Company law and coporate governance

Issue

Hua Seng Brothers Pte Ltd (HSB) is owned by five brothers, each holds 20% of the company shares. Their revenue came from the 2 properties: 18 Namly Crescent and 3 Third Avenue, which were worth $4.2 million and $3 million respectively during the last valuation by Knight Frank. As an expression of appreciation to their 80 year-old father, four brothers terminated the lease at 18 Namly Crescent so that their father can stay without rent for life. As the property was the most profitable, the termination of lease results in the company to lose their biggest source of revenue and became solely dependent on the rental of 3 Third Avenue. With such, the four brothers decided to look into alternative sources of funds to maximize profitability of the company.

Rules

Summary of some alternative corporate financing:

  1. Equity
    Capital supplied by members of the company is equity. The advantage of equity is that it requires no repayment.

    1. Shares
      S4(1) CA defines “share” as share in the share capital of a corporation and includes stock except where a distinction between stocks and share is expressed or implied.

Application

The first alternative financing option Hua Seng Brothers Pte Ltd (HSB) can adopt is by equity financing through private sources. Bringing in new members (such as relatives etc) to join the company as shareholders help raise capital. On a private agreement, the new shareholder(s) buy existing shares from the brothers at an agreed price not regulated by the statutory.

Alternatively, the company can go on public listing to raise fresh capital by issuing new shares to the public. This will be further discussed in 4.0 Offers to Public.

Debt

Loan or funds supplied by creditors (such as banks or individual) is debt. Creditor provides debt with the condition that repayment is made with interest and company provides adequate security to the creditor.

  1. Secured Debt Financing
    Where debt is secured, the securities involves some form of property and its rights. Debentures and charges are the common securities used in debt financing. Guarantee is also classified as a means to secure private company's debt.

    1. Debenture
      S4(1) CA defines “debenture” broadly include debenture stock, bonds, notes and any other securities of a corporation, excludes bills of exchange and promissory notes.

In Levy v, Abercorris Slate and Slab Co (1887), Judge Chitty defines debentures as “a document which either creates a debt or acknowledges it, and any document which fulfills either of these conditions”.

Debenture can be further classified into

  1. Private Debenture
    Instrument which creates or acknowledge a debt entered privately between a company and lender(s).

  2. Public Debenture
    Debt that is offered for public purchase. Interest is payable to the debenture owner and is redeemable by the company when debenture matures.

  3. Public Debenture issued by listed company can be bought and sold the same way as shares. This will be further discuss in 4.0 Offers to Public.

    Application

    The second alternative financing option HSB can adopt is issuing debentures to raise funds. The advantage of debenture is that the company can generate more cash flow, however the disadvantage of issuing debenture is that the company has to pay debenture holder interest which will eat into company's surplus and thus, affecting shareholders dividends.

      Charge
      Security interest granted by a company in favour of a creditor in respect of a company's asset. If the asset is listed in S131(3) CA, company have to register the charge with ACRA within 30days of its creation. Once charge is registered, it ranks in priority according to the date of registration. S131 - S141 CA, Division 8 of PART IV governs the registration of charges.

      Charge can be classified into

      1. Fixed Charge
        It is granted over one or more definite and specific asset. The company cannot dispose the asset(s) without creditors consent. Every member and creditor is entitled to inspect the instruments creating the charge.

      2. Floating Charge
        It is granted over a general class of assets (changes constantly, shifting in nature). The company has to register every floating charge with ACRA at the risk of being held against liquidator and any creditor. The rules on registration of fixed charge also apply to floating charge. A floating charge crystallizes when the assets become specific and thus becomes fixed charge. The company is free to dispose of assets until “crystallization”.

Application

The third alternative financing option HSB can adopt is by securing loans from banks or financial companies via fixed charge over its assets which are 18 Namly Crescent and 3 Third Avenue. The company can mortgage 18 Namly Crescent since it can command higher loan from creditors. With more cash on hand, the company can make use of the loan to acquire other property or renovate 3 Third Avenue so that it can command higher rents. Floating charge is not applicable in the case of HSB as the nature of its assets is specific and constant.

