You are on page 1of 15

CORPORATE GROUPS

0. PRINCIPLES OF MODERN COMPANY LAW (TEXTBOOK)

Courts will not pierce the veil within a group of companies simply on the grounds that
the group constitutes a single economic entity.
o Creditors of a subsidiary might be disadvantaged as a result of the company
becoming a meber of a group of companies. This is because in a group with an
integrated business strategy, business decisions may be taken on the basis of
maximising the welath of the group as a whole or of the parent rather than of the
particular subsidiary of which the claimant is a creditor.
o There are 3 ways by which this phenomenom manifests:
First, the parent may instruct the baord of the subsidiary to do something
that is not in the best interests of the subsidiary, as it would maximise the
benefits of the group.
Secondly, the parent might allocate new business opportunities to the
subsidiary which can maximise the benefit for the group, even though
another subsidiary could develop the opportunity effectively, if less
profitably.
Finally, if a subsidiary falls into insolvency, the parent may refrain from
saving it, even though the group has sufficient funds to do so.
o It is unclear why the decent into insolvency of a properly capitalised subsidiary
which has fuly disclosed the risk of it business should be allowed to threaten the
economic viability of the group. T
o Solution: Is it better to have sophisticated regulation to deal with this particualr
issue of corporate groups or whether it is better based on the extension of
existing creditor-protection rules to deal with this particular situation of group
creditors.
German regulation on Group Corporations: The German statutory regulation
provides two models of regulation, one of which is contractual and thus optional.
o Under the optional provision, in exchange for undertaking an obligation to
indemnify the subsidiary for its annual net losses incurred during the term of the
agreement, the parent acquires the power to instruct the subsidiary to act in the
interests of the group rahter thann its own best interests.
o The second strand of the regime is mandatory and applies to de facto groups.
The core provision is that the parent is liable for the damage to the subsidiary if
the parent causes the subsidiary to enter into a disadvantageous transaction
unless the paretn has compensated the subsidiary for the loss or agreed to do
so.
Weakness: Ther is a difficulty of proof as to what is a de facto group and
also since there is continuing transactional relationship, it would be hard
to show that there is a disadvantageous transaction.

IGNORING SEPARATE LEGAL PERSONALITY?

There may be instances in which domestic company law takes account of group
structures, though these instances are ad hoc rather than the result of the application of
a single general principle.
o The best known form is in the area of financial reporting. The group
phenomenom cannot be ignored if a true and fair view of the overall position of
the company is to be presented, and that accordingly when one company

o
o

controls others, the parent company must present group financial staetments as
well as its own individual statements.
There are also prohibitions on financial assistance for the purchase of a
companys own sharesthat extends to dinaincial assistance by any of its
subsidiaries.
There are prohibitions on certain type of transactions between a company and its
directors. In the same vein there are also prohibitions of transactions.
In non-legal and much legal discourse, the expressions parent and holding
company are used interchangeably Similar to Singapore provision in the
Companies Act s5 and s6.

PROMTING THE INTEREST OF THE COMPANY IN GROUP SITUATION

In group situations, it is common for directors to take decisions in the interest of the
group as a whole without considering the interests of the group as a whole wihtout
considering the interests of the particualr company to which they have been appointed.
o In Charterbridge Corp v Llyods Bank, the directors of a company forming part of
a group had considered the benefit of the group as a whole without giving
separate consideration to that of the company alone when they caused the
subsidiary company of which they were directors to give security for a debt owed
by the parent company to a bank.
In situations such as these, an objective test would then help the directors
that are being sued for their breaches of FD since they had not
subjectively taken their company interests into account.
The proper test in the absence of actual separate consideration must be
whether an intelligent and honest man in the position of a director of the
company concerned would have reasonably believed that the
transactions were for the benefit of the company.
APPLICATION: The challenge to the directors decision failed in this case
because the collapse of the parent company would have been a disaster
for the subsidiary.
NOTE: The core duty of loyalty does not recognise a duty to the group,
for it insists that the main focus of the directors should be on the interests
of the subsidiary even if it accepts that the interests of the subsidiary are
in many cases intimately related to the continuing existence of the group.

1. INTRODUCTION

In this seminar, we consider the specific issues relating to corporate groups


o Corporate groups have gained in importance in the form of conducting business
o However the law and regulatory framework continue to work on the premise that
businesses are conducted through individual entities rather than collective
enterprises
The problem is that there is a dichotomy between the law and commercial reality; the
law treats each company within the group as a separate entity while the controllers of
the corporate group treat the enterprise as a single unit as basis for decision making
o Accounting concept of consolidated accounts and companies within the group
treated as one unit

2. SEPARATE LEGAL ENTITY AND NON-RECOGNITION OF GROUP


DECISION MAKING

As in the case of UK, the Singapore approach still regards the separateness of
companies within groups

o
o

The theory is still that managers must focus only on the company they are
serving at the moment of decision making
Even though for accounting purposes, groups of companies are treated as one
unit, the courts are reluctant to admit the reality of interrelated companies acting
in any other way than as a number of separate entities tied together by their
relationship as significant shareholders
The governance of groups thus depends on the way the regulatory framework
deal with general company law impact on groups.

