Alerts and Updates

Due Diligence in Singapore Public Takeovers

June 7, 2017

The more information that an acquirer has before making a bid for the Target, the better it can evaluate the Target and plan its acquisition strategy. 

Japanese Translation

Acquirers wishing to buy control of, or merge with, a company with a Singapore primary listing (“Target”) should first evaluate a potential Target through due diligence, the process of obtaining and studying information on the Target and its business. Analysing publicly available information avoids legal problems. By contrast, private information from a Target to an acquirer, whilst useful, could trigger legal problems (including insider trading risks). This presents an acquirer with two choices: bid for the Target on the basis of publicly available information only, or do so on the basis of both publicly available information and private information.

Bidding on the Basis of Publicly Available Information Only

Publicly available information on a Target includes:

  • The Target’s and its subsidiaries’ audited accounts
  • Annual reports and annual return
  • Half-yearly or quarterly financial results (the frequency of such results reporting depends on the Target’s market capitalization
  • The Target’s constitution (formerly known as memorandum and articles of association)
  • Details on Target’s share capital
  • Details on Target’s directors
  • Target’s announcements made on the Singapore Exchange’s website
  • News articles written about the Target
  • Stockbrokers’ research reports on the Target

This information, studied from the different standpoints of finance, tax, accounting and legal, will help an acquirer in two ways. First, the acquirer will be able to value the Target. A Target’s title to assets and also productivity in using resources will be important considerations. Second, the acquirer will be able to plan its takeover strategy using a general offer or scheme of arrangement, form of consideration to be offered, amount of first offer, etc.

For example, publicly available information allows such areas to be considered:

 

Financial Aspects

Capital Structure Aspects

Shareholding Aspects

Regulatory Aspects

Considerations

(i) Target’s accounting policies.

(ii) Target’s contingent liabilities.

(iii) Target’s cash flow and profit.

(iv) Value of significant Target assets.

(v) Whether goodwill will be acquired and the effect of post-acquisition amortisation of such goodwill by the acquirer.

(i) Whether there are different classes of Target securities.

(ii) Existing option arrangements (share options or employee option plans).

(i) Who are the Target’s substantial shareholders – extent of shareholding dispersion, whether any substantial shareholders might be willing to offer their Target shares to the acquirer.

(i) Government licensing for Target’s business, and whether change-of-control of Target (pursuant to a successful bid) requires government approval.

(ii) Whether competition law considerations apply to the potential acquisition.

(iii) Whether foreign laws apply to Target, and which could affect acquirer’s bid.

Bidding on the Basis of Both Publicly Available Information and Private Information

If there is ample public information available already, why bother with private information? After all, a Target is likely to tell inquisitive acquirers that it has already publicly announced all material information relating to it and its business, in compliance with the Singapore Exchange’s continuing disclosure requirements.

The answer is that information helps acquirers. The more information that an acquirer has before making a bid for the Target, the better it can evaluate the Target and plan its acquisition strategy. 

For example, apart from the areas set out in the table above, private information allows such areas to be considered:

 

Target’s auditor’s Working Papers

Key Contracts

Real Estate

Employment

Considerations

(i) Target’s auditor’s working papers for Target’s audited accounts can be used to improve financial analysis of Target.

(i) Key contracts or other arrangements could form a significant part of the Target’s business, and their terms may impact a potential bid for the Target. 

For example, if the Target is a party to a joint venture, there may be buy-out obligations triggered in the joint venture as a result of a change-of-control of the Target arising from a successful bid.

(i) Property may form a significant part of Target’s assets, and their ownership or lease terms may impact a potential bid for the Target. 

For example, the Target may own factories leased on land from the government, and such leases may have change-of-control restrictions (which will be triggered by a successful bid from the acquirer).

(i) Employment terms of key directors and executive officers, and whether there are any provisions (for example, promised remuneration triggered by a change-of-control as a result of a successful bid from the acquirer).

An expansive due diligence investigation can therefore offer two advantages for an acquirer.

First, the exercise will help the acquirer to validate various assumptions of the Target and its prospects. These could be strategic, financial, commercial, operational, or technological in nature.

Second, the exercise will help the acquirer to improve the terms of its planned bid. It minimises overpayment and also synergy risk.

In friendly takeovers, an acquirer can ask the Target for additional (private) information, while in hostile takeovers, it has to rely on public information for its assessment as the Target will not be likely to cooperate on information requests.

If the Target provides private information to an acquirer, both parties will have to consider if the benefit of this course of action outweighs the costs.

 

Target

Acquirer

Challenges presented by the use of private information in Target due diligence

(i) Difficult for the Target to assess what private information is materially price sensitive (and triggers insider trading risks) and what information is not (and therefore can be shared with the acquirer without creating complications).

In Singapore, the provider of the information (“tipper”), i.e. Target, will also be found guilty of insider trading if the prohibition is breached.

(ii) The Singapore on Take-Overs and Mergers (“Takeover Code”) requires private information given to an acquirer to be given to any other genuine bidder making a bid.

Such information, even if not materially price sensitive, could be commercially sensitive or subject to confidentiality obligations. A Target may not want to share such information with other bidders, particularly if such bidders are trade competitors.

(i) If an acquirer obtains materially price sensitive information from a Target, the acquirer is prevented by the Takeover Code and Securities and Futures Act from dealing in the Target’s securities until such information is made public by the Target, in a “flush-out announcement”.

An acquirer could find itself unable to act after obtaining such information, if the Target does not cooperate.

If a Target provides private information which is not materially price sensitive to an acquirer, the acquirer must nonetheless ensure that proper disclosure is made in the takeover documentation. This is to comply with statutory and Singapore Code on Take-overs and Mergers disclosure requirements and to avoid challenges on the basis that the acquirer has materially price sensitive information which is not publically available.

Should Private Information Ever Be Used in a Public Takeover?

An acquirer, in deciding the relative importance of private information to its potential bid for a Target, should consider its specific goals for the acquisition. 

For example, an acquirer looking to enter a new product market through acquiring control of a Target and its product lines, may not consider the Target’s profitability to be of great importance for the purpose of due diligence. By contrast, profitability could be of great importance if the acquirer is looking to merge with a Target of similar size, as this affects the combined entity’s post-acquisition value. 

In some cases, private information may be very useful for a bid, and in others, acquirers will be content to bid on the basis of publicly available information only.

For Further Information

If you have any questions about this Alert, please contact Mark See, any of the attorneys in the Duane Morris & Selvam Singapore office or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.