Options and Considerations For Privatisations in Singapore

Lucien Wong and Lee Kee Yeng at Allen & Gledhill LLP offer their highly sought after expertise
on privatisations in Singapore.

Lucien Wong and Lee Kee Yeng

Amid the lingering uncertainties over the economy and the easing valuations in the market in
2009 and 2010, 33 companies, with an aggregate market capitalisation of approximately S$15.4
billion, were privatised and delisted from the Singapore Exchange. While the list of
privatisations included strategic acquisitions led by sovereign wealth funds such as ATICs
acquisition of Chartered Semiconductor Manufacturing Ltd (which was delisted from the
Singapore Exchange in December 2009) and Khazanahs offer for Parkway Holdings Limited
(which was delisted from the Singapore Exchange in November 2010), a significant number of
privatisations were initiated by major shareholders seeking to capitalise on lower valuations, as
listed companies continued to trade below their 2007 peaks. Market observers anticipate that
more such privatisations and delistings may be in the pipeline for 2011 as acquirers continue to
take advantage of current valuations and the recovery in the credit markets.

Why Privatise?

Companies go public in order to raise funds from the market but a listing also requires a
company to continually meet its regulatory obligations. Companies seeking to delist often cite
illiquidity, costs of compliance and lack of operational flexibility as the key motivations for
privatisation. In addition, many Chinese companies who had previously sought an overseas
listing are now tempted by the prospect of re-listing closer to home at higher valuations. Such
companies hope to benefit from greater investor interest in exchanges in China or Hong Kong,
where shares may trade at higher multiples and investors may be more familiar with their brand
names. Oft-cited examples of such success stories include Want Want Holdings Ltd (a
Singapore company with its principal operations in Taiwan and China), which delisted from the
Singapore Exchange in 2007 and was subsequently listed in Hong Kong at three times the value
of its privatisation offer, and Man Wah Holdings Limited (a Bermuda company with its principal
operations in China), which delisted from the Singapore Exchange in 2009 with a market
capitalisation of S$200 million and was subsequently listed in Hong Kong with a market
capitalisation of S$1.2 billion.

A Singapore-listed company (both foreign as well as Singapore incorporated) can be taken

private in several ways:

(i) a voluntary delisting;

(ii) a scheme of arrangement (for a Singapore incorporated company);
(iii) a general offer; and
(iv) an amalgamation (for a Singapore incorporated company). Each of these is briefly
considered below.
Voluntary Delistings

Under its listing rules, the Singapore Exchange will permit a Singapore-listed company to be
voluntarily delisted if: (i) the delisting is approved by more than 75 per cent of shareholders
present and voting with not more than 10 per cent of such shareholders objecting; and (ii)
(following the approval of the delisting) an exit offer is made to the shareholders, which must
normally be in cash or include a cash alternative.

If the delisting is approved, the company will be delisted whether or not shareholders choose to
accept the exit offer. Acquirers who are already major shareholders of the company can vote their
shares to approve the delisting together with the minority shareholders.

As this can significantly reduce the execution risk for the transaction, a voluntary delisting is
generally the route taken by existing major shareholders seeking to privatise a company.

In order to protect minority shareholders, the Singapore Exchange requires a reasonable exit
offer to be made to the remaining shareholders of the company.

The board of directors of a delisting company is required to take into account the interests of all
shareholders as a whole and must ensure that the exit alternative is a reasonable proposal when
making its recommendation for a delisting.

The company must appoint an independent financial adviser to opine on whether the exit offer is
reasonable and such opinion must be clear and unequivocal without reference to diverse
investment horizons.