We now consider the important rules in this category:


o The capacity of the court to lift the corporate veil
o The protection of creditors
o Directors duties
o Minority shareholders

2.1 LIFTING OF CORPORATE VEIL

The approach of the UK and Singapore courts is that the holding company has no direct
proprietary interests in the assets of the subsidiary company. The acts of a company will
not be imputed to another company within the group. The courts have not developed a
notion of enterprise law
o The only exception is where there is a fraudulent misuse of the corporate veil.

Public Prosecutor v Lew Syn Pau & Anor [2006] SGHC 146
o Singapore listed company BIGL was in financial difficulties. Lews company was
appointed to help raise new equity funds. Lew introduced investor to BIGL.
Investor agreed to pay $6.6 million for 33 million new shares in BIGL. Before
completion of sale, investor requested for short-term bridging loan for the
acquisition. BIGLs executive chairman and director, Wong, ordered a BIGL
subsidiary, CM, incorporated in Mauritius to remit to Lew $4.2m. Lew extended
$4m to investor. Wong did so to complete the BIGL share transfer to achieve
cost-savings and avoid possible litigation. He made CM extend loan to Lew
because he did not know the investor. Wong and Lew were both directors of CM,
together with 3 others. Wong and Lew admitted that they knew the ultimate
purpose of the loan to Lew but not the other directors. The remittance was not
initially authorized by the board but was subsequently ratified by them. Lew and
Tan both repaid their loans. Lew was charged with abetting Wong to cause BIGL
to contravene s76 CA.
o HELD:
(redacted)
Prosecution had to show that financial assistance came some way from
the BIGL in order to establish the charge. Prosecution submitted that:
(1) CMs funds were group funds and thus indirectly BIGLs funds.
(2) Giving of financial assistance by subsidiary company is
equivalent to giving of such assistance by the holding company.
(3) Pierce the corporate veil between BIGL and CM so that the acts
of CM are treated as those of BIGL.
Court rejected all three arguments.
(1) By the doctrine of separate entity, there is no such thing as group
funds. CM had existed for years and its finances organized on the basis of
separate entities. The fact that money returned by Lew was to CM showed
that the companys assets were treated and accounted as belonging to it.
Further, the money loaned was proceeds of trading conducted by CM.
Thus, the resources used in financial assistance were that of CMs and not
of BIGLs.

On a separate note, the word indirect does not assist the prosecutions
case. The holding company only facilitated or induced someone else to
give financial assistance, but did not provide financial assistance itself.
This cannot constitute indirect financial assistance.
The fact that the section will be contravened if such assistance
has been given indirectly means only that there is no need to
demonstrate a single, direct, uninterrupted causal link between
the company and the recipient of the financial assistance; and that
the inquiry is ultimately directed at the substance and not the
form of the transaction. Thus, the section will be contravened as
long as financial assistance is given by the company even though
it is given through numerous intermediaries [170]
(2) The giving of financial assistance by the subsidiary ipso facto did not
constitute the giving of assistance by the holding company, because
(1) there can be no doubt that in the ordinary case the relevant
act of the subsidiary, in this instance the giving of financial
assistance, remains the act of that entity only. This follows firstly,
from the basic doctrine underlying all of company law, that each
company is a legal person separate and distinct from every other
company and this is no less true just because the companies in
question happen to be related in some way [183], and
(2) The Parliament has made its intention clear that the doctrine of
separate legal personality is to apply with full force here by
distinguishing provisions for the company from provisions for its
subsidiary [184], and
(3) If one started from the premise that a foreign subsidiary was
not itself within the prohibition in s76(1)(a)(i)(B), then it would be
illogical to hold that the holding company of such a subsidiary
should somehow be found to have contravened s76(1)(a)(i)(A) by
virtue of an action of its subsidiary that was not prohibited [185].
This was not to say that the financial assistance given by the
subsidiary would NEVER amount to financial assistance by its
holding company [186]:
o (a) where the act of the subsidiary is itself a breach of the
prohibition then to the extent that that breach was
procured by the holding company it would constitute an
offence (quite possibly abetment) [186];
o (b) where the holding company hived down its assets to a
foreign subsidiary in order to enable the asset or its
equivalent to be made available to finance a contemplated
acquisition, there would be the indirect provision of
financial assistance by the parent in contravention of the
prohibition [186];
o (c) where the holding company in procuring the subsidiary
company to provide financial assistance undertook either
an obligation or a liability to pay damages to the subsidiary
as a result may well be found to have contravened the
section [191]
(3) Corporate veil cannot be pierced.
(1) The owner of a company does not own the companys
assets. The company owns its own assets. It follows that
the holding company has no direct proprietary interest in
the assets of its subsidiaries [194];
(2) Each company is a separate legal entity in its own
right. The company and its owner are two separate

