Second Reading Speech by Raymond Lim, the Second Minister for Finance on the Companies (Amendment) Bill 2005, at The Parliament, 16 May 2005

Mr Speaker, Sir, I beg to move, "That the Bill be now read a second time".

Background

2. Sir, the Companies Act has been amended three times since 2002 to implement the recommendations of the private sector-led Company Legislation and Regulatory Framework Committee, or the CLRFC. The recommendations sought to simplify business regulations, reduce the costs of capital maintenance in Singapore, and update our corporate regulatory practices. The Bill will give effect to the following recommendations of the CLRFC:

(a) abolish the concepts of par value and authorised capital;
(b) reform the capital maintenance regime;
(c) introduce the concept of treasury shares; and
(d) liberalise the amalgamation process for companies.

3. Sir, I shall now highlight the main amendments proposed in the Bill.

Abolishing the concepts of par value and authorised capital

4. Currently, all shares issued by a company must have a par value and the company is required to report its authorised share capital. Par value is the minimum value ascribed to a share in a company. It is the amount of money that the shareholder holding the said share is statutorily required to pay off for the new share issued to him. The authorized share capital is the maximum amount of share capital which a company is authorised to allot under its Memorandum. Calculation of paid up share capital based on par value is an outdated concept that is no longer relied on by investors and creditors as an accurate proxy of a company's underlying value. In practice, measures such as earning per share and net tangible asset backing, provide a more accurate guide to the economic value of a company.

5. Not only is the concept of par value not an accurate proxy of a company's value, the rule that shares cannot be issued at a discount to par value also serves to prevent a company from raising new funds when the market value of its shares has fallen below par value.

6. Clause 8 amends Section 22 to abolish the concept of authorised share capital, thus removing the upper limit to the number of shares that companies may issue, a limit which serves no prudential purpose. Clause 15 introduces new Sections 62A and 62B to abolish the par value concept and provides for the transition provisions for the treatment of share capital. Clause 18 repeals Sections 67 to 69F which are no longer applicable as the concepts of share premium and share discount will cease to apply.

7. For shares issued after the abolition date, the measure of liability of a shareholder shall be the consideration agreed to be paid on or price of the shares. This includes the amount that would previously have been classified as share premiums. Thenotion of issued and paid capital will continue to be relevant even after the abolition of par value, but they will no longer be measured against the par value of shares. Instead, they will be measured against the amount of capital issued and actually paid up.

8. As a consequence, ACRA will also amend the 8th Schedule to the Companies Act shortly. The 8th Schedule prescribes the requirements for the Annual Return to be submitted by a company having a share capital.

Reforming the capital maintenance regime

9. The Bill also reforms the current capital maintenance regime by introducing greater flexibility to how companies raise and maintain their capital. The Bill seeks to achieve this by:

(a) introducing an alternative capital reduction regime;
(b) liberalising financial assistance restrictions;
(c) reforming the share buyback regime; and
(d) allowing the redemption of preference shares.

I will now briefly explain each of the amendment.

10. Alternative capital reduction regime - Currently, a company is required to obtain the High Court's approval before it can reduce its share capital. Clause 28 introduces new Sections 78A to 78K, which would allow companies to reduce their share capital through a special shareholders' resolution, without the need for approval from the Court. Creditors' interests will continue to be protected. First, companies will be required to support the special resolution with a solvency statement, which is a declaration from the company's directors that the company is able to pay its debts as they fall due and that the company's assets will exceed its liabilities after the transaction. Next, public companies undergoing capital reduction will be required to publish in advance in a national newspaper a notice of reduction of share capital, while private companies can choose either to publish the notice in a newspaper or send a notice to inform all their creditors. To provide greater flexibility, the publicity requirements will be provided in the Regulations, with the Minister being statutorily empowered to prescribe other modes or channels of public communication. The shareholders' resolution and solvency statement have to be made available for public inspection. Consistent with the existing practice, creditors with valid claims will be allowed to object to the capital reduction if they can show good cause.

11. Liberalising financial assistance restrictions - Currently, a company is generally prohibited from providing financial assistance to third parties to acquire its own shares, as this might lead to an improper depletion of the company's assets to the detriment of its creditors. Clause 23 liberalises the restrictions on the giving of financial assistance by a company to third parties if the amount of assistance does not exceed 10% of the paid up capital and the reserves of the company, or if all the shareholders approve the giving of the financial assistance. The financial assistance has to be supported by a solvency statement.

12. In response to feedbackthat the current statutory formulation relating to financial assistance is unclear, Clause 23 amends Section 76 of the Companies Act by clarifying that representations, warranties and indemnities given by an issuer or vendor, in good faith and in the ordinary course of commercial dealings, in the context of an offer to the public to subscribe for its share, will not be construed as financial assistance.

13. Share buyback regime - Currently, share buybacks can only be funded out of distributable profits. Clause 25 will amend Section 76B to allow companies to buy back shares or redeem its preference shares out of profits or paid-up capital. This will provide greater flexibility to the companies. Again as a safeguard, a solvency statement is needed before a company can fund its share buyback or redeem its preference shares out of its capital.

Introducing the concept of treasury shares

14. Today, all shares repurchased by a company must be cancelled immediately upon re-acquisition by the company. Clause 26 introduces new Sections 76H to 76K, which will allow a company to hold re-purchased shares in treasury instead of cancelling them. The introduction of treasury shares will make it easier for companies to restructure their capital through share buy-backs and facilitate any future capital raising without having to issue new shares. As a safeguard against possible abuse, the voting and dividends rights of the re-purchased shares will be suspended so long as these shares are held in treasury.

Liberalising the amalgamation process for companies

15. Under the current regime, Section 212 of the Companies Act provides for the amalgamation of companies by according the Courts the power to effect a transfer of assets and liabilities of the companies and their undertakings. This provision is however seldom used in practice given the high costs involved and its restrictive application by the Courts.

16. Clause 49 introduces new Sections 215A to 215J to allow amalgamation of companies, including holding companies and their subsidiaries, without a court order. To protect creditors' interests, the amalgamation has to be supported by solvency statements from the directors of each amalgamating company as well as the amalgamated company. As an additional safeguard, the new provision also empowers the Court, on application by a member or creditor of the amalgamating company, to make an order against a proposed amalgamation, e.g. directing that the amalgamation proposal must not be effected, if it is satisfied that it would unfairly prejudice a member or a creditor of the amalgamating company.

Conclusion

17. Mr Speaker Sir, the Government will continue to look into implementing the few remaining CLRFC recommendations that require amendments to the Companies Act, such as the recommendation to adopt the UK's statutory restatement of the general principles for directors. We will also continue with our regular review of the provisions in the Companies Act to keep pace with developments. The current amendments will give companies the flexibility to design appropriate capital structures which best suit their needs, at a lower cost, provided that there is full disclosure. We have also balanced the granting of flexibility with safeguards. This is consistent with our overall policy to make Singapore a good and progressive place for business.

18. Mr. Speaker, Sir, I beg to move.