision)



Used to make the target unwanted to an acquirer (e.g. sale of key assets (crown jewels))
Handsome rewards to managers (golden parachutes)
Acquisition of another entity to attract competition law concerns
Launch of a bid on the acquirer (Pac-Man defence)


In hostile takeovers (which involves the employment of takeover defences), the enhanced
scrutiny (Unocal test) is applied
o Why is BJR not applicable in hostile takeovers?
o Enhanced scrutiny test seems to be long-term rather than short-term (relates to
corporate policies)
Difficulty in applying BJR per se
o Directors are confronted with an inherent conflict of interest
o omnipresent specter that a board may be acting primarily in its own interests,
rather than those of the corporation and its shareholders. (Unocal)


Before the targets board is accorded protection of the BJR, it must establish:
o Reasonableness test: that board had reasonable grounds for believing a danger
to corporate policy and effectiveness existed from the hostile offer
o Proportionality test: that the boards defensive response was reasonable in
relation to the threat posed


Air Products v. Airgas (2011, Del.)
o Poison pill by Airgas to prevent takeover by Air Products
o Offer at $70 a share considered inadequate
o 3 directors nominated to the board by Air Products
Plaintiff prayed for invalidity of poison pill and for it to be redeemed
o Ground directors of Airgas failed to fulfill their duties
o Applied the two Unocal tests
o Bifurcated the application into (whether there was)
Structural coercion e.g. 2-tiered share offers (SHs coerced to accept the
offer due to ignorance/fear)
Substantive coercion
UK/SG board can only recommend/reject
US board has more actions (e.g. poison pill)
o In this case, court deferred to board because more than half of Airgas SHs are
short-term investors and arbitrageurs
Identity and motivation of SHs determine how much protection they
should be given
o Held that Airgas board acted in good faith and in the honest belief
No breach of duty
Actions of the board withstood the enhanced test


Usefulness of the poison pill continues (no appeal to Delaware Supreme Court in this
o Why no appeal? Circumstances such as share price may have changed.
o Also, costs of appeal are too high?
Reliance on law laid down by the Delaware Supreme Court
A just-say-no defence is valid
o Even though directors have not taken any additional defensive actions
Process followed acquires importance
o E.g. retention of outside legal and financial advisors
o Perhaps independence of the board was a factor
Only insider of the board was the CEO.
Even Air Products nominee directors agreed with Airgas board decision
Role of short-term investors & arbitrageurs


Revlon Inc. v. MacAndrews & Forbes (1986, Del. SC)
o Offer by Pantry Pride for shares of Revlon using junk bond financing
o Rejected by Revlon upon advise of investment bank
o Instead, Revlon implemented share repurchase program and a note purchase
program (having the effect of a poison pill)
o Revlon separately had negotiations with another bidder Forstmann
o Directors agreed to a leveraged buyout by Forstmann
o Court:
Although the adoption of the pill was valid under the circumstances, its
continued use was not
It became apparent that a break-up of the company was inevitable
Recognition that the company was up for sale
This significantly altered the boards responsibility under the Unocal standard
There was no threat to corporate policy and effectiveness
Directors role changed from defenders of corporate bastion to auctioneers
charged with getting the best price for the stockholders at a sale of
the company.
Selective dealing to fend off a hostile but determined bidder was no
longer a proper objective. Instead, obtaining the highest price for
the benefit of the stockholders should have been the central
theme guiding director action. Thus, the Revlon board could not
make the requisite showing of good faith

In the current era of short term investors and arbitrageurs, would the court in Revlon have
decided differently and gave SHs so much protection?
Revlon case that shows convergence between US and UK judicial attitudes towards board
conduct in takeovers
o Really?
o Should Heron be decided differently if a majority of its SHs are arbitrageurs?