entities. The acts of the former will not be imported to the


latter as a general rule [194].
(3) GROUP COMPANIES reliance upon the fact of control and of
consolidation of group accounts is misplaced if it is thereby sought
to be suggested that the doctrine of separate legal personality is
something displaced in a group setting control is simply not a
sufficient basis [to pierce the corporate veil between a holding
company and its subsidiary] [204].
o Australian authorities supported the application of the
separate entity doctrine even in group contexts.
Walker v Wimborne (1975) 137 CLR 1, albeit dealing
with companies not organized as a group in the
strict sense, held that nothing in such relationships
dispensed with the need to view each entity in the
group as a separate entity.
HCA in Industrial Equity Ltd v Blackburn (1977) 17
ALR 575 unanimously rejected the argument that
the profits of the subsidiaries were in effect the
profits of the holding company and accordingly
upheld the separate entity doctrine in group
contexts notwithstanding modern requirements to
consolidate group accounts introduced in NSW by
the Companies Act 1961.
Menon JC at [206] endorsed Rogers A-JAs dicta in
Briggs v James Hardie (1989) 16 NSWLR 549 at 576:
the proposition that the corporate veil may be
lifted where one company exercises complete
dominion and control over another is entirely too
simplistic.. The commercial reality is that every
holding company has the potential, and more often
than not, in fact, does exercise complete control
over a subsidiary. The court further endorsed at
[211] the observation made in Adam v Cape
Industries at 554 that the right to use a corporate
structure [to minimize legal liability] is inherent in
our corporate law.
o UK authorities similarly uphold the separate entity doctrine
for companies within a group.
Endorsed at [211] Adams v Cape Industries plc
[1990] Ch 433 in which Slade LJ stated at 544 that
[W]e do not accept as a matter of law that the
court is entitled to lift the corporate veil as against a
defendant company which is the member of a
corporate group merely because the corporate
structure has been used so as to ensure that the
legal liability (if any) ... will fall on another member
of the group rather than the defendant company
the right to use a corporate structure in this manner
is inherent in our company law
Further affirmed at [212] Win Line (UK) Ltd v
Masterpart Pte Ltd [2000] 2 SLR 98 in which Prakash
J held that the doctrine of separate legal
personality is not displaced simply by virtue of the
fact that the companies in question are organized as
a single economic unit

ON THE FACTS, the Prosecution submitted the following


facts supporting that the corporate veil should be pierced:
Wong was executive chairman of BIGL and in control
of BIGL.
Wong was able to and did arrange loan by virtue of
his control over BIGL and CM
Purpose of the loan was solely to enable acquisition
of BIGL shares
Wong was acting in BIGLs interest and on behalf of
BIGL
CM had ineffectual board and Wong was
instrumental in making the loan
CM funded loan from working capital but it was
merely a tool used by Wong.
Court stated that these do not render the giving of the loan
by CM the giving of financial assistance by BIGL. The key
to note here is that Compart Mauritius was a bona fide
company established years before this transaction for
perfectly valid and legitimate tax reasons. There can be no
doubt that [CM] was not a sham or faade. It was not even
a wholly owned subsidiary of BIGL. It was incorporated for
good commercial reasons and the Compart Group had been
run in this way for years. The assertions in these factual
points in fact go no further than to say that [CM] was
amenable to control by its parent company and Mr Wong
[220]
If the CM board was ineffectual and directors acted
otherwise than in the companys interest then those
directors may well face a liability for breach of their
fiduciary duties [220]
The fact that the loan was given at the request of
or even following strong pressure from BIGL... makes
no difference because the commercial reality is that
a subsidiary company is often liable to act in line
with the wishes of its parent company case law
all establish that this is not sufficient to ignore the
separation of legal personalities [221]

2.2 PROTECTION OF CREDITORS

There are provisions on claw-back for transactions at an undervalue and unfair


preferences. See s 329 of the Companies Act, read with ss 98, 99, 100 and 101 of the
Bankruptcy Act.
o There may be third party liability for breach of fiduciary duty arising under the
common law doctrine of Royal Brunei Airlines v Tan [1995] 2 AC 378. You are not
expected to read the case. We are not covering third party liability for breach of
fiduciary duties in this course in detail (which is an extremely complicated topic);
this would be covered in the course on Equity and Trusts
o A stranger who knowingly assists in breach of trust by a trustee may be
personally liable to account in equity to the wronged beneficiary for the trustees
breach of fiduciary duty
o Here, where the nominee director acts in breach of fiduciary duties, and parent
company is involved in breach (dishonest assistance), parent company may
become liable