  1. Guarantee
    A guarantee is a promise that the company provide creditor that in the event the company cannot pay up the debt, an individual or a corporation as a surety (guarantor) will be liable to answer for the debt of the company.

Application

The forth alternative financing option HSB can adopt is Guarantee, seeking someone or a corporation to be their guarantor so that they can get a loan from banks or financial companies without mortgaging any of their properties. However, the brothers are strongly discouraged to be company's guarantor as they will be personally (involving their personal assets) liable for the debts if in the event when the company is unable to pay. While on the second note, convincing someone else or a corporation to be the company's guarantor would not be easy as they have to prove its credibility.

  1. Collective Investment Schemes
    It is refer to as a range of interests which are not shares or debentures. The definition is further explained in S2 SFA.

Application

The fifth alternative financing option for HSB is Collective Investment Scheme. The company can place profiting properties like 3 Third Avenue in a trust and appoints a manager to manage this asset. Investor can then purchase an interest in the trust by buying units which are listed on the stock exchange. Since units are offered to the public, the company has to comply with the provisions governing offers of units in collective investment schemes found in S285 - S302 SFA.

  1. Offers to public
    When a company is listed in SGX, it is entitled to offer its securities to the public to raise funds in the public sphere. (1.1) Shares, (2.111) Public debentures and (3.0) Units in collective investment schemes are types of securities offered to the public. SFA, CA and Monetary Authority of Singapore Act are statutory rules governing the capital market. While SGX-ST Listing Manual (LM) and Takeover & Mergers Code (TC) administered by the Securities Industry council (SIC) are non-statutory rules governing the capital market.

Company can be listed in

    1. SGX Main board
      Company must have a minimum market capitalization of $80 million or satisfactory profit track record of at least $7.5 million for the last 3 years. It must have at least 1,000 shareholders and proves healthy financial position with no shortfall in working capital. Company must produce a Prospectus.

    2. Catalist
      Company need not meet any financial entry criteria. However, the company needs to have a sponsor which has entry criteria that it is a corporate with minimum base capital of S$500,000. On the other hand, instead of prospectus, the company must produce an Offer Document.

Application

In the case of HSB cannot be listed in SGX Main Board because its maximum asset did not meet the $80 million minimum market capitalization or a $7.5 million track record in 3 years. Therefore the sixth alternative financing option for the company is to be listed in Catalist. The company will have to make an initial price offering (IPO) through issuing an offer document lodged at Catalist website for public dissemination and list through sponsors. The other alternative is by placement of shares through intermediaries (such as stockbrokers). The intermediary will find investors to subscribe to the allotted shares at a given price.

Although this option can help expand company financial source, a note of caution is that raising funds in the public sphere has more stringent rules to abide to and requires the company to file numerous reports to SGX. The company's every move will be subjected to a close scrutiny of its public shareholders and it might also be subjected to takeover since the company now belongs to the “public”.

  1. Take Over
    A process which shares of a public company are acquired such that the voting control of the company passes to a new shareholder, who is the “offeror” of the take-over.

“Offeror” can take-over the company by

  1. Rule 15 TC Voluntary takeover
    “Offeror” initiates a voluntary offer to acquire shares by following the procedure stated in TC.

  2. Rule 14 Mandatory takeover
    “Offeror” can trigger for mandatory takeover when he/she acquires 30% or more of the voting shares in the company.

Application

Takeover is NOT a alternative financing option for HSB. When becoming public listed company, takeover is something the company can be subjected to. It is the last thing the brothers will want for the company. If this happen, the five brothers will become the minority share holders of the company and eventually lose their control and rights except for minority shareholder rights that they will be entitled to.

Conclusion

There are many alternative sources of funds available for the company. However, the company has to examine all the pros and cons of such financing alternatives. Some are debentures which interest is payable, while some has charges that require company's asset as a form of security to creditor and some are subject to public bureaucracy.



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