Debated in Parliament on 8 Oct 2014.
Resumption of Debate on Question (7 October 2014), "That the Bill be now read a Second time". – [Deputy Prime Minister and Minister for Finance.]
Question again proposed.
Mdm Speaker, please let me declare that I work in the financial services industry. I rise in support of the Bill.
The Ministry has put in a lot of work on this wide-ranging Bill and spared no effort in a robust public consultation exercise. There were 217 recommendations from the steering committee, with the Ministry accepting most of the recommendations. I would like to express my gratitude to those who have given valuable suggestions and to those who have been meticulous in crafting the amendments.
There are three main objectives of this Bill. The first is to ensure that rules and regulations governing companies in Singapore are brought up to date. The second objective is to ensure that the cost of compliance is not prohibitive for companies. And the third objective is to ensure that the governance structure strikes the correct balance between flexibility and transparency.
With regard to the first objective of keeping the Companies Act up to date, rules of governance are constantly evolving. Therefore it is difficult to pin down a perfect set of rules at any one point. This Bill has, by and large, kept abreast of financial innovations and globalisation of recent times. For example, liberalisation of rules on electronic communications, phasing out of outstanding share warrants, and greater disclosure standards required of foreign companies similar to standards required of local companies can be seen as efforts to bring the Companies Act up to date.
The new multiple proxies regime also seeks to enfranchise Indirect investors like Central Provident Fund (CPF) and Supplementary Retirement Scheme investors to give minority shareholders a voice during annual general meetings. This particular update is welcomed as most retail shareholdings are held via trustee accounts. As an added benefit, this update will also add more flexibility and vibrancy to our financial landscape as it allows for more institutional shareholder activism and a conduit to hold management to account. There are
Page: 42
some practical considerations to implementation and I am happy to note that the Ministry will allow for a grace period of six months to full implementation.
The second objective of this Bill is to reduce the cost of compliance. I am supportive of the "small company" concept for audit exemption. The Ministry estimates that at least 25,000 companies will benefit from this amendment and save each company around $2,000 to $3,000 a year in audit fees. Many of our small and medium enterprises (SMEs) will benefit from this rule change from a cost and time perspective. However, the public consultation has brought up concerns on how the Ministry can ensure that proper accounts are kept by small companies such that the risk of tax evasion does not increase.
The third objective of this Bill is to achieve the correct balance between flexibility and transparency and this is where I feel is the most challenging part of the Bill. The introduction of dual class shares exemplifies this delicate challenge.
Mdm Speaker, the introduction of dual-class shares is a very contentious issue in many jurisdictions such that there is significant opposition to the convention in places that allow for it as well as in places that ban it.
Proponents of dual-class shares cite the ability for companies to focus on long-term value creation and to maintain their founder's vision and ethos instead of fulfilling the short-term profit expectations of Wall Street. Continental European family-owned companies also use this structure to pursue different dividend policies to different classes of shareholders.
Detractors of dual-class shares often cite fairness as their defence, that there should not be second-class shareholders. Shareholders should be able to hold management and the board accountable if the company heads in the wrong direction.
Dual-class shares were first introduced in the United Kingdom (UK) in the 1960s as a way to fend off hostile corporate takeovers. However, as the Financial Times describes, "it has been discouraged to the point of extinction in recent times". London Business School's Prof Julian Franks says that "the UK market believes in the principle of 'one share one vote' even if it trumps efficiency".
On the other side of the Atlantic, the United States (US) has seen a resurgence of dual-class structures as tech companies from Google to LinkedIn have shown a strong preference for it. One recent example drives home the point. Alibaba chose to do an initial public offering (IPO) on the New York Stock Exchange instead of the Hong Kong Stock Exchange because the Hong Kong Stock Exchange would not accommodate Alibaba's desire for a board
Page: 43
control structure to get around its ban on dual-class shares. Hong Kong, as a result, lost the biggest IPO in the history of IPOs.