Royal Brunei Airlines v Tan [1995] 2 AC 378


o Royal Brunei Airlines appointed Borneo Leisure Travel Sdn Bhd to be its agent for
booking passenger flights and cargo transport around Sabah and Sarawak. Mr
Tan was Borneo Leisure Travels managing director and main shareholder. It was
receiving money for Royal Brunei, which was agreed to be held on trust in a
separate account until passed over. But Borneo Leisure Travel, with Mr Tans
knowledge and assistance, paid money into its current account and used it for its
own business. Borneo Leisure travel failed to pay on time, the contract was
terminated, and it went insolvent. Royal Brunei claimed the money back from Mr
Tan.
o HELD:
It was the dishonest assistants state of mind that matters. Knowledge
depends on a gradually darkening spectrum. Therefore, the test for
being liable in assisting breach of trust must depend on dishonesty, which
is objective. It is irrelevant what the primary trustees state of mind is, if
the assistant is himself dishonest.
The standard of what constitutes honest conduct is not subjective.
Honesty is not an optional scale, with higher or lower values according to
the moral standards of each individual. If a person knowingly appropriates
another's property, he will not escape a finding of dishonesty simply
because he sees nothing wrong in such behaviour.

2.3 DIRECTORS DUTIES

One means by which a parent company can exercise control over group companies in
order to implement its strategies and establish channels of communication between
group companies and the parent is through the appointment of nominee directors to
manage each company. See para 3 below.

NOMINEE DIRECTORSHIPS

They are directors but in the performance of their office, act in accordance with some
understanding, arrangement or status which gives rise to an obligation to the appointer.
o They represent a particular sectional interest in performing their duties as
directors.
In the corporate group context, the appointment of nominee directors generates
particular legal problems: defining their fiduciary duties, particularly the extent to which
they may actively promote the interests of the enterprise) and identifying whether they
can legitimately communicate information to the parent.

Fiduciary duties of nominee directors


The duty to exercise independent judgment:

Directors cannot undertake to act or vote in accordance with instructions of their


appointer, but to exercise independent judgment and discretion in managing the
companys affairs

No conflict rule:

Directors can be appointed to company boards to represent sectional interests and do


not, by reason only of their nominee status, infringe the fiduciary duty of undivided
loyalty
Directors will not breach this duty unless they actually subordinate the interests of the
company in favour of the interests of their appointor

Nominee directors are prohibited from subordinating the interests of the company where
those interests actually conflict with the appointers interests
o No director shall obtain for himself a profit by means of a transaction in which he
is concerned on behalf of the company unless all the material facts are disclosed
to the shareholders and by resolution a general meeting approves of his doing
so, or all the shareholders acquiesce: Furs Ltd v Tomkies
An undisclosed profit which a director so derives from the execution of his
fiduciary duties belong in equity to the company
It is no answer to the application of the rule that the profit is of a kind
which the company could not itself have obtained, or that no loss is
caused to the company by the gain of the director
Nor is it an answer for the director to assert that his action was bona fide
thought to be, or was, in the interests of the company: Howard Smith Ltd
v Ampol Petroleum Ltd
o A director is under an obligation not to place himself in a position where the
interests of the company whom he is bound to protect comes into conflict with
either his personal interest (Creanovate Pte Ltd v Firstlink) or the interest of a
third party for whom he acts (Chew Kong Huat v Ricvil (Singapore) Pte Ltd)
If a fiduciary assumes a duty to another which is inconsistent with his
duty to the principal, the principal may claim compensation for loss
resulting from the agents inability, due to the conflict of duties, fully to
discharge his duty to that principal: North & South Co v Berkeley
Preference for interest of interested company over the plaintiff company:
Chew Kong Huat v Ricwil (Singapore) Pte Ltd
Preference for personal interest over interest of plaintiff company:
Kumagai-Zenecon-Construction Pte Ltd v Low Hua Kin
o The duty to avoid conflicts of interest has broad ramifications
Where the director is a counter-party to a transaction that the company
enters into, the company has the option whether or not to avoid the
contract
That the director has sold an asset at fair market value does not
prevent the company from seeking rescission of the contract, a
remedy it might desire should there be a decline in the market
value of the asset
The company may seek disgorgement of any profits the director receives
from the transaction, or compensation for any loss arising from his breach
of his duty of loyalty: Mahesan v Malaysian Government Officers Cooperative Housing Society
Where a commission is otherwise due from the company, the
agents right to the commission may be forfeited: Andrews v
Ramsay & Co