Whether an exit offer is reasonable continues to be a sticky issue in the market, especially in
relation to shares that trade below their net asset value. Acquirers should therefore remain
sensitive to shareholder reaction as to the consideration offered. While the delisting transactions
for 2009 and 2010 have generally offered a premium above the closing share price prior to the
transaction announcement date, some of the delisting transactions were made at a price lower
than the net asset value of the company. This has been a hotly debated issue in a number of
voluntary delistings, where minority shareholders objected voraciously. Whether rightly or
wrongly, the net asset value of the company will remain a benchmark for some shareholders as
reflecting the true value of the shares and major shareholders looking to privatise must be
prepared to defend their valuations.

Although the use of a voluntary delisting does not guarantee the buy-out of the minorities, once
the delisting is approved, there is the disadvantage of remaining as a shareholder of illiquid
shares in an unlisted company, and this often provides the motivation for minority shareholders
to accept the exit offer. If minority shareholders do not accept the exit offer, the company will
still be delisted, with minority shareholders remaining in the company. Acquirers using the
voluntary delisting route must therefore assess whether their post-delisting objectives can be
achieved with minority shareholders in place, and the potential exit strategies for these minority
shareholders thereafter.
Schemes Of Arrangement

Where obtaining 100 per cent of the shares is key to the acquirers plans for the company post
delisting, a scheme of arrangement may be preferred as it provides the comfort of a binary
outcome either compulsory buyout of all shareholders if the scheme is successful or the
acquirer does not have to acquire any shares. A Singapore-listed and Singapore incorporated
company may enter into an implementation agreement pursuant to which it agrees to undertake a
scheme of arrangement for the acquisition by the acquirer of all its issued shares in accordance
with section 210 of the Companies Act (chapter 50 of Singapore, the Companies Act). The
scheme requires the approval of the majority in number of shareholders present and voting,
representing 75 per cent or more in value of the shares voted. The scheme is also subject to
approval by the High Court of Singapore.

Major shareholders looking to privatise may be disadvantaged in a scheme of arrangement as,

unlike a voluntary delisting, they would not be permitted to vote on the scheme and the decision
would be entirely in the hands of minority shareholders. In addition, as a scheme must be
approved by a majority in number present and voting on the scheme, the transaction could be
defeated by a large number of shareholders holding a very small number of shares.

General Offers

Voluntary delistings, schemes of arrangement and amalgamations (discussed below) require the
co-operation of the target company. If this is not expected to be forthcoming, an acquirer would
need to consider implementing the privatisation by way of a general offer for the company. In
addition, where there is substantial interloper risk, a general offer structure allows an acquirer to
retain greater flexibility in its ability to respond to a competing bid. Where the intention is to
privatise, the offer should be conditional upon the acquirer receiving acceptances for more than
90 per cent of the outstanding shares of the company. If the acquirer holds more than 90 per cent
of the company, the listed company would no longer meet its free float requirement and the
Singapore Exchange would direct that the company be delisted if the acquirer does not restore
the free float after the close of the offer. In addition, if the acquirer receives sufficient
acceptances to exercise its rights of compulsory acquisition under the Companies Act, it can
squeeze out the minority shareholders who have not accepted the general offer.

Amalgamations

Where the Singapore-listed company is also a Singapore incorporated company, the privatisation
could take place by way of an amalgamation under section 215A of the Companies Act.
Amalgamations are akin to US-style mergers in which a merging entity is absorbed into an
acquiring entity. The acquirer and the listed company would enter into an agreement to
implement an amalgamation of the two companies with the acquirer as the surviving company or
with both companies merging into a new company. The amalgamation must be approved by not
less than 75 per cent of the shareholders of each amalgamating company, and the board of
directors of each amalgamating company must give a solvency statement, stating its belief that
the amalgamated company will remain solvent for the next 12 months. On completion of the
amalgamation, the Singapore-listed company will be delisted and cease to exist as a separate
legal entity and all its property, rights, privileges, obligations and liabilities will be transferred to
and vest in the amalgamated entity.

