Singapore

Negotiated M&A Guide

Corporate and M&A Law Committee

Contact
Richard Young

Allen & Gledhill LLP

Singapore

[email protected]

50771233.5
1. Introduction

Private M&A transactions in Singapore are largely unregulated by statutory law, and parties are
generally free to negotiate the terms and conditions of the sale and purchase. As we shall see,
the contractual provisions for the acquisition of a Singapore company are often dictated by
commercial considerations, but they nevertheless share the same basic components and
features of acquisition agreements in other jurisdictions.

This article seeks to examine and discuss some of the more common legal practices and
requirements in relation to private M&A transactions in Singapore.

2. Legal Framework

Notwithstanding that private M&A transactions are generally unregulated, the following statutory
provisions may be applicable or relevant in certain acquisitions and should be taken note of.

2.1 Companies Act

The Companies Act, Chapter 50 of Singapore (the “Companies Act”) contains general corporate
legislation including provisions relating to the incorporation, management, administration and
winding up of companies. Issues relevant to acquisitions such as the fiduciary duties of directors,
as well as the procedural requirements for the transfer of shares in a Singapore company and for
the disposal of a company’s business which may arise as part of an acquisition, are covered
under the Companies Act.

For instance, where a business sale involves the disposal by the vendor of the whole or
substantially the whole of its undertaking or property, the prior approval of the vendor’s
shareholders in a general meeting must be obtained pursuant to Section 160 of the Companies
Act. The approval required under Section 160 is a simple majority vote of the shareholders
present and voting at the general meeting.

Since 1 July 2015, the prohibition against the provision of financial assistance for the acquisition
of shares in a private company has also been removed. This means that in practice, the target
Singapore private company may provide such financial assistance, for instance, by offering its
assets as security for any loan taken up by the purchaser of shares in question. However, in
deciding whether to give financial assistance to a purchaser who is acquiring the company’s
shares, the directors of the target company are subject to their duties and obligations under the
Companies Act and the common law to act in the best interests of the company.

Please note, however, that the provision of such financial assistance (whether direct or indirect) is
still prohibited under Section 76 of the Companies Act in the case of a public company or a
subsidiary of a public company. If a public company or a subsidiary of a public company wishes
to provide financial assistance in connection with the acquisition of its shares, it may do so under
the “whitewash” procedures as specified under the Companies Act. Such “whitewashing”
procedures have since 1 July 2015 been simplified so that solvency statements by directors
and/or the placing on newspaper advertisements are no longer required. A board resolution of the
company confirming that (i) the company should give the financial assistance and (ii) the terms
and conditions under which the assistance is proposed to be given are fair and reasonable to the
company will suffice to “whitewash” the proposed financial assistance.

Recent changes to the way a company’s register of members is maintained may also be relevant
to private M&A transactions. From 3 January 2016, the Accounting and Corporate Regulatory
Authority (“ACRA”) has maintained an electronic register of members of private companies, and
the companies are required to file information concerning share ownership and changes in share
ownership for registration with ACRA. The electronic register of members by ACRA has replaced

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 the physical register of members maintained previously by the company as the main and
authoritative register of members in a private company. Therefore, a purchaser of shares in a
Singapore company will only be registered as the legal owner of such shares when the electronic
register of members of the Singapore company is updated of the same.

From 31 March 2017, the following two amendments to the Companies Act should also be taken
into consideration in the context of private M&A transactions. Firstly, nominee directors of
companies are required to disclose their nominee status and nominators to their companies.
Companies are required to keep a register of nominee directors and produce the register of
nominee directors and any related document to the Registrar, an officer of ACRA or a public
agency, upon request. Nominee directors must inform their respective companies of the fact that
they are nominees and provide the prescribed particulars of their nominators to their companies
within the applicable timelines.

Secondly, unless exempted, all Singapore companies, foreign companies and limited liability
partnerships (“LLPs”) will be required to maintain and keep up-to-date a register of controllers
which will have to be made available to the Registrar of Companies or the Registrar of Limited
Liability Partnerships (as the case may be), or law enforcement authorities upon request, but not
to the public. For reference, a “controller” of a company/foreign company/LLP refers to an
individual or legal entity who or which has a “significant interest” in, or “significant control” over,
the company/foreign company/LLP.

