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Pitfalls to Avoid When Chinese Companies with Singapore Subsidiaries Seek an IPO

April 8, 2022

Pitfalls to Avoid When Chinese Companies with Singapore Subsidiaries Seek an IPO

April 8, 2022

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Proposed issuers seeking to list in China would typically engage a local (Singaporean) law firm to conduct due diligence on each of their related companies incorporated in Singapore to ensure compliance with the CSRC requirements.

In 2020, there were 1,415 initial public offerings (IPOs) globally, which raised a total of USD $331.3 billion in proceeds for the companies involved. This represented a significant increase year-on-year in terms of both volume of transactions and proceeds raised. In contrast, there were only 1,040 IPOs globally in 2019, which raised a combined capital of USD $199.2 billion. The 2020 figures are even more remarkable considering that the COVID-19 pandemic had slowed IPO activity around the world dramatically in April and May 2020.

The Asia-Pacific region (APAC) has been the region to watch in recent years. More than half of the IPOs launched around the world (approximately 52 percent) in 2020 were on exchanges in APAC. In particular, the major IPO hotspot in APAC in 2020 was China (excluding Taiwan and Hong Kong), which was alone responsible for 365 IPOs, raising a total of USD $64 billion. The Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE) recorded 234 and 161 IPOs in 2020, respectively. This represented a dramatic 81 percent increase in China’s listing volume from 202 IPOs in 2019. This bullish surge in IPOs showed no signs of abating in the first three months of 2021, as a record 143 Chinese companies completed their IPOs, amassing an impressive USD $23.6 billion in funds. On 3 September 2021, the Beijing Stock Exchange (BSE) was established to serve innovative small and medium-size enterprises. According to its 2021 market statistics, 82 IPOs are recorded with RMB 7.522 billion raised (approximately USD $1.181 billion).

While the flurry of IPOs may be happening in other jurisdictions, there are often substantial domestic implications. When a company (issuer) files for an IPO on the main board of the SHSE and the SZSE in China, the Chinese Securities Regulatory Commission (CSRC) would usually require it to furnish information about its corporate group. By no coincidence, many of these proposed issuers tend to have Singapore subsidiaries or other related companies incorporated in Singapore, since having such related companies often confers substantial tax and trade benefits, as discussed below.

Proposed issuers seeking to list in China would typically engage a local (Singaporean) law firm to conduct due diligence on each of their related companies incorporated in Singapore to ensure compliance with the CSRC requirements.

Proposed Issuers and Singapore Subsidiaries

Benefits of Proposed Issuers Having a Legal Presence in Singapore

There are strong incentives for a Chinese company to establish a legal presence in Singapore by incorporating a Singaporean subsidiary. The three most salient benefits are:

  1. Singaporean companies enjoy attractive tax incentives. Besides a low corporate tax rate of 17 percent, all Singapore resident companies are eligible for partial tax exemption―a 75 percent exemption on the first S$10,000 of normal chargeable income and a further 50 percent exemption on the next S$190,000 of normal chargeable income. This effectively translates to a tax rate of about 8 percent for the first S$200,000 of normal chargeable income. There are also schemes offering further exemptions or rebates for companies carrying out global or regional headquarters operations in Singapore. In comparison, the corporate income tax rate in China stands at 25 percent.
  2. Singapore has tax treaties with 86 countries, affording it crucial benefits such as double taxation exemptions and lowered import tariffs. Moreover, Singapore reaps additional benefits from its coveted status as a member of ASEAN, and its close ties to Western trading blocs. While China has a separate free trade agreement with ASEAN, it is not as far-reaching as the tax treatments that ASEAN members enjoy, which include free trade access to all ASEAN member countries, namely: Singapore, Indonesia, Malaysia, the Philippines, Thailand, Brunei, Burma, Cambodia, Laos and Vietnam.
  3. Singapore is extremely well regarded for its ease of doing business, having been ranked second in 2020 (with Hong Kong in first place), for ease of doing business (including in relation to the formation of a company), according to the Global Business Complexity Index, released as part of a report by business administration support services firm TMF Group. With a strong talent pool, attractive living conditions and ease of setting up of a company, Singapore has been viewed favourably as a Southeast Asian hub for multinational companies looking to manage their regional operations.