What should Singapore do? I feel we have to be pragmatic about this issue. The fact of the matter is that capital is like water. It will flow to where it is the most expedient for it to do so. If companies cannot access public markets for capital in Singapore, they will go to a jurisdiction that allows for it. Our key objective must be to maintain the relevance of Singapore as a financial hub and to maintain its competitiveness and attractiveness relative to our competitors. This becomes more pertinent if dual-class listings bring about positive externalities to the rest of the economy and, especially, if we have ambitions to be a tech and biomedical hub for start-ups and to help bring them to market.
However, we should also be aware of the risks of dual-class shares and seek ways to mitigate the negative side of it.
Firstly, it has to be made very clear to potential shareholders of the dual class structures of shares that they are buying into. The rules of implementation need to be transparent. In other words, if a listing is made, what is the burden of disclosure that will be imposed on the distribution of voting rights? Potential shareholders need to be aware of this, so that they go in with their eyes open regarding who ultimately retains control and voting rights. Without such transparency, if one such listing goes sour, shareholders might turn around and blame the exchange and the regulator for allowing the listing to proceed without full disclosure to the public. Would the Minister give the House this assurance, please?
Secondly, What happens if the founder of a company leaves the company and his vision and ethos are not espoused by those who succeed him? Many young companies need to access capital to grow but are wary of dilution of control to achieve their vision. But when these companies eventually do grow and reach a certain scale, will they find it harder to issue new debt and equity to finance the next stage of their growth due to their existing structure? To this end, would the Minister consider provisions, such as setting limits on the proportions of voting and non-voting shares, or providing a sunset clause so that dual class shares die out after a specific period of time?
Thirdly, we have to be mindful that while we are nurturing companies which prefer a dual-class structure, we cannot alienate pension funds and institutional investors who are barred in their charter from investing in dual-class structures. These investors contribute to the viability of our financial ecosystem as much. We also need rules to govern what happens when super majority shares are sold to the market. Do these shares then convert to ordinary
Page: 44
shares?
Mdm Speaker, I have every confidence that the Minister has considered these issues thoroughly and will assure the House that he will implement safeguards that will enhance the flexibility and transparency of our system and maintain Singapore as a premier financial centre. With that, I support the Bill.
Mr Liang Eng Hwa.
Mr Liang Eng Hwa (Holland-Bukit Timah): Mdm Speaker, I also wish to declare my interest. I work in the financial services industry. First and foremost, I would like to also join Senior Minister of State Josephine Teo in thanking the steering committee led by Prof Walter Woon as well as many public and private sector members involved for their thorough review of the Companies Act.
I agree with the Senior Minister of State that our company laws are fundamentally sound and the changes proposed in this amendment are focused on reducing the regulatory burden on companies and with the aim to enhance Singapore's position as a global business hub. Given the extent of changes to the Act, I would not be surprised that many of our company law text books will soon have to come up with new editions to capture the latest changes introduced in this amendment.
The entire Companies Act review has been a multi-year effort starting in 2007 and involved very extensive public consultations including from the members of our Government Parliamentary Committee for Finance. It culminated in a 262-page report with 217 recommendations. The Ministry of Finance, in response, also came up with an equally lengthy response – a report which, more importantly, accepted 192 recommendations, modified 17 and left the door open for the remainder to be considered in future.
As there were already very detailed deliberations by various parties on the various recommendations, I will just highlight a number of notable changes for clarification by the Senior Minister of State.
Firstly, on the "small company" concept for audit exemptions. This is clearly a progressive move to reduce the regulatory burden on small companies. Having a more flexible requirement of meeting two out of three criteria to qualify for audit exemption is helpful and more encompassing. However, we need to safeguard against businesses of a
Page: 45
bigger group deliberately creating small companies just to enjoy the audit exemptions.
I do hope that most of the 25,000 companies mentioned by the Senior Minister of State can benefit from this exemption although I understand that banks do often ask for audited accounts from companies when they extend credit facilities so that the companies can also enjoy a better rating and, therefore, better borrowing rates. Notwithstanding this exemption, if companies can afford it, we should encourage companies to still prepare audited accounts so as to keep up with best accounting practices and to prepare for growth of their companies.
Secondly, on the removal of one-share-one-vote restrictions for public companies. While this removal would give public companies greater flexibility in capital management and allow them to have a different class of shareholding structures, the concern is whether it would entrench control of public companies by way of the special voting rights and whether it would lead to more companies going that route of having that shareholding structure just to fend off or retain permanent control, which can be to the detriment of minority shareholders.