2.2 Competition Act

The Competition Act, Chapter 50B of Singapore (the “Competition Act”), prohibits mergers,
acquisitions of control and certain joint ventures that have resulted, or may be expected to result,
in a substantial lessening of competition within any market (or market segment) for goods or
services in Singapore. This prohibition applies even where the merger takes place outside of
Singapore, or where any merger party is located outside Singapore.

From 1 July 2007, a party who is unsure whether a proposed acquisition is prohibited by the
Competition Act may apply to the Competition Commission of Singapore (the “CCS”) for a
decision regarding whether the acquisition, if carried into effect, will infringe the provisions of the
Competition Act.

While merger notification to the CCS is voluntary, the CCS requires all parties to mergers to
conduct a self-assessment, in accordance with the methodologies in the guidelines published by
the CCS, read with its decided cases, on whether a merger filing is necessary. The self-
assessment should be documented in customary form which the CCS would accept as
documentary evidence that the self-assessment has been conducted contemporaneously with the
transaction.

In the event of an investigation, the self-assessment may be provided to the CCS as a first line of
defence on why the transaction does not give rise to a substantial lessening of competition, that
the self-assessment requirement was met, and that the infringement (if any) was not entered into
intentionally or negligently. If the CCS finds that an infringement was entered into intentionally or
negligently, the CCS may impose financial penalties on merger parties, in addition to considering
other directions and remedies.

In the absence of a filing, parties bear the antitrust risk as there is no limitation period on the
timeframe after which the CCS may cease to have the power to investigate a transaction. There
is accordingly an evergreen risk of an investigation and subsequent divestments or other
remedies to the transaction, even where the transaction has been implemented for some time.
The CCS has stated that it will generally not consider the costs of divestment which the parties
would have to incur, as it would have been open to the parties to notify CCS of the merger for a

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 decision. The only way to close off the antitrust risk with certainty is to undertake a merger
notification and obtain a clearance decision from the CCS.

The CCS has increasingly looked at commitments in its recent merger actions with an emphasis
on Singapore-specific effects. The clearance of the acquisition by SEEK Asia Investments Pte.
Ltd. of 100% of the online recruitment business assets of JobStreet Corporation Berhad, including
JobStreet.com Pte. Ltd. (SEEK Asia/JobStreet.com) is notable for the first-ever market testing of
proposed commitments offered by merger parties, and the first conditional clearance subject to
local commitments offered in Singapore. Mergers cleared in Singapore by the CCS previously
pursuant to commitments had been on the basis of global commitments offered by merger parties
in other jurisdictions.

The CCS’ decision to block the proposed acquisition by Parkway Holdings Ltd of RadLink-Asia
Pte Limited from Fortis Healthcare Singapore Pte. Limited (RadLink/Parkway) in 2015 followed
less than five months after the conditional clearance of the transaction. It is notable that no
commitments were proposed to the CCS for consideration during the review process according to
media reports on the CCS provisional decision on RadLink/Parkway.

On 1 December 2016, the CCS published revised guidelines which indicate how the CCS will
interpret and give effect to the Competition Act. Among these are the CCS Guidelines on the
Substantive Assessment of Mergers 2016, which generally formalise the positions taken by the
CCS in its merger decisional practice to date. For instance, the CCS has clarified that minority
shareholdings may give rise to an acquisition of control based on factors such as historical
attendance at shareholders’ meetings and voting patterns, and the wide dispersion of shares. In
respect of venture capitalists and private equity investors, the CCS has further clarified that
competition concerns may arise if mergers involving such entities result in the coordination of
conduct among portfolio firms in the same market in which the parties have stakes and are able
to influence commercial behaviour.

2.3 Take-over Code

The Singapore Code on Take-overs and Mergers (the “Take-over Code”) applies to the
acquisition of voting control of public companies. While the Take-over Code was drafted with
listed public companies, listed registered business trusts and real estate investment trusts in
mind, unlisted public companies and unlisted registered business trusts with more than 50
shareholders or unitholders and having net tangible assets of S$5 million or more must also
observe, wherever possible and appropriate, the letter and spirit of the Take-over Code as set out
in its General Principles and Rules. When evaluating an acquisition of any such unlisted public
company or unlisted registered business trust, consideration should be given to approaching the
Securities Industry Council (“SIC”), being the regulator which oversees the Take-over Code and
is part of the Monetary Authority of Singapore, and requesting a ruling that the applicable
provisions of the Take-over Code will not apply.