The duty to act bona fide in the interest of the company:

English approach suggest that the fiduciary obligation imposed on directors is not
affected by their status as nominees: Scottish Co-operative Society v Meyer
o Facts: The holding company created a subsidiary that dabbled in a particular
business of making rayon cloth. The subsidiary made substantial profits. The
holding company then decided to use its majority of votes to transfer all the
business to a branch of the holding company. This then caused the subsidiarys
shares to be valueless.
o Held: (HL) There was oppression of the minority shareholders. The 3 nominee
directors breached their fiduciary duties owed to P by putting the interests of D
ahead of P. The inaction of the 3 nominee directors amounted to a breach of their
duties to their nominated companies.

However, if the directors have in fact (OBJECTIVELY and this is seen where there is an
objective benefit to the company even if their interests were not considered) acted in
the best interest of that company, the fact that they actually considered the
interests of the group as a whole would not put them in breach of duty:
Charterbridge Corp v Lloyds Bank Ltd
o A reasonable person would still have considered the decision to be in the interest
of the company -> A benefit to the company must exist for any reasonable
person to believe the decision to be in the interest of the company
Australian approach is more pragmatic: Re Broadcasting Station 2B Pty Ltd
Coincidence of interests test
o Facts: Fairfax acquired controlling interest in the company and sought to take
control of the board by requiring the resignation of its existing directors and
replacing them with its own appointees. One of the incumbent directors refused
to resign, alleged affairs of company were conducted in an oppressive manner
o Jacobs J Nominee directors may actively promote Fairfaxs interests, provided
that they believe that this is also in the interests of the company
o TEST: The nominees conduct was proper so long as they bona fide believed that
the Fairfax companies would act in the interests of the company as a whole. The
words quoted suggest that nominee directors will breach their duty only if they
knowingly sacrifice company interests for those of their appointor.
Rationale: To require a higher standard of nominee loyalty would be to
ignore the realities of company organisation and make the position of a
nominee director an impossibility.
Where it is obviously not in the best interests of the company: Thanakharn Kasikorn
Thai Chamkat (Manachon) v Akai Holdings
o Where a company takes on the debt of another company that is hopelessly
insolvent and that other company is not its subsidiary nor affiliate
This is so even though the insolvent company is a supplier
o Majority number of shareholders in the parent company had no interest in the
insolvent company

Takeaway points:
1) Directors can be appointed to company boards to represent sectional interests and do not,
by reason only of their nominee status, infringe the fiduciary duty of undivided loyalty.
2) Nominee directors are prohibited from subordinating the interests of the company where
those interests actually conflict with the appointers interests
3) Can nominee directors promote the interests of their appointer where this does NOT harm
the companys interests? Position is not so clear-cut (Re Broadcasting as long as you
make sure you make sure that the group companies that benefit have interests
that coincide with the nominated directors company VERSUS Charterbridge Corp
which states that there needs to be a fiduciary duty

3. DISCLOSURE OF INFORMATION TO NOMINATING COMPANIES

Issue: Are nominee directors free to disclose inofrmaiton to their appointer? The
problem here is that the nominee may have access to confidential information and the
disclosure of which may be harmful to the company.
o S 158 of the Companies Act deals with this issue, and is operated to the
exclusion of the common law position.
A director of a company may disclose information which he has in his capacity as a
director or an employee of a company, being information that would not otherwise be
available to him, to the persons specified in subsection (2) if such disclosur is not likely
to prejudice the company and is made with the authorisation of the board of directors. s
158(1)

The director declares at a meeting of the directors of the company the name and
office or position held by the person to whom the information is to be disclosed
and the particulars of such information

The information referred to in subsection (1) may be disclosed to: s 158(2)


(a) A person whose interests the director represents; or
(b) A person in accordance with whose directions or instructions the
director may be required or is accustomed to act in relation to the
directors powers and duties

The authorisation referred to in subsection (1) may be conferred in respect of disclosure


of: s 158(3)
(a) All or any class of information; or
(b) Only such information as may be specified in the authorisation.