When do cases shade from defending the CO (per Unocal) into breaking-up (per Revlon)?
o What happens when 2 offers come in a lower offer that wont break-up the CO or a
higher offer that will break-up the CO?
No break-up = need to defend against threat to corporate policy and
effectiveness (Unocal)
Break-up = obtain best price possible for SHs (Revlon)


Poison pill and other embedded defenses are subject to redemption by the board or
Offeror may seek to obtain redemption by taking control of the board through obtaining
enough shares to mount a proxy fight
Hence, in order to ensure robustness of defense, poison pills are usually accompanied
by a staggered board


Structure of a staggered (or classified) board

o Board is divided into classes (usually 3 classes)
o Each class of directors will retire each year (i.e. a third of the board changes each
o Each director will therefore have a term of 3 years
Nothing preventing staggered board arrangements in UK/SG but it wont be as effective as
in US
o Anyone with control of CO can simply remove entire board in UK/SG
o Even though this is only applicable to public COs, bear in mind that for private COs,
there is no need to approach board
You probably have to approach the SHs (which are most likely the ones in
control) directly.
In case the Offeror needs to acquire control of the board, it must wait two election cycles
o i.e. to obtain majority on the board
In addition, law and constitutional documents of Delaware companies contain strict
restrictions on removal of directors
o Shareholders can remove directors only for cause
E.g. severe misconduct, offence of moral turpitude, etc.
o But, greater removal rights to shareholders in UK/Singapore
This makes staggered boards a formidable defense in the U.S.
o Offeror to undertake prolonged proxy fights in order to overthrow the board
o Delays and costs may result in offeror surrendering in their takeover attempts
E.g. Recent Airgas takeover battle


Offeror's attempts to reconstitute the board are taken through proxy fights
o Offeror calls for a shareholders meeting where it seeks to propose its own
candidates for directorship
o These candidates are countered by the management

The process of voting is important. Balance is usually tilted in favor of management

o It has access to the proxy machinery
List of shareholders
o Less costly for managers
But, an extensive set of regulations in the US attempts to grant limited rights to
o Movement towards shareholder primacy is extremely slow in US
Blasius Industries Inc. v. Atlas Corp. (Del, 1988)
o Blasius a new stockholder of Atlas (holding 9.1%)
Proposed a restructuring of the company
Intended to obtain control by seeking appropriate representation on Atlas
board by increasing the board size to 15 and appointing its own nominees
o Management called an emergency board meeting
Added 2 more directors (taking the total to 9)
To defeat Blasius ability to appoint majority board
o Evidence establishes Atlas principal motive for acting as preventing Blasius control
o Court of Chancery (Allen, J.)
Board was not acting out of a self-interested motive it acted in good faith
Similar to best interests test in UK/Singapore
But, question whether principal purpose of boards action was to prevent
shareholders from electing majority of the board
Ordinary considerations of business judgments are not present in matter
involving shareholder voting (Unocal test not applicable here)
It is a question of authority between the board and
Facts did not justify coercive action by the board. There was a violation of
the duty of loyalty owed by the company
Discussion of Blasius test
o Unocal versus Blasius test (academic rationalisation)
Blasius SH right to vote (a company law right)
Unocal/Airgas SH right to exit (a contractual right)
Boils down to nature of rights being interfered with?
o How does this compare with Howard Smith (proper purpose test)?
Seems rather similar

Final takeaway from discussions on takeover process, hostile takeovers and defenses
Role of regulation
Differences in the US and UK positions
o Analysis in article by Armour and Skeel
o There are historical reasons why regulations have developed in a divergent manner
need to be cognisant of the players involved in setting up these regulations
Type of shareholding more diffused in US/UK and more concentrated in SG
Which regime is better?
Shareholder primacy (UK/SG position)
Management primacy (US position)
o Short term SHs (do they need so much protection?)