In considering such an application, the SIC will take into account the following factors:

2.3.1 the number of Singapore shareholders or unitholders and the extent of trading in
Singapore; and

2.3.2 the existence of protection available to Singapore shareholders or unitholders provided

under any statute or code regulating take-over and mergers outside Singapore.

Where a takeover offer is made, all mandatory and voluntary offers are required to be subject to
the condition that the offer will lapse if the CCS (i) makes a decision to proceed to a Phase 2
review or (ii) issues a direction that prohibits the offeror from acquiring voting rights in the offeree
company.

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2.4 Statutory restrictions in specific industries and for real property

Singapore is generally an open economy with minimal foreign ownership or investment

restrictions. There are, however, statutes relating to particular industries which govern take-over
activity in Singapore, insofar as they limit or require prior regulatory approval for share ownership
in companies engaged in those industries. Those industries are generally industries perceived to
be critical to national interests, for instance, banking, finance, insurance and media. Examples of
such statutes include the Banking Act, Chapter 19 of Singapore; the Finance Companies Act,
Chapter 108 of Singapore; the Insurance Act, Chapter 142 of Singapore; the Newspaper and
Printing Presses Act, Chapter 206 of Singapore; and the Telecommunications Act, Chapter 323
of Singapore.

In addition to share ownership restrictions, it should also be noted that a foreigner, including a
foreign-owned company, cannot own residential property without the approval of the Controller of
Residential Property.

2.5 Employment Act

Under Singapore law, the transfer of employees employed in a business, all or part of which is to
be sold, is dealt with differently depending on whether the employees are protected under the
Employment Act, Chapter 91 of Singapore (the “Employment Act”). The Employment Act covers
all employees (including part-time employees), except persons employed in a managerial or
executive position who receive a salary exceeding S$4,500 a month, seafarers, domestic workers
and public servants (the “Covered Employees”).

Under Section 18A of the Employment Act, where a business or part thereof is transferred from
the transferor to the transferee, Section 18A automatically operates to novate the contracts of
employment of all of the Covered Employees to the transferee. Section 18A applies where there
is a sale of a business on a going concern basis, and not where there is a sale of assets. The
distinction between the two is sometimes one of degree, but in most cases, it will be clear as a
matter of law whether a business sale, rather than an asset sale, is involved. Section 18A
specifically provides that there will be an automatic transfer, with no break in the continuity of
employment, and the terms and conditions of service of the transferred Covered Employees will
be the same as those enjoyed by them immediately prior to the transfer. Section 18A of the
Employment Act further provides that on completion of the transfer of the business, all the
transferor’s rights, powers, duties and liabilities under, or in connection with, the employment
contracts of its Covered Employees, are transferred to the purchaser and any act or omission
done before the transfer by the transferor in respect of such contracts shall be deemed to have
been done by the purchaser. So, for example, if the transferor had failed to pay a Covered
Employee’s wages before the transfer of the undertaking, as between the purchaser and such
employee, the purchaser will be statutorily liable to such employee.

In the case of employees falling outside the scope of the Employment Act (the “Non-Covered
Employees”), the automatic statutory novation and consultation procedures under Section 18A
do not apply. If the Non-Covered Employees are to be transferred to the purchaser as part of the
transfer of the business, the company will have to terminate their employment in accordance with
the termination provisions in their employment contracts and the purchaser will have to offer new
employment to the Non-Covered Employees on such terms as the purchaser and such
employees may agree. Note that the Non-Covered Employees cannot be compelled to accept
any such offer. The transfer of Non-Covered Employees is therefore entirely a matter of contract
under Singapore law.

The above should be borne in mind whenever considering a business acquisition.

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3. Acquisition Structures

The purchaser of the business of a Singapore company may generally acquire the business by
one of two possible methods: the purchaser acquires the issued shares of the Singapore
company that carries on the business (a “Share Sale”), or the purchaser acquires the business
(assets and liabilities) of the Singapore company (“a “Business Sale”).

In the case of a Share Sale, the purchaser need not be a Singapore company or have a legal
presence in Singapore. In the case of a Business Sale, the purchaser must be a Singapore
company, or a branch of a foreign company registered in Singapore, as it is an offence to carry
on business in Singapore without the legal presence of a Singapore-incorporated company or a
Singapore branch.