Section 158 is operated to the exclusion of the common law position

4. MINORITY SHAREHOLDERS

Where a subsidiary is partly owned, additional legal restraints apply in order to protect
the interests of the minority shareholders. Although the integration of group activities
may be the most efficient use of the groups resources, this can harm the interests of
the minority shareholders in group companies who do not share in the profits of the
group enterprise.
o MINORITY DOES NOT BENEFIT: Group controllers want to undertake
transactions that impose costs on subsidiary but which are more than offset by
the benefits to the enterprise as a whole. Minority shareholders do not enjoy
these benefits because their interest is confined to the activities of the subsidiary
Solution 1: Oppression issues may arise under s 216 if the company acts
in a manner that prefers the interests of the parent company (or
controllers) rather than the company.
Solution 2: For listed subsidiary companies, additional controls under
Chapter 9 of the Listing Manual.
LISTED COMPANIES RELATED PARTY TRANSACTION: Where the subsidiary is
listed, most stock exchanges have stringent rules for dealing with related party
transactions, in view of the potential for abuse by directors and controlling shareholders.
The listing manual of Singapore Exchange (Listing Manual) does not only govern
transactions between directors and the listed company but also between certain
shareholders and the listed company. These are known as interested person
transactions under the Listing Manual.
Where a subsidiary is partly owned, additional legal restraints apply in order to protect
the interests of the minority shareholders
Minority shareholders of a partly-owned subsidiary are vulnerable
o Group controllers want to undertake transactions that imposes costs on
subsidiary but which are more than offset by the benefits to the enterprise as a
whole
o Minority shareholders do not enjoy these benefits because their interest is
confined to the activities of the subsidiary
Oppression issues may arise under s 216 if the company acts in a manner that prefers
the interests of the parent company (or controllers) rather than the company
Procedure for unlisted company: Disclosure to board, interested director abstains
from voting

Where the subsidiary is listed, most stock exchanges have stringent rules for dealing
with related party transactions, in view of the potential for abuse by directors and
controlling shareholders
Any transaction between an entity at risk and an interested person: Rule 904
o Rule 904(2): Entity at risk
(a) Listed issuer
(b) A listed issuer's subsidiary, which is not listed on a foreign/local stock
exchange
Covers subsidiary of subsidiary -> All the way down the chain of
subsidiaries
(c) A listed issuer's associated company ("target associated company")
provided that
The listed group, or the listed group and its interested person, is
the largest shareholder; and
It is not listed on a foreign/local stock exchange
o 904(4)(a): In the case of a company, "interested person" means
(i) A director, chief executive officer, or substantial shareholder, of the
listed issuer
A substantial shareholder either
Holds directly or indirectly 15% or more the voting shares of the
company; or
In fact exercises control over the company
(ii) An associate of any such director, chief executive officer, or
substantial shareholder.
o Rule 904(5): interested person transaction means a transaction between an
entity at risk and an interested persons
o

Rule 904(6) "transaction" includes:


(a) The provision or receipt of financial assistance;
(b) The acquisition, disposal or leasing of assets;
(c) The provision or receipt of services;
(d) The issuance or subscription of securities;
(e) The granting of or being granted options; and
(f) The establishment of joint ventures or joint investments;
Whether or not in the ordinary course of business, and whether or not entered
into directly or indirectly (for example, through one or more interposed entities).

General Requirements: Rule 905, 906, 908 and 909


o Rule 905: Immediate announcement from the 3% Net Tangible Assets
(NTA)
(1) An issuer must make an immediate announcement of any interested
person transaction of a value equal to, or more than, 3% of the group's
latest audited net tangible assets.
(2) If the aggregate value of all transactions entered into with the same
interested person during the same financial year amounts to 3% or more
of the group's latest audited net tangible assets, the issuer must make an
immediate announcement of the latest transaction and all future
transactions entered into with that same interested person during that
financial year.
(3) Rule 905(1) and (2) does not apply to any transaction below $100,000.
o

Rule 906: Shareholder approval needed for 5% NTA and above


(1) An issuer must obtain shareholder approval for any interested person
transaction of a value equal to, or more than:
(a) 5% of the group's latest audited net tangible assets; or
(b) 5% of the group's latest audited net tangible assets, when
aggregated with other transactions entered into with the same

interested person during the same financial year. However, a


transaction that has been approved by shareholders, or is the
subject of aggregation with another transaction that has been
approved by shareholders, need not be included in any
subsequent aggregation.
(2) Rule 906(1) does not apply to any transaction below $100,000.

Rule 908: For the purposes of aggregation Aggregation only


happens between two parties
In interpreting the term "same interested person" for the purpose of
aggregation in Rules 905 and 906, the following applies:
(1) Transactions between an entity at risk and interested persons who are
members of the same group are deemed to be transactions between the
entity at risk with the same interested person.
(2) If an interested person, (which is a member of a group) is listed, its
transactions with the entity at risk need not be aggregated with
transactions between the entity at risk and other interested persons of
the same group, provided that the listed interested person and other
listed interested persons have boards the majority of whose directors are
different and are not accustomed to act on the instructions of the other
interested persons and their associates and have audit committees whose
members are completely different.
EXAMPLE: As an example, Entity-At-Risk A, Listed B and Listed C are all
subsidiaries of Ultimate D. Listed B, Listed C and Ultimate D have boards, the
majority of whose directors are different and are not accustomed to act on the
instructions of Ultimate D and its associates and have audit committees whose
members are completely different. Transactions between Entity-At-Risk A and
Listed B need not be aggregated with transactions between Entity-At-Risk A and
Listed C or with transactions between Entity-At-Risk A and Ultimate D.