Better able to take care of other stakeholders such as employees

and creditors
Does it matter in East Asian Cos when the controlling SHs are also on the
Why not give to the board since the controlling SHs can exercise their
power through the boards also?
o Studies suggest that the US approach lead to better value from M&A
Discussion Question: Based on analysis of takeover regulation, can we draw some
strands as to the background and rationale for takeover regulation in
o UK approach shareholder primacy
o Controlling shareholders protection mechanisms for minority shareholders
Mandatory offers (why not appraisal rights?)
Oppression remedies sufficient? Easy to claim?
Recent changes in the UK
o Reaction to the Cadbury/Kraft takeover are such reactions knee-jerk and uncalled
o Call for greater protection to:
Target companies, Managements, Employees
o Imposition of greater restrictions on Offeror
Discussion question: Will the recent measures place obstacles on hostile takeovers
in the UK?
o Yes offerors may find it more expensive and time consuming to mount hostile
o No merely clarification of current standards also boards in UK still not given as
much latitude in mounting defences in the face of a hostile takeover compared to
boards in the US.






No (or less) cash outflow from acquirer
But, dilution of existing shareholders
Useful for reverse takeovers
When the offeror has a smaller asset size can be used to do backdoor
Need for shareholder approvals s161 CA SH approval for share issues by the board
Internal resources



Key features of LBO

o Significant use of external financing (banks, bonds)
Highest tier - senior debts (long term bank loans)
Middle tier - Mezzanine financing
Lowest tier - Junk bonds (high-yield / high-risk)
o Partial sponsor-funding
o Use of targets assets to leverage the financing
Mostly by way of security or guarantee if not external financiers only
own targets shares, not the assets themselves

o Why indirect borrowing by sponsor? To separate and limit liability into SPV
Structuring Issues
o Direct borrowings vs. use of special purpose vehicles (SPVs)
Bankruptcy remoteness / limited recourse financing

o Negotiation of conditions
o Confirmation of financial resources
Remember Jade Technologies threshold triggering mandatory
takeovers; need to talk to SIC first
Also need to talk to lender (c.f. danger of info leak)
o Standardization of documentation
o Documentation usually provided by underwriters such loans are binding
upon conditions precedent
Also, sometimes financial advisers will have to look at the financial situation
of underwriters
o Issues for financial advisers to look at:
Is there enough financing?
Are the documentation done properly?
Directors to act in good faith in the interests of the company
o Group company situations
o When subsidiary provides guarantee/security for parents obligations
The rule against financial assistance
o Does security guarantee over Targets assets amount to financial assistance by
Target to Acquirer(s)?


Applies in the case of acquisition of shares of the Target (i.e. in a takeover)

o Probably not an issue if it was an acquisition of Targets assets by the SPV
Rule against financial assistance
o Largely to protect creditors
o Also, to protect against trafficking in shares / manipulation of price, etc.
o Protect minority against controlling shareholders
Comes in the way of LBO transactions
o Particularly in the UK and Singapore
Little such rules in US
o UK/SG adopts a more rules-based approach compared to US

Financial assistance for the purpose of or in connection with

o Examples:
SPV borrows from bondholders and provides the shares it holds in the Target
as security
SPV borrows from banks and provides Targets assets as security
3 months after the acquisition, the Target declares extraordinary dividend
used by the SPV to repay part of its loan to banks
FA can be direct or indirect, for example:
o Interposing another entity in between company and lender
o Acquisition of assets by company at substantial value when those assets are not
necessary for its business
Reason v. purpose (just need to be a purpose, not THE purpose)