The other issues are also whether retail investors are ready for such structures and do they understand the implications for this sort of shareholding structures and, importantly, whether the markets are efficient enough to fairly price the different class of shares with different voting rights.
Senior Minister of State Josephine Teo mentioned that the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX) are reviewing this for the listed companies. I hope they will address these concerns in their reviews.
Thirdly, on the new multiple proxies regime, I welcome the effort to encourage shareholder activism as well as the thoughtful changes in the Act to allow indirect investors, such as CPF investors, to participate at shareholders' meetings. Such shareholder engagement could nurture a more long-term investment culture in Singapore and that would augur well for us to develop a healthy market.
Depending on the companies' mix of shareholders, this could obviously entail more administrative as well as logistical arrangements and resources on the part of the companies. Hence, it is essential to give companies enough time to prepare for a potentially larger number of attendees at shareholders' meetings and to expect more active participation by the shareholders.
For this to work, stakeholders, management and shareholders need to work together to establish a culture or norms for an orderly and purposeful conduct of shareholders'
Page: 46
meetings and to do it with decorum. Otherwise, it will defeat the purpose of this amendment.
Fourthly, on the Accounting and Corporate Regulatory Authority's (ACRA's) Consent for Premature Resignation of Auditors, while requiring ACRA's consent will strengthen governance, I would like to ask the Senior Minister of State how ACRA would assess such requests for consent and under what circumstances would ACRA not give consent, for example. Would ACRA's decision to give or not to give consent be seen as a signal or an indication that the state of accounts for the company may be in trouble or there could be some problems? Hence, whether also there will be this potential issue of future public liability where investors may take that consent as an indication?
Premature resignation of auditors for a public interest company is likely to be price-sensitive information for its traded securities, including whether the consent is given by ACRA. Hence, it would be necessary for the company to circulate the auditor's notification to its shareholders, and in the case of the public interest company, to the public, in the soonest possible time. Here is where we can have greater clarity for this amendment.
I read in the public consultation report that auditors are also concerned about the risk of defamation if they were required to disclose reasons for their resignations. Is this a valid concern?
Finally, on the removal of the maximum age limit of 70 years for directors, this is a timely change in line with the overall trend of rising retirement age. I tend to think that as we get older, we also get wiser. So, it is good to remove this age limit, whether in the corporate world or elsewhere. The current rules are obviously obsolete. In any case, we should not be overly prescriptive on the selection of directors in the Act, such as requiring directors to present education credentials or any age specifications. It is best left to the shareholders to decide on the appointment of directors and for them to live by their decisions.
Mdm Speaker, it is important that we constantly update our company law in response to changes in the way companies do business and how shareholders would want to be engaged and involved. Overall, these are very good changes to the Act and I agree and support the amendments.
Senior Minister of State Josephine Teo.
Page: 47
Mdm Speaker, I thank Mr Ong Teng Koon and Mr Liang Eng Hwa for their comments and support of the Bill. Let me address the specific questions that they have raised, and there are quite a few.
First, Mr Liang has indicated the need to safeguard against businesses that create many small companies to enjoy the audit exemption. To prevent such instances, the Bill will require that for a company which is part of a group, the company must not only itself qualify as a small company, but the entire group must also meet at least two of the three quantitative criteria on a consolidated basis. In other words, a company can be exempt if it is a small company in a small group, but not if it is a small company in a bigger group.
Mr Ong has asked how we can contain the risk of tax evasion arising from audit exemption. While the criteria for mandatory audit will be changed, the Bill still requires all companies, including small companies, to keep proper accounts. In addition, these accounts must comply with the Singapore Financial Reporting Standards unless the company is not listed, does not have more than $500,000 in total assets and has no accounting transaction in a year.
ACRA has powers to investigate the accounts and to require a company which is exempted from audit to lodge audited accounts, if it is satisfied that there has been a breach of these duties, or if it is in the public interest to do so.
