Employers in Singapore who are considering the implementation of an employee share option scheme should tread carefully so as not to run foul of the relevant provisions under the Companies Act (Cap 50). Mark Buchanan takes a look at what the Act permits and discusses the effect of the Companies (Amendment) Bill of 10 October 2000 in this area.
There are a number of ambiguities and restrictions in the Singapore Companies Act (Cap 50) ('the Act'), which sometimes lead to difficulties when implementing an employee share option scheme in Singapore. The Companies (Amendment) Bill of 10 October 2000 ('the Bill') makes certain minor amendments to the provisions of the Act relating to employee share investment offers and schemes. However, the Bill does not provide for certain material changes, which would be appropriate in order to clarify the current provisions and to permit more flexibility in implementing share option schemes in Singapore.
In contrast, there have been changes in the tax laws and stock exchange regulations to encourage the introduction of employee share option schemes. On 22 May 2000, the Minister for Finance introduced the Entrepreneurial Employee Stock Option Scheme, pursuant to which employees of Singapore companies can enjoy tax exemptions of 50% on up to S$10m of stock option gains arising over a period of ten years, if certain criteria are met.
On 6 April 1999, the Singapore Exchange Securities Trading Limited ('SGX-ST') amended its Practice Note 9h to allow greater flexibility in respect of employee share option schemes. In particular, the rules were relaxed to permit greater participation by controlling shareholders, non-executive directors, parent group employees and directors and employees of associated companies.
When implementing an employee share option scheme, it is important to identify whether the offer of shares to the employees constitutes a private or public offering. This is particularly important for private companies, as it is an offence under the Act for a private company to offer its shares to the public. A private company must convert to a public company before implementing an employee share option scheme which constitutes a public offering. If it is a public offering, unless one of the exemptions contained in Division 5A of Part IV of the Act applies, there are onerous requirements such as the filing of a prospectus (or equivalent document) with the Registrar of Companies ('ROC') and compliance with numerous criteria relating to the contents of the prospectus.
The Act is not helpful in determining what 'public' refers to. Section 4(6) of the Act merely provides that any offer to any section of the public is an offer to the public. There is no statutory definition of who does or who does not constitute the public or any section of the public. Further, the restrictions on offers to the public would apply equally to offers to any member of the public. The Bill makes certain amendments to section 4(6) of the Act to clarify that certain offers or invitations are not to be construed as offering shares or debentures to the public, but this does not extend to offers to employees.
Accordingly, whether or not an offer constitutes an offer of securities to the public is ultimately a question of fact and degree. It may be concluded from case law that offers made by way of private placement to a small number of pre-identified investors, under circumstances in which, if those investors decline, no further offers will be made, would not be considered to be offers to the public.
Factors which may be relevant as to whether an offering would constitute a private placement offering include:
It is not possible to state with precision the maximum number of persons who may be approached in a private placement. However, if the above conditions are not satisfied, an offer made only to one person may be construed to be an offer to the public.
Division 5A Exemptions
The third option is to make the offer under a Division 5A Exemption, allowing offers to be made to certain persons or under certain circumstances. Four specific exemptions may be relevant.
Section 106B(1) exemption
Currently, there is an automatic exemption from the prospectus requirement under section 106(B)(l)(f) of the Act. The automatic exemption applies only to an offer of shares or debentures (whether such shares or debentures have been previously issued or not) by a corporation to employees of the corporation or its related corporation, where the shares or debentures are to be held by or for the benefit of the employees in accordance with an employee share investment scheme (including a share option scheme) for the time being in force.
In addition, the offer must comply with the following conditions:
Accordingly, offers not made pursuant to an employment share investment scheme (including a share option scheme) for the time being in force would not be eligible for the section 106(B)(1)(f) exemption. The words 'Employment share investment scheme' and 'share option scheme' are not defined in the Act, but they would suggest the requirement of a formalised, existing scheme where offers of shares or options are made to employees with an aim to incentivising them in their capacity as employees. In this regard, it is necessary to check the nature of any offers to employees, to confirm whether there is an investment or option scheme currently in force pursuant to which these offers are made.
