Business Sale and Purchase in Singapore

Last updated on February 1, 2024

Below are a few legal points to look out for when selling and purchasing a business in Singapore, as established in the Companies Act (CA) and Employment Act (EA).

Prohibition on Financial Assistance: Section 76 CA

A buyer may wish to buy a company, but not have enough assets. The term “financial assistance” refers to the assistance given by a company to individuals or other entities to buy the company’s own shares or those of its holding companies. Such assistance can take the form of a loan, the provision of security or the guaranteeing of a loan.

Generally, public companies, or a company whose holding company or ultimate holding company is a public company, are prohibited from providing such assistance. This prohibition is to ensure the company’s capital is preserved and that creditors are protected as well. If this prohibition is breached, the relevant transaction will be deemed void.

Nevertheless, a public company and its subsidiary may help a person to acquire shares in the company or its holding or ultimate holding company if all the following conditions are met:

  • The giving of such assistance falls under sections 76(8) and 76(9) of the Companies Act;
  • The company’s members and board of directors approve this move;
  • The assistance does not materially prejudice the interests of the company or its shareholders; and
  • The assistance does not affect the company’s ability to pay its creditors.

Private companies, on the other hand, are exempt from this prohibition. In particular, private companies may provide financial assistance to a person for the acquisition or proposed acquisition of shares in a company which does not have a holding company, or where the holding or ultimate holding company is not a public company.

However, the prohibition is subject to a number of exceptions. It should be noted that these exceptions only apply if they comply with the company constitution.

One notable exception is that of an off-market purchase on equal access scheme, where an offer on the same terms bar certain acceptable differences is made to all shareholders without the involvement of any stock exchange. This exception applies to both listed and non-listed companies. All shareholders are treated equally and have a reasonable opportunity to accept the offer.

Another notable exception is that of selective off-market purchase for non-listed companies. Such a purchase involves a company offer to purchase shares from identified members in accordance with an agreement. The agreement must be authorised in advance by special resolution and people who are receiving any form of benefit from the purchase cannot vote on it. A market purchase by listed companies will also be exempt if it has been authorised in advance by ordinary resolution. The authority for the purchase can be unconditional or subject to conditions.

A purchase under a contingent purchase contract would also be permitted for any company. This means that the company enters into a contract with members in the future. Such contracts are either put warrants where member has the right to sell shares back to the company or call options where the company has the right to buy back the shares from the member.

Director’s Duty to Act Honestly and Use Reasonable Diligence: Section 157 CA

In the sale and purchase of any company, the director’s duty to act honestly and use reasonable diligence in the discharge of his duties as stated in section 157 of the Companies Act still applies.

To comply with this duty, the goal of any attempted sale or purchase approved by directors should be to promote the interests of the company. If the sale or purchase is undertaken with an ulterior motive of maximising personal profit for instance, then the directors who approved the purchase will have breached their section 157 duty and may be held liable for any damage suffered by the company as a result of the breach.

They may also be punished with a fine not exceeding $5,000 or imprisonment for a term not exceeding 1 year.

Nominee Director Disclosure to Principal: Section 158 CA

In a situation where nominee directors are involved for the consideration of any business sale or purchase, a mechanism for a nominee director to disclose information to his principal obtained in his position as director is provided for under section 158 of the Companies Act.

This mechanism is crucial as directors are bound by the fiduciary duty not to fetter their discretion in deciding matters for the company. This means that they have to actively give any matter some thought before coming to a decision.

However, it may be tricky for a nominee director as the nominee director is technically representing the principal director at board meetings. This mechanism allows the nominee director to account to the principal, without breaching any duty. Any such information disclosed would require a declaration to the Board, prior authorisation by the Board before disclosure, and that such disclosure is not likely to prejudice the company.

Approval of Company Required for Disposal by Directors of Company’s Undertaking or Property: Section 160 CA

Before directors can sell the whole or a substantial part of the company’s undertaking or property, section 160 of the Companies Act states a requirement for company approval. The company can approve such disposal through ordinary resolution.

The High Court case of Long Say Ting Daniel v Merukh Nunik Elizabeth provides a helpful example of the application of section 160. In that case, the claimant had sought to sell 3 properties, which comprised a substantial portion of the relevant company’s property. He was found to have acted in breach of section 160.

The aim of section 160 is the protection of members and employees by preventing the company’s capital from being suddenly depleted by sale. Members are also given the opportunity to apply to the court to prevent such sales under section 160.

Transfer of Employees: Section 18A Employment Act

When there is a transfer of business as a result of a sale or merger, the employment contracts of employees will typically be transferred over to the new company.

However, this provision only applies to employees covered by the Employment Act. For such employees, they will have their employment terminated by common law and they may have to sign new employment agreements with the new company.