A Share Sale tends to be a more straightforward transaction as it only involves a transfer of

ownership of the shares in the Singapore company. On the other hand, a Business Sale requires
the passing of title to assets from the Singapore company to the purchaser. The Singapore
company’s assets may include land and premises, stock and work in progress, book debts,
intellectual property rights, goodwill, insurance, leasing, hire purchase and other contracts, and
plant and machinery. It will therefore be necessary to transfer each asset, or category of asset,
from the Singapore company to the purchaser by way of different conveyances, assignments and
transfers.

Since January 2006, a third alternative has existed in the form of the statutory amalgamation
procedures under Section 215A of the Companies Act, whereby the purchaser (provided it is a
Singapore company) may merge with a target Singapore company to become an enlarged
amalgamated company. In practice however, this is rarely adopted since the directors of the
purchaser will have to issue solvency statements in relation to the amalgamated company, and
most directors will, not surprisingly, be unwilling to do so given their lack of knowledge of the
financial position of the Singapore target. Amalgamations are typically used to facilitate mergers
between related companies instead.

3.1 Tax considerations

Leaving aside commercial factors dictating the acquisition structure to be adopted, tax
considerations are often critical. In the Singapore context, these include the following:

3.1.1 Existing tax assets and liabilities of the Singapore company

Generally, and except as specified below, all existing tax rights, obligations, assets and
liabilities remain with the Singapore company.

(i) Unused deductibles (capital allowances, losses and donations)

Any unused deductibles will remain in the Singapore company and the purchaser in a
Business Sale will not be able to utilise the unused deductibles of the Singapore
company.

The purchaser of the Singapore company in a Share Sale will generally not be able to
utilise the unused deductibles of the Singapore company because unused deductibles
may not be carried forward to be deducted against future profits, if the shareholders of
the Singapore company on the last day of the year in which the deductibles arose or
were incurred and the shareholders of the Singapore company on the first day of the year
of assessment in which the deductibles are to be used, are not substantially the same,
i.e. less than 50% of the issued shares in the Singapore company are held by or on
behalf of the same persons (the “Shareholding Test”).

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 In all the above instances, the Shareholding Test may be waived if the Comptroller of
Income Tax determines that the change in shareholding was for commercial reasons,
and not for the purpose of deriving any tax benefit or obtaining any tax advantage.

(ii) Tax incentives

In a Share Sale, any tax incentives which the Singapore company enjoys should
generally continue to be applicable after the sale, unless the incentive is subject to a “no
change of control” condition.

On the other hand, in a Business Sale, tax incentives will not automatically be transferred
to the purchaser. The purchaser will need to reapply for the incentives afresh.

3.1.2 Tax issues on transfer of assets

(i) Share Sale

In a Share Sale, the vendor will transfer shares in the Singapore company to the
purchaser.

There is no capital gains tax in Singapore. Accordingly, in a Share Sale, the vendor
should not be subject to income tax on the gain arising from the sale of shares, unless
the shares are regarded as trading stock in its hands.

(ii) Business Sale

In a Business Sale, the vendor will transfer business assets and trading stock relating to
the business to the purchaser.

Any gain realised on the sale of any capital asset by the vendor will not be subject to tax.
However, if capital allowances had previously been claimed in respect of the asset (for
example, plant or machinery), a balancing charge or allowance may be applicable. A
balancing charge is applicable (up to the amount of capital allowances previously
claimed) insofar as the consideration for the sale of the asset exceeds the tax written
down value of the asset (the original cost of the asset less the amount of capital
allowances already claimed). Conversely, if the consideration for the sale of the asset is
less than the tax written down value of the asset, a balancing allowance for the difference
may be claimed by the vendor.

Agreement regarding the amount of consideration paid in respect of each capital asset is
important as the purchaser will claim capital allowance for each such capital asset based
on the cost paid for the asset. Under the Income Tax Act, Chapter 134 of Singapore, any
transfer of plant or machinery at less than market value will be treated as if the sale is at
market value.

Any gain realised on the sale of trading stock by the vendor will be subject to tax. Where
the purchaser will not claim the cost of the trading stock as an expense (because it would
not be trading stock in the purchaser’s business), the sale of trading stock by the vendor
is deemed to be made at market value.

3.1.3 Financing costs of acquisition

Generally, interest and other financing costs are deductible for tax purposes if they are
incurred on capital employed to produce taxable income.

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 In a Share Sale, any interest and other financing costs incurred by the purchaser to
acquire shares in the Singapore company will not be tax deductible as the shares
acquired would only produce dividends which are exempt from tax.

In a Business Sale, any interest and other financing costs incurred by the purchaser to
acquire assets that will be used in the production of income in a business to be carried on
by the purchaser will generally be tax deductible.