The Bill provides for certain amendments to section 106(B), pursuant to which the provisions set out in section 106(B)(1)(f) will now be dealt with under a new section 106(B)(1)(c). In particular, the requirement that the offer must be made pursuant to an 'employment share investment scheme (including a share option scheme)' has been amended to refer instead to 'an employee share investment offer or scheme (including a share option offer or scheme)'. While these words are still not defined by the Act, it appears that the amendment has been made in order to extend the exemption to offers that are not under a formal scheme.
The Bill also provides for a new section 106(B)(1A) that makes it clear that nothing in subsection (1)(c) is to be construed to make an offer by a corporation to employees of the corporation or its related corporation of any of its shares or debentures, or units of shares or debentures, an offer to the public by reason only that such offer is made to the employees of the corporation or its related corporation.
The Bill does not change the scope of the exemption under section 106(B)(1) and it remains limited to employees of the corporation making the offer or its related corporations. If the corporation wants to make an offer to non-executive directors, consultants or other third parties who are not employees or who are employees of joint venture or associated companies and not related corporations, an application would have to be made under one of the other exemptions available under section 106.
Section 106B(2)(a) exemption
Under section 106B(2)(a), an application may be made to the Minister of Finance for an order that it is appropriate to dispense with the prospectus requirements as:
The Minister, on making the order, may impose such conditions on the offer as he considers appropriate. An order made by the Minister is final and cannot be challenged by the courts. This exemption is not automatic and has to be applied for. It may be possible for non-executive directors and consultants to apply for a specific exemption under this sub-section in order to participate in a share option scheme.
Section 106D exemption
A company may choose to make an offer under the exemption afforded by section 106D of the Act. Section 106D provides that the prospectus requirements of the Act shall not apply to an offer of shares or debentures to the public, whether or not they have been previously issued, where the offer is made to not more than 50 persons, each of whom is a sophisticated investor. A 'sophisticated investor' is defined in the Act to mean the following:
The offer of the shares pursuant to an exemption invoked under section 106D must also comply with the following conditions:
If the offer of shares in Singapore is proposed to be made pursuant to this exemption, a prescribed form (Form 30B) will have to be lodged with the ROC, such lodgment to be effected upon or prior to any offer being made in Singapore. The information required to be disclosed in the Form 30B includes:
The requirement for the lodgment of the Form 30B with the ROC only applies to a primary offering of the shares by the offeror or its agent to persons in Singapore and such requirement does not apply to the case where a third party (other than the offeror) is offering the shares as principal in a secondary sale.
Where the offer of the shares is proposed to be made to sophisticated investors, a copy of the information memorandum will have to be lodged with the ROC in Singapore before it is distributed to such persons. The lodgment of an information memorandum with the ROC is a simple procedure which does not take much time. Such lodgment with the ROC for the purposes of section 160D of the Act does not mean that it has been registered as a prospectus with the ROC.
The Bill provides for the amendment of section 106D in order to remove the requirement that the number of sophisticated investors should be limited to 50.
The Bill also provides for revisions to the monetary requirements needed in order to qualify as a sophisticated investor. In order to qualify, a person's total net personal assets must now exceed S$2m, instead of S$1m, or his income in the preceding 12 months must not be less than S$300,000, instead of S$200,000. In the case of corporations, the total net assets must now exceed S$10m, instead of S$5m. The Minister may change these amounts by order published in the Gazette.
Another important amendment provided by the Bill is the deletion of the provision that restricts the invoking of the exemption under section 106D on more than one occasion in any 12 month period.
Section 106F exemption
It is also possible to apply for an exemption under section 106F of the Act in respect of an offer of shares or debentures to the public which have not been previously issued, in a case where the shares or debentures to be offered are, or are to be, uniform in all respects with shares or debentures previously issued and listed for quotation on a stock exchange. In order to obtain this exemption, a statement of material facts, which complies as to form and content with Part VI of the Fifth Schedule of the Act, has to be lodged with and accepted by the ROC and the SGX-ST.
There are a number of pitfalls that have to be looked out for under the Act when implementing an employee share option scheme in Singapore. The Bill addresses certain technical issues, but does not clarify important issues such as what constitutes a public offering. It would be appropriate to make additional amendments to the Act in order to facilitate the implementation of employee share option schemes in Singapore, without having to issue a prospectus.
Baker & McKenzie