Even though motive (reason) of transaction may be justifiable, if purpose was to

give financial assistance to acquirer, then transaction in doubt
Even if the declaration of dividends was for the substantive purpose of
financing external acquirers, it will amount to FA
Target companys board should show why the entire transaction is beneficial to the
target company
o Should be done by an independent committee of the Targets board
Look at SGCA case of Intraco
o To protect Targets creditors, a process called structural subordination can be done
to make the Targets creditors have priority over the Targets assets over other
creditors possibly soothing fears of FA
Gradual relaxation in law
o UK: exception to private companies under the Companies Act, 2006
If target is privatised after the takeover, it can subsequently finance the
acquirer (e.g. through extraordinary dividends)
How to privatise? Do a squeeze-out and forcefully de-list the company
Company must be privatised within 3 months of takeover
Determination of legality of FA should be whether company is
privatised already at the point of FA
How do independent financiers ensure that Target will lend the money
Charge a higher rate of interest until the Target lends money.
Cant create charges over Targets assets because it may amount to FA
o E.g. Singapore Companies Act, s. 76
Several exceptions incorporated
Lending to employees trust (Hogg v. Cramphorn)
Dividend in the ordinary course of business
Scheme of arrangement need to get creditors approval and courts
o Whitewash provisions (conjunctive) - Look at case of NatSteel for LBO and FA
Shareholders approval
Solvency declaration by directors
Subject to restrictions
Discussion Question: Does the legal position change if the transaction involves an
acquisition of assets/business, and not shares?
o No. FA provisions only apply to acquisitions of shares, not assets/business
(see above).



A group of managers buy the assets, business or control of the Target
o Backed by a group of financiers (banks or investors)
o With management taking an equity stake
To ensure risk and commitment to the venture
o Managers feel CO is undervalued
o Flexibility in restructuring CO
Why management wants to privatise CO?
o No need to disclose sensitive information to public
o Ability to take long-term decisions without being subject to pressures of market
share prices and quarterly results
Usually involves 100% acquisition of shares of the Target
o I.e. a going private transaction. Shares are delisted from stock exchanges
It is another form of an LBO a sub-set
o Hence, involves same issues pertaining to financial assistance - whitewash

Managers are on both sides of the transaction

o As purchasers
o As directors/managers of the Target (Board members which are supposed to advice
SHs on TO)
How do they protect the interests of Target shareholders?
How do they ensure parity of information regarding value of the Target?


Independent Advice (UK: r. 3, Sing: r. 7)

o Element of independent becomes much more important in MBOs compared
to other forms
Involvement of non-executive directors
o Who appoint the independent advisors
o Who advice the shareholders about merits of the offer
Equality of information (UK: r. 20, Sing: r. 9)
o All


Fairness opinions
o From investment banker
o That price for the offer is fair (based on a range)
Appraisal rights

o Not entirely useful to individual shareholders

Independent negotiating committee
o Consisting of independent directors to address conflict situation
o But, how is independence ensured?
Can such a committee be fully independent?
Formal independence is easy to ensure but how about substantive
o Expertise, availability of information to directors?
Shareholder vote on the MBO instead of board
o Need to give SHs information informed consent
Requiring greater disclosure of the transaction
o Especially walk-out price for managers
Mandatory auctions
o SIC actually intervened and force such auctions.
o Gives the possibility of a better offer from another party indirectly forcing
management to increase its price
Most practicable option consists of a combination of:
o Independent fairness opinion
o Independent committee of directors to negotiate
o Adequate disclosures
o Shareholder vote

Agreement between company and its founder + Silver Lake Partners

Usual conflicts in MBOs apparent
o Here, the CO is effectively represented by an independent committee of directors
Hence, lawyers devised protective terms in the agreemen
o Go-shop period for 45 days
Relevance of such a clause - Obligation to talk to other potential offerors to
reduce information asymmetry?
Contrast with no-shop and no-talk
Usually very risky for directors to enter into as they can be questioned
as to whether they discharged their fiduciary duties
Only justification is that but for these clauses, there will be no
acquirers seeking to acquire the CO problem of potential rivals
o Termination fee payable by Target company to compensate resources expended
by buyer in mounting bid
During go-shop period lower fee
After go-shop period higher fee
o Separate investment banker hired to find a higher bidder
o Matching rights to bidders (especially initial bidder)
o Disinterested shareholder approval
o Reverse termination fee for buyer termination (i.e. management terminates) to
compensate Target for disruption to business, possibility of lawsuits, loss of key
personnel during bid process etc
Relates to financing conditions