The provisions for amalgamations under the Companies Act were introduced in Singapore in
2005. While amalgamations have been used to effect internal restructurings, we have yet to see a
privatisation in Singapore being implemented by way of an amalgamation. There are several
possible reasons for this. First, acquirers remain understandably reluctant to be the test case for a
new acquisition structure. In addition, directors on the board of a public company are likely to be
wary of providing a forward looking solvency statement for the amalgamated company on a
consolidated basis, as they are personally liable for such statements. Lastly, as with a scheme,
major shareholders looking to privatise would not be permitted to vote on the amalgamation and
this invariably increases the execution risk of the transaction.

* * *

Delistings are part and parcel of a functioning capital market. As companies continue to review
their valuations in the aftermath of the financial crisis, and look to strategically reposition
themselves for better market conditions, privatisation will remain a key option for consideration.
In determining the most appropriate transaction structure, acquirers must assess which structure
allows them to adequately manage their execution risks while achieving their objectives for
delisting.

A conditional offer refers to a takeover offer which is expressed to be subject to certain

conditions being fulfilled. This means that the offeror will only become obligated to purchase the
shares in the target company which have been validly tendered in acceptance of the offer after
the conditions have been fulfilled. If the conditions to the offer are not fulfilled on or before the
closing date of the offer, the offer will lapse and shareholders who have tendered their shares in
acceptance of the offer will have their shares returned to them. A conditional offer is said to
unconditional once all the conditions to the offer have been met.

The conditions that may be attached to an offer would depend on whether the offer is a
mandatory or voluntary offer.

Under the Singapore Code on Take-Overs and Mergers (the Code), a person is required to
make a takeover offer (a Mandatory Offer) for a company if:

i. he acquires shares which (taken together with shares held or acquired by persons acting
in concert with him (concert parties)), carry 30% or more of the voting rights of the
company; or

ii. he, together with his concert parties, holds between 30% and 50% of the voting rights of
the company and he, or any of his concert parties, acquires in any 6-month period
additional shares carrying more than 1% of the voting rights of the company.
All other takeover offers made under circumstances other than one triggered for a Mandatory
Offer, are considered as voluntary offers (each a Voluntary Offer).

A Mandatory Offer can only be subject to the following conditions:

i. the condition that the offeror receives sufficient acceptances to the offer which, when
taken together with any shares which the offeror may hold or acquire after the
announcement of the offer until its closing date, would allow the offeror and his concert
parties to control more than 50% of the voting rights issued shares of the target company
(the Minimum Acceptance Condition); and

ii. the condition that the offer shall lapse in the event the Competition Commission of
Singapore makes a decision to undertake a Phase 2 review of the transaction, or issues a
direction that prohibits the offeror from acquiring shares in the target company.

In the case of a Voluntary Offer, if an offeror (and his concert parties) hold less than 50% of the
issued share capital of the target company at the time of making the offer, then the Voluntary
Offer must contain the Minimum Acceptance Condition. However, the offeror may apply to the
Securities Industry Council (SIC) for its consent to increase the acceptance threshold under the
Minimum Acceptance Condition from 50% to 90%.

If the offeror (and his concert parties) hold more than 50% of the voting rights of the target
company as at the date of the offer, the Voluntary Offer is not required to contain the Minimum
Acceptance Condition, although the offeror may nonetheless attach it if it intends to acquire not
less than 90% of the target companys voting rights.

Other conditions (such as the requirement for approval by the offerors shareholders, or
conditions relating to the target companys financial performance) may be attached to a
Voluntary Offer, with the consent of the SIC. These conditions must be approved by the SIC,
which does not allow conditions that require subjective judgments by the offeror or lie in the
bidder's hands, as this can create uncertainty. Moreover, the Code further prescribes that offerors
should not invoke any condition (other than the Minimum Acceptance Condition) so as to cause
the offer to lapse unless the circumstances which give rise to the right to invoke the condition are
of material significance to the offeror in the context of the offer, and information about the
condition is neither publicly available nor known to the offeror before the offer announcement.