Rule 909: the value of a transaction is the amount at risk to the issuer. This is
illustrated by the following examples:
(1) In the case of a partly owned subsidiary or associated company, the value of
the transaction is the issuer's effective interest in that transaction;
(2) In the case of a joint venture, the value of the transaction includes the equity
participation, shareholders' loans and guarantees given by the entity at risk; and
(3) In the case of borrowing of funds from an interested person, the value of the
transaction is the interest payable on the borrowing. In the case of lending of
funds to an interested person, the value of the transaction is the interest payable
on the loan and the value of the loan.

Definition from SGX rulebook for controlling shareholder: (a) holds


directly or indirectly 15% or more of the total number of issued shares excluding
treasury shares in the company. The Exchange may determine that a person who
satisfies this paragraph is not a controlling shareholder; or (b) in fact exercises
control over a company.

Announcement requirements: Rule 917


Rule 917: An announcement under Rule 905 must contain all of the following
information:
(1) Details of the interested person transacting with the entity at risk, and the nature
of that person's interest in the transaction.
(2) Details of the transaction including relevant terms of the transaction, and the
bases on which the terms were arrived at.

(3) The rationale for, and benefit to, the entity at risk.
(4)
(a) A statement:
(i) whether or not the audit committee of the issuer is of the view that the
transaction is on normal commercial terms, and is not prejudicial to the
interests of the issuer and its minority shareholders; or
(ii) that the audit committee is obtaining an opinion from an independent
financial adviser before forming its view, which will be announced
subsequently.
(b) Transactions that satisfy Rule 916(1), (2) and (3) are not required to comply
with Rule 917(4)(a).
(5) The current total for the financial year of all transactions with the particular
interested person whose transaction is the subject of the announcement and the
current total of all interested person transactions for the same financial year.
(6) Where the issuer accepts a profit guarantee or a profit forecast (or any covenant
which quantifies the anticipated level of future profits) from the vendor of
businesses/assets, the information required in Rule 1013(1). The issuer must also
comply with Rule 1013(3).

Shareholder Approval: Rule 918 and 919


o Rule 918: If a transaction requires shareholder approval, it must be obtained
either prior to the transaction being entered into or, if the transaction is
expressed to be conditional on such approval, prior to the completion of the
transaction.
o Rule 919: In a meeting to obtain shareholder approval, the interested person
and any associate of the interested person must not vote on the resolution, nor
accept appointments as proxies unless specific instructions as to voting are
given.

General Exceptions: Rules 915 and 916


o Rule 915: The following transactions are not required to comply with
Rules 905, 906 and 907:.
(1) A payment of dividends, a subdivision of shares, an issue of securities by way of
a bonus issue, a preferential offer, or an off-market acquisition of the issuer's
shares, made to all shareholders on a pro-rata basis, including the exercise of
rights, options or company warrants granted under the preferential offer.
(2) The grant of options, and the issue of securities pursuant to the exercise of
options, under an employees' share option scheme approved by the Exchange.
(3) A transaction between an entity at risk and an investee company, where the
interested person's interest in the investee company, other than that held
through the issuer, is less than 5%.
(4) A transaction in marketable securities carried out in the open market where the
counterparty's identity is unknown to the issuer at the time of the transaction.
(5) A transaction between an entity at risk and an interested person for the
provision of goods or services if:
(a) The goods or services are sold or rendered based on a fixed or graduated
scale, which is publicly quoted; and
(b) The sale prices are applied consistently to all customers or class of
customers.
(i) Such transactions include telecommunication and postal services, public
utility services, and sale of fixed price goods at retail outlets.
(6) The provision of financial assistance or services by a financial institution that is
licensed or approved by the Monetary Authority of Singapore, on normal
commercial terms and in the ordinary course of business.
(7) The receipt of financial assistance or services from a financial institution that is
licensed or approved by the Monetary Authority of Singapore, on normal
commercial terms and in the ordinary course of business.