Something similar to the Jade Technologies scenario show that MBO isnt
being given favourable treatment
Consequence of 2008 financial ccrisis
How feasible are these conditions?
Are they sufficient to overcome conflicts in MBOs?
Latest position
Further bids by Blackstone & Carl Icahn
How does the board decide on a superior proposal?
Price? Financing terms? Future prospects of the company
Note the Unocal/Airgas versus Revlon scenarios
Auction = long-term interests no longer relevant?
Or since CO is still alive, long-term interests still relevant?
Break fees for termination
Is it FA? No because it isnt for the purpose of acquiring shares.
Also, US regime for FA more lax





M&A for closely-held COs seem more contractual in nature and less regulated by Code and
regulations compared to M&A for public listed COs
Considerations of expertise versus considerations of confidentiality whether to engage
o Expertise binding/non-binding agreements; non-solicitation
o Confidentiality costs
o Questions of announcements need legal advice on the timing of such
Due diligence
o May not be that necessary for public companies that have a lot of information in the
public domain. However, some potential offerors still opt to do so because of fears
of liabilities and trade secrets
Signing = signing of an agreement subject to conditions which requires performance by
respective parties at closing
o Some conditions competition, continuation in ordinary course of business, material
adverse change (controversial as it is pretty subjective)


Entered into during initial stages (e.g. at commencement of discussions)

Definition/scope of confidential information
Need to bind employees and advisors of purchaser
o Information already available publicly
o Where disclosure is required by law, e.g. Takeover Code
Offeror will probably make Target responsible for its employees (and vice-versa?)
o Employees usually already incorporated into employment contracts


o Other advisers usually made to enter into such agreements by acquirer

o Target in a no-talk agreement perhaps to protect confidentiality
Reverse confidentiality agreements (Target to keep Offerors information confidential)
o Share swap acquirer needs to provide info about its own shares


To reflect preliminary understanding between parties

o Contains essential (commercial) terms of the deal
To enable negotiation of detailed documentation and commencement of due diligence
Binding or non-binding?
o No thumb-rule
o Depends on the wording of the LoI and the intention of the parties
A clause not to talk to other parties in an LoI may be binding notwithstanding the other
clauses being non-binding
Dispute arises when parties fail to execute definitive agreement after signing LoI
o AIH Acquisition Corp. v. Alaska Indus. (SDNY, 2003)
AIH entered into a commitment letter to purchase Alaska. There were
extensive negotiations on T&Cs of stock purchase agreement. They agreed to
all the material terms in final form with signatures coming the next day as a
mere formality.
AIH also incurred substantial expense in the course of conducting due
diligence. Alaska subsequently refused to execute the final definite
Court held that parties entered into final and binding agreement
notwithstanding the lack of signatures as it was a mere formality.
Agreement was legally enforceable and court granted specific performance
o Texaco Inc. v. Pennzoil Co.(US, 1987)
Pennzoil entered into Memorandum of Agreement, subject to individual board
approval, on a merger with Getty. Texaco made an alternative offer to Gettys
board. Getty repudiated Pennzoils offer and accepted Texacos instead.
Pennzoil sued Texaco for tort of interference with contract but Texaco
contended that there was no binding agreement between Getty and Pennzoil.
Court held that Pennzoil and Getty had an intention to be bound, as evinced
from the Memorandum and their press release.
requirements and formation of agreement being conditioned upon
completion of such requirements
Matter of degree? Perhaps the former is a condition and the latter is a
condition precedent?
o Factors to consider
Whether parties intended to be bound on when definitive agreement is
Whether there was partial performance;
Whether all essential terms agreed upon;
Whether complexity of the transaction demanded a detailed agreement.
o Courts are willing to hold that LoI and similar documents are binding even
though they dont justify the complexity of an M&A transaction
But, certain terms are expressly made binding even in an LoI


Confidentiality (if part of LoI)

No shop clauses
Break-up fee


Purchase and Sale
o In an asset or business sale, identify the assets and liabilities being transferred
o Need to be clear about what liabilities are covered
Consideration cash, shares, notes, etc.