Furthermore, to help companies comply with tax reporting requirements, the Inland Revenue Authority of Singapore (IRAS) has put out a set of detailed guides on the records that must be kept under the Income Tax Act and Goods and Services Tax Act, and what constitutes good report keeping. IRAS has been selectively checking on the record keeping practices of small companies through reviewing tax returns, audits and site visits, and will continue to do so to ensure that their tax declarations are correct. As for companies that seek to evade tax, IRAS will take legal action against them as well as on advisors or agents who assist such companies. So, on audit exemption, there are safeguards.
Moving on to shares with multiple voting rights, Mr Ong has provided a balanced perspective on whether Singapore should allow them. Clearly, there are benefits and drawbacks in allowing shares with different voting rights. However, I should point out that the concept of such shares is not entirely new in Singapore, and they have been permitted in private companies for some years. Further, in the Companies Act amendments of 2013, the one-share-one-vote restriction was lifted for private companies that are subsidiaries of public companies. We have now decided to lift the restriction in the Companies Act for public companies in view of global developments and the demands of increasingly sophisticated investors. The change will not affect listed companies for now, as MAS and SGX are still deliberating on the issue. Rather, it is the 800 or so non-listed public companies that can take
Page: 48
immediate advantage of the liberalisation.
Mr Ong Teng Koon has highlighted the need to mitigate the risks in allowing shares with different voting rights. Although Mr Ong's comments are made in the context of shares of listed companies, I would like to assure Members that the Bill will put in checks and balances for all public companies, whether or not they are listed. Specifically, the Bill will require public companies to specify the rights for different classes of shares in their constitutions and clearly demarcate the different classes of shares so that shareholders know the rights that are attached to any particular class of shares. The disclosure requirement is to enable investors to decide whether they are prepared to accept such structures before investing in the company.
The Bill will also require public companies to ensure that information on the voting rights for each class of shares must accompany the notice of meeting at which a resolution is proposed to be passed. In addition, holders of non-voting shares will have equal voting rights on resolutions to wind up the company or to vary the rights of non-voting shares.
Mr Ong has asked about shareholders' recourse. The Companies Act already allows minority shareholders to seek redress if they are oppressed by the majority. A shareholder may apply to Court for an order that the affairs of the company are being conducted in a manner oppressive to one or more of the shareholders, or in disregard of the interests of shareholders. The Court can order one of a spectrum of remedies, such as directing or prohibiting any act, cancelling or varying any transaction, making an order to regulate the conduct of the company in the future, providing for the purchase of the shares of the minority by other shareholders or the company itself, or even order the winding up of the company. Ultimately, shareholders can sell the shares. I would add that directors have fiduciary duties to act in the best interests of the company which, generally, requires the balancing of interests of all shareholders.
Mr Ong has also suggested imposing limits on the proportions of voting and non-voting shares and providing a sunset clause for shares with different voting rights. The Bill does not impose such a requirement on public companies, similar to the current approach for private companies, since the objective of the change is to give public companies the flexibility in their capital structures. Rather than for the law to prescribe the capital structures of the companies, shareholders will be in a better position to decide whether proportion limits or sunset clauses should be adopted by their companies. For example, family-controlled public companies may not find it necessary to include a sunset clause, whereas there were listed companies in the US that have included sunset clauses.
Mr Ong's final points are on having rules to govern the sale of super-majority shares through the market. Due to the nature of super-majority shares, such shares are unlikely to
Page: 49
be sold in the market. Nevertheless, it is a pertinent point for shares of listed companies which MAS and SGX will consider.
Let me now turn to Mr Liang Eng Hwa's comments. Mr Liang made two comments on shares with different voting rights. The first comment is on educating retail investors. Retail investors typically invest in the shares of listed companies which, as yet, will not be affected by the Bill. Nevertheless, I agree with him that it would be useful to promote awareness and understanding of such shares.
Mr Liang's second comment relates to the pricing of different classes of shares.
Mr Liang has also asked about the circumstances under which ACRA would give consent for the premature resignation of auditors and whether ACRA's decision would give a signal as to the state of the company.
Typically, we will not expect an auditor to want to resign before the end of his term, unless in exceptional circumstances. The purpose of not allowing mid-term resignations without consent is to ensure that a public interest company is not left in the lurch, without an auditor. The auditor will have had the opportunity to determine his willingness to take on the appointment at the last Annual General Meeting at which he is appointed. Therefore, he ought not to resign within a short time of the year without good reasons.