3.1.4 Stamp duty

In Singapore, stamp duty is payable on a transfer of shares in a Singapore company or a

transfer of real property (which would include leasehold property) in Singapore. The
transferee is liable to pay the stamp duty under the Stamp Duties Act, Chapter 312 of
Singapore.

In respect of a transfer of shares in a Singapore company pursuant to a Share Sale,

stamp duty is payable on the contract or agreement for the sale of the shares or the
instrument of transfer of the shares (i.e. the share transfer form), whichever is executed
first, at the rate of 0.2% of (a) the consideration paid for the transfer of the shares, or (b)
the net asset value of such shares, whichever is the higher.

In respect of a transfer of real property pursuant to a Business Sale, stamp duty is

payable on documents executed for the transfer of the real property, generally at the rate
of 3% of the purchase price or the market value of the property, whichever is the higher.

The Singapore Government has enacted various tax measures to discourage speculation
in the property market in Singapore. This may affect a Business Sale where the assets
transferred include real property zoned or used for industrial or residential purposes. If
the real property is property zoned or used for industrial purposes, seller’s stamp duty of
up to 15% of the sale price or the market value of the property, whichever is the higher,
may be applicable if the Business Sale occurs within three years of the acquisition of the
property by the seller. Similarly, if the real property is property zoned or used for
residential purposes, seller’s stamp duty of up to 12% of the sale price or the market
value of the property, whichever is the higher, may be applicable if the Business Sale
occurs within three years of the acquisition of the property by the seller. Additional
buyer’s stamp duty may also be applicable to the buyer if the real property is property
zoned or used for residential purposes. If the buyer is an entity (not an individual person),
the rate of additional buyer’s stamp duty is 15% of the purchase price or the market value
of the property, whichever is the higher.

Stamp duty relief may be available for certain transfers between associated companies
and in relation to certain reconstructions or amalgamations.

Additional conveyance duties may also be chargeable on the buyer and/or seller in
respect of certain significant acquisitions or disposals of shares in property-holding
entities beneficially owning (directly or indirectly) residential properties in Singapore
where the market value of such residential properties is at least 50% of the total tangible
assets of the target entity and its related entities.

3.1.5 Goods and Services Tax (“GST”)

GST is not payable on a sale of shares. However, a purchaser in a Share Sale should
ensure that the Singapore company was not previously a member of a GST group as the
Singapore company may remain liable for the GST liabilities of other members of the
GST group.

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 GST may be payable on the sale or transfer of assets in a Business Sale or under a
statutory amalgamation.

If the Business Sale involves the transfer of all or part of a business as a going concern,
the sale of the assets may be exempt from GST pursuant to the Goods and Services Tax
(Excluded Transactions) Order.

The main criteria for exemption under this Order are summarised as follows:

(i) the assets being sold as part of the business will be used by the purchaser in
carrying on the same kind of business as that carried on by the company; and

(ii) the purchaser is already or immediately becomes, as a result of its acquisition of

the business, a “taxable person” in Singapore.

In any event, as GST is a consumption tax, unless the purchaser is the ultimate
consumer of the assets acquired, GST is normally not an outright cost but rather a cash
flow issue. Any GST payable on the acquisition of the assets generally can be offset as
input tax against the GST which the purchaser must pay on the taxable supplies that it
makes where the assets are acquired by the purchaser in order to make its taxable
supplies.

4. Memorandum of Understanding / Letter of Intent

A memorandum of understanding (“MOU”) or letter of intent is fairly common in Singapore,

particularly for transactions of a larger size. Typically, it is entered into where parties are keen to
obtain some earlier assurance that the other party is fully committed to the transaction and to
confirm that parties are working on the same understanding as to the outline terms of the
transaction. MOUs are usually non-binding, save for certain key provisions such as
confidentiality, costs or expenses, and “no-shop” or exclusivity clauses.

Notwithstanding the non-binding nature of most MOUs, care should nevertheless be taken to
ensure that the provisions accurately reflect the commercial intentions of the parties, as parties
often have a moral commitment or obligation to adhere to those terms in the definitive
agreements, and the leverage and bargaining position of the parties will be affected accordingly.

Break fees, while common in public acquisitions, are still rarely used for private deals in
Singapore, although a binding commitment by the party walking away from the deal to reimburse
all or a portion of the other party’s costs and expenses is increasingly being sought for and
incorporated in MOUs.