Statements of fact regarding the Target

To be vouched for by seller so as to double up over or validate due diligence and
valuation done by purchaser
Heavily negotiated
Usual qualifiers:
o Materiality threshold
Subjective or objective (e.g. amount of money)
o Best of knowledge
That which the seller knows or ought to have known
o Except as disclosed by the Seller
In a disclosure schedule or separate disclosure letter
New trends: reps & warranties insurance
o Buyers may want this if Seller goes insolvent can recover from insurance CO.
However, there could be exclusions in the policy
o Also, insurance policy could be void for lack of full disclosure by Seller insurers will
conduct due diligence before policy
o May not be cost-effective to get policies for every deal
Usually given by Seller for Buyers benefit. Why give such reps/warranties?
o To give Buyer contractual certainty to sue (in case of info asymmetry) above and on
top of what the law provides
o If Buyer ascribes more value to asset than it actually commands (due to info
asymmetry), the Buyer can, upon discovery of misrepresentation, rely on the
warranty to recover the deficit
Purchase price adjustment to arrive at real value of CO
Personal guarantees by controlling SHs/directors
Need to be cognisant of the regulatory requirements/disclosure regimes

To be satisfied (or waived) before the deal can be implemented


E.g., objective conditions - shareholder approvals, any governmental consent,

antitrust review, etc.
SH approval usually not needed for cash txns (duh!)
o Some subjective conditions no material adverse change (MAC), completion of
due diligence
Consequences if no fault of either parties -> agreement comes to an end
(only if drafted as such)
Failure of CPs will result in walk-away right to one or both of the parties
o But, each party to take best/reasonable efforts to ensure satisfaction of CPs
Drop dead date a date which the agreement will end if CPs not fulfilled
o Lack of such drop dead date is akin to an exclusivity clause
Good for buyer (seller cant shop around for other buyers)


E.g. to carry on business in the ordinary course between signing and closing
o Non-compete clause
o No sale of assets
o No increasing of liability of CO (e.g. borrowing a lot of $$$)
Also, some post-closing conditions
Breach usually results in indemnification or a claim for damages
o Indemnification akin liquidated damages clause.
Better as it is more certain w.r.t. quantum of damages compared to claim for
damages due to breach of K
o ***Remedy is suing for enforcing another K obligation, not for breach of
Parties have flexibility to provide for conditions of such indemnification


A specific contractual remedy

o As opposed to relying on general remedy for breach of contract
Liability arises when there is a breach of representation, warranty or covenant
Usually a payment obligation
Most negotiation tends to occur on limitations to indemnification obligation on
following counts:
o Cap on liability
As a percentage of purchase price
o Trigger on liability
To avoid de minimis situations
Only if liability aggregates to certain threshold amount
Whether threshold amount deductible or not?
o Time period for invoking indemnity
Relationship with limitation period under law
o Exceptions for certain types of liability
IP, Environmental, Tax (8 years)


For continuation of existing management

o To ensure smooth transition
Term of employment
Non-compete provisions
o Part of consideration for sale linked to future profits
o To minimise disagreements on valuation buyer has incentive to maximise earn-out
as much as possible (how much he has to pay is under his control)
o But, issues can arise in implementation of earn outs
Differences in strategy post-acquisition
Disagreements regarding role of continuing management personnel
o Otool v. Genmar Holdings Inc.(US 10th Circuit, 2004)
Sellar retained as GM of CO. Earn-out linked to sale of particular product from
seller to buyer. Sellers powers began to be eroded by buyer. Buyer started
cannibalising sellers product with its own product.
Court held in favour of seller buyer found to have deliberately done
things to minimise earn-out
However, cannot always depend on court to come to rescue of seller

