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M&A transactions in Singapore: Ambitious business center on course for success

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published on 24 February 2021 | reading time approx. 3 minutes


Singapore’s role as investment and finance hub in the Asia-Pacific region is also reflected in its important role in M&A transactions in the region. The city state’s sound and predictable legal system, its world-class banking and finance landscape, a competitive tax system and its openness to foreign investors make it an interesting place for M&A activities.


According to the Institute for Mergers, Acquisitions and Alliances, the announced M&A transactions in Singapore in 2019 had a value of over 43 bio. US-Dollar. In the pandemic year 2020, this value has dropped to an amount of over 27 bio. US-Dollar (October 2020), and follows the sagging regional trend for M&A transaction in Southeast Asia. 2021, depending on the development of Covid-19 and the corresponding governmental response, could become an interesting year for M&A activities in the region and in Singapore. The post-pandemic environment is likely to be a buyer-friendly market, where the focus will be on comprehensive due diligence exercises and the risk mitigation within contracts.

M&A transactions post Covid-19 in Singapore will come with new challenges and opportunities. Changes in the employment framework with regards to retrenchment might impose difficulties for transactions concerning target companies with excess manpower. The introduction of restrictions to ipso facto clauses, which would usually allow contractual parties to terminate or modify commercial contracts in case of certain triggering events such as restructuring, provide certainty in the area of distressed M&A transactions where the target depends on certain key suppliers.

M&A activities in Singapore are likely to be seen in a variety of industries. In particular the start-up and technology sector could become a relevant sector of transactions. Asset holding companies in different industries, focusing on assets in the ASEAN region, might make Singapore the center stage for future deals in the region.

 


What are the common deal structures in Singapore?

The deal structure in Singapore would be determined by the commercial background of the transaction and the parties intention. As many transactions in Singapore involve asset holding companies, where assets are located outside of Singapore (i.e. shares in a manufacturing entity in other ASEAN countries etc.), share deals are the most common deal structures.

The Companies Act of Singapore does not only allow acquisitions of shares in another company, but also governs mergers (amalgamation) of two or more companies in Singapore. Where the deal is entirely onshore, asset deals might be considered, depending on the assets involved and the level of indebtedness of the target company.


How is a share transaction structured in Singapore?

Essentially, based on the Companies Act, the transfer of shares requires the execution of an instrument of transfer (share transfer form) and the notification of the registrar, the Accounting and Corporate Regulatory Authority of Singapore (“ACRA”). The transfer is only effective once the Register of Members under ACRA has been updated. However, since the share transfer form only refers to the parties, the amount of shares and the consideration, and does therefore not stipulate further terms of the transaction, parties usually enter into a Share Purchase Agreement (“SPA”). The SPA would usually reflect the findings of any due diligence exercise and would contain the usual provisions, among others conditions precedent, closing proceedings, purchase price adjustment mechanism, representations and warranties, etc.


Singapore is also an established place for private equity and angel investors. Convertible Loan Agreements, another form of share transactions, are used to provide financing to new business ventures and to secure equity.

Share transactions also occur in form of contribution in-kind or share swap agreements in Joint Ventures or other business collaborations.


What are the main tax drivers to be considered?

A transfer of shares in a Singapore company is subject to stamp duty. Stamp duty for shares applies to the share transfer form and is payable to the Commissioner of Stamp Duties, amounting to 0.2 per cent of the total consideration or the net asset value of the shares, whichever is higher. In certain situations (transfer of assets between associated entities), a stamp duty relief might be possible. However, as such relief is a comprehensive and burdensome exercise, it may not always be practicable. Profits from the sale of shares are generally not taxable in Singapore if they are capital in nature. However, profits might be taxed as other income in case the transaction is made as part of the normal business of the acting party.

Another relevant tax implication might lie in unutilised items which, subject to further conditions, may be carried forward and deducted from future income. However, such deduction is only possible if the company satisfied the shareholding test. That is the case when there is no substantial change in its ultimate shareholders and their shareholdings at the relevant dates.


Are there restrictions for foreign direct investment?

Foreign direct investment is in general unrestricted in Singapore. Restrictions only apply in certain areas, such as real estate or media.


Common risks and opportunities when entering the Singapore market via M&A

Considering that Singapore is open to foreign direct investment, there is no particular legal advantage of an M&A investment into Singapore over a green field investment. However, as it might also be the case in other jurisdictions, commercial reasons, such as the purchase of an existing business operation, might make a M&A investment preferential.


Which valuation methods are commonly utilised in the market?

In an M&A, target companies can be valued using three main approaches i.e. market approach, income approach and asset-based approach, depending on the purpose of acquiring a company.

The three main approaches can be done using

  • rice-Earnings (P/E) Ratio compared to the ratios of the companies of same industry,
  • Enterprise-Value-to-Sales Ratio (EV/Sales) to get a base estimate of price to purchase a company’s sales,
  • Market Value and Guideline Publicly-Traded Comparable Method (adjusted for discounts for lack of marketability and control premiums),
  • Liquidation Value,
  • Replacement Cost and
  • Discounted-Cash-Flow Method (with major consideration for terminal value, growth rate and discount rate).


The aforementioned methods are not exhaustive.


Have any M&A related investment or tax facilitations been enacted in Singapore in light of the current pandemic?

Singapore has introduced the Mergers and Acquisitions Allowance in 2010, where under certain circumstances an allowance may be granted to the acquiring company. The Mergers and Acquisitions Allowance has been extended in the budget 2020 until 2025.

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