5. Confidentiality Letter

If, as is the usual case, due diligence investigations (see paragraph 6 below) are carried out by
the purchaser on the Singapore target and its businesses, the purchaser typically is required to
sign a confidentiality letter, often prepared by the vendor, in which the purchaser provides
undertakings that protect the vendor from the risk of any misuse or unauthorised release of
commercially sensitive information that the vendor may provide to the purchaser during the due
diligence process. The letter defines what the confidential information is, the authorised purposes
that the purchaser can use the information for, who the purchaser can disclose the information to,
and what the purchaser should do with the information should negotiations fail.

Typical issues relating to confidentiality letters include (i) the scope of information covered; (ii) the
duration of the confidentiality undertaking; (iii) the exclusions, if any, to the undertakings; and (iv)
the remedies for breach.

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6. Due Diligence

Before an offer for an acquisition is made, the purchaser may require due diligence to be
conducted on the Singapore company.

The purpose of due diligence is to afford a purchaser or investor an opportunity to discover all
that it reasonably can about the Singapore company’s business being acquired or invested in
prior to concluding the transaction, such as its critical success factors and its strengths and
weaknesses. A thorough due diligence should uncover potential risks and/or problems which may
be addressed in the price negotiations or by incorporating appropriate clauses into the contract.

There are several aspects of due diligence, including legal due diligence, business due diligence
and financial due diligence. Legal due diligence investigates and analyses the Singapore
company’s legal compliance with relevant statutory and regulatory authorities, as well as the
ramifications and relevance of the provisions of material contracts on the proposed transaction. It
is important to consider that legal due diligence does not operate in a vacuum but rather
complements business and financial due diligence. Taken together, all aspects of due diligence
strive to reveal a true picture of the target’s business, financial and legal position to the
purchaser, and to uncover and highlight key issues that the parties will need to address during
the due diligence and negotiations process.

One issue to note in the due diligence process is that the CCS has highlighted in its Guidelines
on Merger Procedures issued in 2012 that parties to an anticipated merger should exercise due
caution when exchanging commercially sensitive information (such as prices and customer
details) in the context of the merger negotiations, and the CCS application and review process.
The exchange of such information may infringe Section 34 of the Competition Act (against anti-
competitive agreements) where it has the object or effect of restricting competition within
Singapore.

There are two main forms of a due diligence report: A long-form report or an exceptions-only
report. A long-form report is relatively rare and will describe the business in detail. An exceptions-
only report is increasingly common in Singapore and covers only material issues.

Some of the matters which may be relevant when reviewing particular types of documents
(subject to the required scope of the due diligence exercise) include the following:

6.1 Constitutional documents

Issues to check in relation to a Share Sale include whether there are any restrictions on transfer,
any minority shareholders and any minority shareholder protection (such as any provisions
restricting changes in control or making such changes expensive for any potential purchaser).
Also, it should be determined whether there is any security over the shares to be acquired. If the
purchaser needs to charge the shares, confirmation should be sought that there are no
restrictions on granting security.

6.2 Board minutes

A review of board and board committee minutes can reveal material information about a
company’s business and identify critical documents, such as an acquisition or loan agreement,
which may be relevant to the proposed transaction.

6.3 Material contracts (e.g. supplier contracts, customer contracts)

On a Share Sale, change of control will be a material issue. On a Business Sale, it will be
necessary to check whether it is necessary to seek the consent of third parties to the assignment

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 of identified contracts to the purchaser. Other matters to consider include whether any material
contracts are set to expire in the near future and whether there are any indemnities for which the
vendor or the target is liable.

6.4 Litigation

The amount of litigation claims, pending and in progress, should be noted. It is also worth
considering whether the likelihood of success has been considered and whether any litigation
claims are covered by insurance.

6.5 Accounts

It may be useful to review the target’s accounts to find out if they flag anything that should be
reviewed as part of the due diligence exercise. For example, consider how litigation is treated –
there could be a provision, meaning a claim is considered likely, or there could be a contingent
liability note, which suggests that there is a more remote chance of liability.

6.6 Relationship between due diligence and disclosure

One of the reasons why a vendor will conduct due diligence is to support the disclosure exercise
against the warranties. To the extent that a matter is fairly disclosed, a purchaser will not be able
to claim for breach of warranty. It is in the interests of the vendor to disclose as much as possible
and there will often be a general disclosure of the contents of the data room. The effectiveness of
the disclosure will generally depend on whether the information has been fairly disclosed. A well
organised data room will, however, support any argument that a matter has been fairly disclosed.