Issued by sellers law firm in favour of purchaser
Covers legal aspects of the transaction
o Mainly an enforceability opinion
Law firm acts as a gatekeeper
o Stakes its reputation
Limitations on legal opinion assumptions, exceptions as to enforceability
Liability of issuing law firm

A lot of due diligence info here is relevant to private COs. For public COs, a lot of the
information is already available in the public domain
For a public M&A, selective availability of information (that results in share price
movements) may infringe security laws




Evolved as a method to protect directors

o Of issuers companies under securities laws
To prevent possible infringement of insider trading laws
o Of acquirer companies under corporate laws
Process of seeking further information
o To make an information judgment about value
o To identify risks and deal with them not the materiality of risks but the type
of such risks
By walking out of the deal; or
E.g. fraud/embezzlement/corruption
By including specific protection in deal documentation


o Minimizing risk
o Allocating risk
This is performed largely by deal documentation than by due diligence
o Maximizing shareholder value for client
o Contractual modification to the caveat emptor rule
o Due diligence is usually conducted by the acquirer on the seller
But, in case of share consideration, seller may conduct limited due
diligence on acquirer
o Also, there may be prior seller due diligence conducted by sellers own lawyers
Clean up act
o Business, financial, tax, human resources, environment
o Legal
Accounting/finance, Tax, Property, Litigation, Environmental matters)
o Depends on quantity and quality of data provided by the Seller
o All risks are not diligenceable
o Limitations on time
o Often, competitive bidding does not permit full due diligence
Disputes over Due-diligence
o Sherwood Brands, Inc. v. Levie (US 4th Cir, 2007)
Acquisition of shares from controlling shareholders
Extensive due diligence conducted by acquirers personnel
But, they failed to ask the appropriate questions, despite high level of
No relief granted to acquirer,

Also, recent example of HP Autonomy deal

Auditor warned HP (acquirer) of financial irregularities in Autonomys
HP still went ahead led to a significant loss for HP


Role of Lawyers
o Broad understanding of valuation methodologies
o Technicalities of valuation are not important
o Valuation is usually the most contested aspect in an M&A deal
E.g. minority shareholder litigation
o Historical approach may not work well for future projections
Futuristic approach may not be true in future


Discounted Cash Flow method

o Forward looking in nature
Takes into account the future prospects of the Target
Represents the real value to be derived by the acquirer
o Present value of future cash flows + present value of the companys assets
Applying a discount rate
Where present value = The current worth of a future sum of money or stream
of cash flows given a specified rate of return.
o Most widely accepted by the financial community
o Important for knowledge-based industries where existing assets are minimal
o But, value is dependent on accuracy of inputs
Estimation of cash flows and terminal value
Application of a discount rate
Comparable Company method
o Market value of share + control premium
o Comparison with other public traded companies
Financial performance across years
Price-to-earnings (P/E) ratios
o Element of subjectivity
In identification of comparable companies
Depends on industry
Delaware Block Approach
o Combination of different values
Earnings value net income
Market value stock price
Asset value liquidation value
o Weightages assigned to each values to arrive at the final figure
o Based largely on historical performance
Future prospects are not incorporated to the extent required
Trading Market Value
o Based on stock price of the company
o After weeding out information relating to the M&A transaction
As that is an abnormal stock price movement

Choice of relevant date is subjective
Market movements due to extraneous reasons i.e. beta
Questions regarding ECMH (Efficient Capital Markets Hypothesis)
Liquidation Value
o Net asset value
Total assets less total liabilities
o Usually on a break up basis
Not a going concern
o Again, purely historic in nature
Does not incorporate future prospects of business


Discounts to determined value

o Minority discount
Due to inability to exercise control
o Illiquidity discount
For private and unlisted companies
Lack of ability to trade in the market
In case of private companies, restrictions on transfer of shares in the articles
of association
Control premium
o For the availability of controlling block
o Not shared by minority shareholders
Usually possible in private negotiated deals
o ***Regulations do not permit control premium in public takeovers***
E.g. uniform pricing requirements under takeover codes