We take the view that premature resignation of an auditor of a public interest company, or its subsidiary, is a serious matter, given the public interest implications involved. An auditor is obliged to report on any concerns with the company and can choose to qualify the audit opinion if necessary. When the Registrar rejects the application and does not consent to the resignation, it does not necessarily give a negative signal about the company. For example, the Registrar may have assessed that the auditor had not exhausted all means to discharge its duties, but had taken the easy way out by resigning mid-term.
Having said that, ACRA will exercise its discretion judiciously, and approval of resignation will generally only be granted in exceptional situations where the auditor is no longer capable of performing a competent audit, for example, due to failing health of the auditor or loss of independence of the auditor.
Page: 50
Mr Liang Eng Hwa will be pleased to note that ACRA plans to issue guidelines on what it considers as valid circumstances under which resignations will be accepted. Should the application for consent bring to light potential breaches of the Companies Act by the company, ACRA may also consider investigating the company and its directors.
Mr Liang has also sought clarification on the timing of the dissemination of the reasons for an auditor's resignation and whether there will be risks of defamation. Upon receiving the notification of resignation from the auditor, the company is required to send a copy of the statement of the auditor's reasons for resignation to the shareholders within 14 days. Safeguards have been put in place to address concerns relating to defamation. A company may apply to the Court to avoid the dissemination of the statement of the auditor's reasons for resignation on the grounds that the auditor has abused the use of a written statement or is using the requirement for dissemination to secure needless publicity for defamatory purposes. The Bill also provides that a person will not be liable for any action for defamation in respect of publication of a written statement of an auditor's reasons for resignation, if there is an absence of malice.
Mdm Speaker, let me briefly conclude. The proposed amendments to the Companies Act will reduce regulatory burden and provide greater business flexibility. It would also improve corporate governance and ensure that the Companies Act remains relevant and updated. These amendments balance the need for business flexibility and strong corporate governance and will enhance Singapore's position as an efficient and trusted place for business and investment. Mdm Speaker, I beg to move.
*Question put, and agreed to.*
*Bill accordingly read a Second time and committed to a Committee of the whole House.*
The House immediately resolved itself into a Committee on the Bill. – [Mrs Josephine Teo].
Bill considered in Committee.
[Mdm Speaker in the Chair]
Clauses 1 to 17 inclusive ordered to stand part of the Bill.
Clause 18 –
Clause 18. Senior Minister of State.
Page: 51
Madam, I beg to move, the amendment* standing in the name of the Deputy Prime Minister and Minister for Finance as set out on the Order Paper Supplement.
*The amendment read as follows:
In page 25, line 34, after "becomes", to insert "a".
Amendment agreed to.
Clause 18, as amended, ordered to stand part of the Bill.
Clauses 19 to 168 inclusive ordered to stand part of the Bill
Clause 169 –
Clause 169. Senior Minister of State.
Madam, I beg to move, the amendment* standing in the name of the Deputy Prime Minister and Minister for Finance as set out on the Order Paper
Page: 52
Supplement.
*The amendment read as follows:
In page 240, line 10, to leave out "(a)", and insert "(b)".
Amendment agreed to.
Clause 169, as amended, ordered to stand part of the Bill.
Clauses 170 to 188 inclusive ordered to stand part of the Bill.
First Schedule –
First Schedule. Senior Minister of State.
Mdm Speaker, I beg to move the amendment* standing in the name of the Deputy Prime Minister and Minister for Finance as set out on the Order Paper Supplement.
*The amendment reads as follows:
New Item (A):
In page 277: to insert –
Notes in Order Paper Supplement:
(1) It is intended that this New Item (A) be inserted immediately after item 32.
(2) In page 277: to renumber items 33, 34 and 35 as items 34, 35 and 36, respectively.
Amendment agreed to.
First Schedule, as amended, ordered to stand part of the Bill.
Second Schedule ordered to stand part of the Bill.
Bill reported with amendments, read a Third time and passed.
Page: 53
PAPERCUTS