From a purchaser’s point of view, the strength of the contractual protection sought in the form of
warranties can be influenced by the amount of due diligence it carries out. In secondary buyouts,
private equity investors will rarely give warranties. Although management may give limited
warranties, these are likely to be capped at a low level and it may not be desirable to sue
management post-closing as they will be employed in the purchaser’s group after the sale.
Purchasers will therefore carry out extensive due diligence to make up for the lack of warranty
protection.

A purchaser may be less willing to trade due diligence for warranty protection. Warranties, as we
shall soon see, are typically subject to limitations and disclosure and may be qualified by
materiality and the knowledge of the vendor. However, where a largely solvent vendor is
prepared to indemnify the purchaser for liability relating to the pre-acquisition period arising in the
target after the sale, the purchaser might, under those circumstances, be prepared to carry out a
more limited due diligence.

7. Sale and Purchase Agreement

Assuming that the due diligence investigations are satisfactory to the purchaser, the next and
final step in the acquisition cycle will be to finalise and execute a sale and purchase agreement.
As is the usual case in other jurisdictions (and save in special circumstances such as auction
sales), it is generally accepted practice in Singapore that the lawyers acting for the purchaser will
prepare the acquisition agreement whether it is a Share Sale or Business Sale. This is because
the most contentious part of an agreement is usually the scope and content of the warranties and
it is the purchaser who knows what protection it requires.

The principal contents of a sale and purchase agreement comprise the following:

 Parties

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  Definitions

 Agreement to purchase and sell

 Purchase price

 Conditions precedent

 Actions preceding completion

 Completion

 Warranties and representations (with the warranties often contained in a schedule to the
agreement)

 Limitations on claims under warranties (the limitations are also often contained in a schedule
to the agreement)

 Restrictive covenants

 “Boilerplate” provisions

7.1 Purchase consideration

Particularly in high-value transactions, the purchase consideration may have a variable

component to it to adjust the amount payable by the purchaser. These typically take the form of a
set of completion accounts being prepared, and a working capital, indebtedness or net asset
adjustment being effected.

Retention sums or “holdbacks” to meet claims are sometimes used when there is doubt that the
vendor can meet its obligations, although this is unsurprisingly resisted by vendors. Compromises
are usually made by reducing the duration, as well as amount, of the retention.

It may also be decided that payment of a part of the consideration should be deferred. The
amount deferred may be ascertainable or unascertainable, e.g. calculated by reference, say, to
future profit, turnover or other financial data. Where deferred consideration is unascertainable, the
purchaser should try to impose a maximum limit so that in the case of consideration based on
future profits, the purchaser is protected from having to pay excessive consideration.

7.2 Conditions precedent

Conditions to completion are transaction-specific and may occasionally be contentious since the
vendor craves transaction certainty, whereas the purchaser would typically require certain walk-
away rights for protection (such as satisfactory due diligence being carried out by the purchaser).
Conditions outside the control of parties, such as regulatory or governmental approvals, are often
not controversial, but parties will often resist the insertion of events dictated by the other party
such as the approval of the board or shareholders of the other party, so that this is not abused as
a walk-away right after signing.

7.3 Period between signing and completion

If, as is usually the case, there is a time gap between signing and completion, the purchaser will
typically insist on restrictions being imposed on the vendor’s conduct of the business during this
period. Instead of listing the various specified actions which are prohibited, the vendor could

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 negotiate for a general obligation to carry on the business as a going concern in the ordinary and
usual course, especially where the representations and warranties given by the vendor to the
purchaser on signing are repeated at completion, and the purchaser’s interests are already
protected to a large extent.

The purchaser’s entitlement to terminate the agreement in the event of a material breach of the
vendor’s representations, warranties and/or undertakings prior to completion is fairly common.
What is more contentious though is the incorporation of “MAC” clauses or material adverse
change provisions (not resulting in or constituting a breach of the vendor’s representations and
warranties) entitling the purchaser to terminate the agreement. While such termination is often
stated to preclude the purchaser’s claim for damages, this is little comfort to the vendor who
would otherwise have been looking to complete the acquisition. Material adverse changes in
economic or similar conditions put the transaction at risk for events outside the vendor’s control
and are often strongly resisted by the vendor.