(8) Director's fees and remuneration, and employment remuneration (excluding


"golden parachute" payments).
Rule 916: The following transactions are not required to comply
with Rule 906:
(1) The entering into, or renewal of a lease or tenancy of real property of not more
than 3 years if the terms are supported by independent valuation.
(2) Investment in a joint venture with an interested person if:
(a) The risks and rewards are in proportion to the equity of each joint venture
partner;
(b) The issuer confirms by an announcement that its audit committee is of the
view that the risks and rewards of the joint venture are in proportion to the
equity of each joint venture partner and the terms of the joint venture are not
prejudicial to the interests of the issuer and its minority shareholders; and
(c) The interested person does not have an existing equity interest in the joint
venture prior to the participation of the entity at risk in the joint venture.
(3) The provision of a loan to a joint venture with an interested person if:
(a) The loan is extended by all joint venture partners in proportion to their equity
and on the same terms;
(b) The interested person does not have an existing equity interest in the joint
venture prior to the participation of the entity at risk in the joint venture; and
(c) The issuer confirms by an announcement that its audit committee is of the
view that:
(i) The provision of the loan is not prejudicial to the interests of the issuer
and its minority shareholders; and
(ii) The risks and rewards of the joint venture are in proportion to the equity
of each joint venture partner and the terms of the joint venture are not
prejudicial to the interests of the issuer and its minority shareholders.
(4) The award of a contract by way of public tender to an interested person if:
(a) The awarder entity at risk announces following information:
(i) The prices of all bids submitted;
(ii) An explanation of the basis for selection of the winning bid; and
(b) Both the listed bidder (or if the bidder is unlisted, its listed parent company)
and listed awarder (or if the awarder is unlisted, its listed parent company)
have boards, the majority of whose directors are different and are not
accustomed to act on the instructions of the interested person or its
associates and have audit committees whose members are completely
different.
(5) The receipt of a contract which was awarded by way of public tender, by an
interested person if:
(a) The bidder entity at risk announces the prices of all bids submitted; and
(b) Both the listed bidder (or if the bidder is unlisted, its listed parent company)
and listed awarder (or if the awarder is unlisted, the listed parent company)
have boards, the majority of whose directors are different and are not
accustomed to act on the instructions of the interested person or its
associates and have audit committees whose members are completely
different.
o

Thanakharn Kasikorn Thai Chamkat (Manachon) v Akai Holdings, FACV No. 16 of 2009
and FACV No. 9 of 2010, 8 November 2010
o Corporate benefit:
Mr Ting clearly owed a fiduciary duty to Akai, which he equally plainly
breached when he intentionally, indeed dishonestly, purported to
commit Akai to the Switch Transaction, without its authority or knowledge,
for the benefit of Singer NV
The effect of the Switch Transaction was, at least on the face of it, as
follows

Akai took on a liability to the Bank for US$ 30m, which it had to
repay with interest in a years time, which liability was secured by
the pledging of a large proportion of the shares in Akais chief
operating subsidiary
In return, Akai got nothing: the US$ 30m was immediately used to
pay off the liabilities of another company, Singer NV, which
(whether directly or indirectly) neither owned nor was owned
by Akai, albeit that they shared the same parent: the two
companies were neither subsidiaries nor affiliates
The transaction was of obvious and very substantial benefit to
Singer NV (even on the assumption that Akai became subrogated
to Singer NVs liability to the Bank)
It was also of obvious and very substantial benefit to the Bank: for
no cost to itself, it gained an apparently financially strong borrower
and excellent security in place of a weak borrower, already in
default, with security of almost negligible value
Although the largest shareholder in both Akai and Singer NV was STC
Canada, the majority of the shareholders in Akai (and, if it is relevant,
which I doubt, half of the shareholders in Singer NV) were members of
the public, who had no apparent interest in using a substantial
amount of Akais money to prop up the ailing Singer NV
That is not only significant in itself, but (as was stated in
the Akai Credit Application) Akai was listed on the Hong Kong
Stock Exchange, and its Rules required the Switch Transaction
to be disclosed to the Stock Exchange authorities, as it was an
arrangement between connected persons, and the Stock
Exchange would probably have required shareholder approval,
as well as main Board approval, so far as Akai was concerned
In addition, the very person who was purporting to represent Akai, Mr
Ting, was in an obvious position of conflict, given his very substantial
interest in STC Canada and his management responsibilities for both
Singer NV and Akai
To appreciate this conflict did not require any nuanced
understanding of Akais bye-laws or of company law Mr Tings
conflict must have been obvious to any banker reviewing
the Akai Credit Application
But, over and above this, arts 103 and 104 of Akais bye-laws,
which the Bank had obtained in connection with the
transaction, made it clear that he should not have been
involved with the decision to enter into the Switch Transaction,
owing to his conflicted position.

3. ATTEMPTS AT REFORMS

UK has looked at the issue relating to whether it is feasible to replace the current regime
with a separate regime governing corporate groups. However it was ultimately rejected.
o Company Law Review Steering Group, Modern Company Law for a Competitive
Economy: Final Report of the Company Law Review Steering Group (DTI, URN
01/942 and 01/943, July 27, 2001), paras 8.23-8.28.