SINGAPORE: An Introduction to Corporate/M&A: Domestic
Overview
2023 was a challenging year for mergers and acquisitions (M&A), during which we saw a 25% decline in global M&A value relative to 2022. However, an uptick in activity in the final quarter indicated a renewed interest among investors in exploring M&A opportunities. This momentum has continued into 2024, as fears of a recession ease and interest rates stabilise.
This overview highlights several key trends that we anticipate will shape the landscape of domestic M&A in Singapore for 2024 and beyond.
Amendments to Compulsory Acquisition Regime
The first half of 2023 witnessed a flurry of public M&A transactions, driven largely by the then-impending changes to the compulsory acquisition framework in the Singapore Companies Act.
Under the previous regime, offerors who acquired 90% or more of the shares of a target company (excluding those held by the offeror, its related corporations and their nominees) could trigger a "squeeze-out" of minority shareholders, effectively privatising the target. This mechanism inadvertently created a loophole where individual controlling shareholders, often holding a significant proportion of shares, would make an offer through a special purpose vehicle and tender their shares into the offer. This allowed their shares to be included in the computation of the 90% threshold, making it easier to compulsorily acquire the minority's shares.
To address this, the amended compulsory acquisition provisions, which came into effect on 1 July 2023, have significantly expanded the scope of persons considered to be related to the offeror. Shares held by the following additional persons are now excluded from the calculation of the 90% threshold:
(a) persons accustomed or under an obligation to act in accordance with the offeror's directions, instructions or wishes, or whose directions, instructions or wishes the offeror is accustomed or under an obligation to act in accordance with, in respect of the target;
(b) certain family members of the offeror; and
(c) bodies corporate controlled by the offeror or persons mentioned above.
With the amended rules making privatisation through a "squeeze-out" mechanism more challenging, this may pave the way for a resurgence in alternative takeover strategies perceived as relatively "easier" avenues to achieve privatisation, such as schemes of arrangement. Additionally, we foresee a potential revival of takeovers via a voluntary delisting, a method that has been largely overlooked since the Singapore Exchange's voluntary delisting rules were amended in 2019. Depending on the circumstances, a voluntary delisting could in some instances prove to be a more effective means of achieving privatisation objectives.
Due Diligence Requirements for CF Advisers
In 2023, the Monetary Authority of Singapore issued Notice SFA 04-N21 (Notice) outlining business conduct requirements applicable to corporate finance (CF) advisers. The Notice establishes certain mandatory baseline standards for CF advisers, in the interests of elevating standards of conduct, enhancing the quality of disclosures and empowering investors to make well-informed decisions.
Notably, from an M&A standpoint, the Notice introduces due diligence requirements for CF advisers advising on certain types of public M&A transactions. These require advisers to assess the accuracy and completeness of material statements made or information given by their clients, conduct appropriate verification, and monitor any developments that contradict or bring into question the information's reliability. However, exemptions apply if the adviser's advice (a) is not given for any offer of specified products to the public, and (b) where the client is Singapore-listed, is not circulated to shareholders or made publicly available.
Going forward, it will be crucial for CF advisers to closely consider the enhanced business conduct requirements and ensure that the necessary processes can be completed within already-tight transaction timelines.
Gradual Recovery for S-REIT M&A
Singapore has established itself as a prominent global hub for real estate investment trusts (REITs) over the last two decades, and is now the largest REIT market in Asia outside of Japan. As of 31 January 2024, there were 41 Singapore REITs (S-REITs) and trusts trading on the Singapore Exchange, with a combined market capitalisation of approximately SGD100 billion.
More recently, Singapore has seen a notable trend of REIT mergers, strategically aimed at fuelling growth, enhancing portfolio diversification and optimising costs of capital through the consolidation of two REITs into a single, larger REIT.
However, S-REITs encountered significant economic challenges in 2023, marked by persistently high interest rates which led to escalating borrowing costs, reduced property valuations and lower distributions. Moreover, higher yields from alternative investment products such as fixed deposits and government treasury bills rendered S-REITs less attractive to investors.
Nevertheless, the landscape is set for a positive shift. With S-REIT managers actively managing balance sheet exposures and debt cost headwinds subsiding, we are poised for a revival of REIT M&A activity in 2024. This would enable S-REITs to explore new growth opportunities, thereby fostering an environment conducive to enhancing distributions over the medium to long term.
Private Equity Exits
Private equity M&A activity experienced a slowdown in 2023, attributed to rising interest rates, market volatility and economic uncertainty. These factors made it more challenging for parties to reach agreement on valuation and hampered exit strategies, leading private equity firms to retain assets beyond the traditional five-year investment cycle. This resulted in general partners (GPs) making less distributions to limited partners (LPs), which has impacted fundraising efforts – with limited returns from previous investments, LPs have found themselves with less capital to reinvest in new funds.
Consequently, GPs are facing increased pressure from LPs to make distributions from investments undertaken prior to the COVID-19 pandemic. This urgency to secure returns as investments reach the end of their investment horizon may lead to a shift in strategy, where immediate returns are prioritised over historical valuation expectations. As the market begins to stabilise and borrowing conditions improve, we anticipate that the narrowing of valuation gaps between buyers and sellers will result in increased activity.
Continuing the trend of previous years, the secondary market is expected to remain as the preferred route for private equity firms seeking monetisation.
Shareholder Activism
In recent years, Singapore has witnessed a significant increase in shareholder activism, characterised by hedge funds and other activist groups canvassing support to oppose what they perceive as undervalued privatisation offers. These developments highlight the critical importance of proactive shareholder engagement in the early stages of public transactions to garner support. Ongoing engagement with stakeholders such as the Securities Investor Association (Singapore) is also increasingly vital.
With increasing investor sophistication, there is also heightened scrutiny of the role played by independent financial advisers (IFAs) in public transactions and in 2023, the Singapore Exchange Regulation (RegCo) issued guidelines aimed at improving the standards, clarity and consistency of advice rendered by IFAs and outlining RegCo's expectations of directors in obtaining IFA advice.
In April 2024, RegCo also published a consultation paper which proposes to introduce new rules requiring listed issuers to assist shareholders who have requisitioned a general meeting. Issuers must commence facilitative efforts within 21 days of deposit of the requisition notice and an issuer who disputes the validity of such notice must apply for a court ruling within the same timeline. Whilst the verdict is still out, these changes nevertheless indicate a clear direction towards increased shareholder activism. Looking ahead, we anticipate this trend to continue, with the number of activist campaigns expected to rise as M&A activity increases.