7.4 Restrictive or protective covenants

The restrictive covenant seeks to ensure that the benefit of any goodwill attaching to the
Singapore target company or its business passes to the purchaser. Such covenants are
notoriously difficult to enforce, since covenants in restraint of trade under Singapore law are
generally only enforceable to the extent that they are reasonably necessary for the protection of a
party’s legitimate business interests. As a general guide, restrictive covenants of 12 to 18 months
have been accepted. The covenant is usually limited as well to the geographical area where the
target carries on business as at the transfer date.

Restrictive covenants are commonly drafted to be severable, so that a provision that affects say,
public policy constraints, can be ignored without affecting the other provisions.

There have been recent investigations by the CCS on restrictive covenants for possible
infringements of Section 34 of the Competition Act (against anti-competitive agreements) or
Section 47 of the Competition Act (against abuse of a dominant position). Restrictive covenants
may benefit from an exclusion from Section 34 or Section 47 of the Competition Act, if the
restrictive covenant is an ancillary restriction directly related and necessary to the implementation
of a merger. Where the exclusion does not apply, restrictive covenants should be reviewed to
ensure that they do not give rise to an infringement.

7.5 Warranties, indemnities and disclosure

There is generally little protection under Singapore law for a purchaser of shares and the purpose
of warranties is to provide the purchaser with some express contractual protection. Warranties
apportion the risks associated with a particular transaction: to the extent that warranties are
given, the vendor accepts liability; to the extent that they are not given or if they are restricted in
their scope, the purchaser accepts the risk.

Warranties also underpin the price, in that the purchaser will be less likely to pay a good price if it
has no contractual protection to satisfy itself that it is getting what it bargained for.

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 The most contentious and heavily negotiated portions of the acquisition agreement invariably
concern the representations and warranties provided by the vendor. Warranties should be
tailored to each transaction but common areas of protection cover the following:

 Title to shares

 Accounts, financial matters, absence of undisclosed liabilities

 Assets (including real property), intellectual property, contracts

 Employees

 Environmental matters

 Compliance with laws

 Litigation

 Product liability

 Tax

 Post-balance sheet events

Negotiations on the warranties typically centre on their scope and breadth, as well as various
qualifiers by reference to say, materiality and the vendor’s knowledge, which the vendor will seek
to incorporate, and the purchaser will resist.

The vendor will also set out in a separate disclosure letter (and not disclosure schedule as is
common in some European jurisdictions) exceptions to the warranties so that liability for breach
of warranty is removed from the vendor to the extent of the matters disclosed. This letter is given
at signing, and any updating thereafter is typically resisted. Disclosures may be general (for
instance, information which may be uncovered via the conduct of searches at public registries or
information which is within the actual or constructive knowledge of the purchaser) or specific in
nature, but in all cases, the matter in question must be “fairly” disclosed to be effective at law.
This will generally require the disclosure to be sufficient and precise, which in turn is likely to be
subject to an objective, and not subjective, test.

The vendor will usually seek to treat all documents placed in a data-room for the purchaser’s due
diligence as deemed disclosures, which the purchaser will almost certainly resist. A typical
compromise will be to treat a pre-agreed and reduced list of data-room documents as deemed
disclosures.

Warranty indemnity insurance is increasingly being used in Singapore. That said, vendors still
typically look to mitigate their risk exposure through contractual limitations of liability. In this
respect, a broad range of limitations are usually inserted, notably those relating to time (ranging
from having no time limits for title breaches, six years for tax warranty breaches, and 12 to 24
months for all other breaches), and amount (common ones include no cap for title warranties,
100% for tax warranties and anything from 30% to 60% for other warranties). Purchasers are also
increasingly resisting high de minimis and basket thresholds as well.

Finally, in the event that the vendor is liable for warranty breaches, the purchaser’s remedies will
usually be to pursue a claim for damages, which in turn are subject to the usual remoteness tests
and mitigation duties in common law. Few vendors are prepared to provide indemnification for

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 breaches of warranties, so these indemnities are seldom used, save perhaps for identified
breaches prior to signing and breaches of tax warranties.

* * * * *

Richard Young is a partner with Allen & Gledhill LLP. He has extensive experience in domestic
and cross-border mergers and acquisitions (with a particular focus on share and business
acquisitions), local and regional joint ventures, schemes of arrangements, amalgamations, capital
reductions, corporate reorganisations as well as general corporate and commercial law. He can
be reached at (65) 6890 7635 or [email protected].

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