Due Diligence on Singaporean Subsidiaries of Proposed Issuers

IPO listings on the main board in China are currently subject to regulatory approval by the CSRC, as opposed to listings on the Science and Technology Innovation Board in the SHSE, the ChinNext in the SZSE and the BSE, which have a registration-based system. The approval system in China differs from the registration-based system in Hong Kong, the United States and other capital markets. For the CSRC to approve a particular listing, it has to be satisfied that the prospective issuer has provided accurate and adequate disclosure in accordance with listing requirements.

In terms of timelines for a traditional IPO, approximately 90 days before the CSRC accepts the IPO application, the sponsor, auditors, legal advisers and other stakeholders would have to complete due diligence on the issuer, set IPO terms (such as the amount to be raised), advise the issuer on the IPO process and assist the issuer in complying with IPO requirements.

To abide by the timelines, it is important that all the necessary filing information on the corporate group be obtained, including undertaking a due diligence review into specific compliance areas of the Singaporean subsidiary, where required.

Specific Issues to Be Examined in Relation to the Singapore Subsidiary

From the Singapore subsidiary’s perspective, a legal opinion is the primary document required for submission to the CSRC for listing on the main board. Other information pertaining to the subsidiary would be captured in the prospectus and the lawyers’ consolidated working report from Chinese legal counsel, which contains a discussion of legal issues identified in the course of due diligence.[1] Nonetheless, stock exchanges may request other information, including other legal opinions, on a particular subject matter at their discretion, especially if the subsidiary plays a key role in the corporate group of the proposed issuer.

As an unintended consequence arising from the ease of setting up a company in Singapore, very often, foreign companies set up subsidiaries in Singapore without seeking advice from a local lawyer or a professional corporate services provider. As such, we have noted a few common areas of noncompliance/concerns that may be uncovered during the due diligence process that foreign issuers may be likely to have, the rectification of which may set back the IPO process.

Below is a brief overview of the information typically required in the legal opinion, along with our insights on issues commonly encountered.

Validity of Share Ownership and Share Capital

During the course of due diligence, the local law firm engaged by the issuer would need to review all filings, returns and registrations with the Accounting and Corporate Regulatory Authority (ACRA), the Inland Revenue Authority of Singapore and/or any other regulatory authority required under the relevant laws or regulations to confirm the ownership of the proposed issuer’s shares in the Singaporean subsidiary. If there have been issuances or transfers of shares, the relevant corporate approvals should be available, and any changes in shareholding or share capital should also be updated with ACRA (as opposed to just the physical registers of the Singapore subsidiary, if any).

Section 161 of the Companies Act 1967 (CA) requires shareholders to give their approval for the issuance of company shares, “notwithstanding anything in the company’s constitution”. In the event that the subsidiary’s board of directors (the Board) had issued shares in the subsidiary without first obtaining approval from the shareholders at the general meeting, the shareholders may decide to pursue a course of action under section 161 of the CA to rectify the issue and allotment of shares. To prevent such situations from arising, the Board must obtain from the shareholders prior to any issuance of shares either (1) a specific mandate for that particular issuance of shares or (2) a general mandate authorising the Board to issue shares. The general mandate would have to be renewed at every annual general meeting of the company. Nonetheless, a general mandate does away with the need for specific mandates for every issuance of shares.

Encumbrances (Shares or Assets)

The issuer’s local law firm would need to conduct searches to determine if there are any encumbrances on the subsidiary’s assets that could affect their value. If there are any mortgages, liens, charges or any unpaid utility bills, tax payment or any other statutory payment tagged to the assets, they would need to be flagged out. Where the charges created by such documents are registrable under section 131 of the CA, any liens and encumbrances can be discovered through a search of the subsidiary’s ACRA business profile.

As not all charges or encumbrances have to be registered, the process for determining if the subsidiary has any share charges or encumbrances would be different. This would require examination of the copies of all agreements and instruments containing restrictions on transfer, encumbrances upon or other restrictions with respect to the capital stock of the subsidiary.

Directors, Officers and Corporate Resolutions

It is also important to state in the legal opinion whether the directors and officers (secretaries) of the company have been properly appointed and duly authorised. To this end, each director or secretary should have consented to act in respect of their appointment. The copies of the relevant forms (i.e., Form 45A or 45B), corporate approvals and resolutions that prove their valid appointment should be maintained by the subsidiary (or its company secretary). Following this, the appointment of directors and secretaries will also have to be updated with ACRA. Failure to have such documents may call into question the authority of the directors and officers, as well as constitute an offence under the CA.

In addition, companies must be clear on when the required corporate resolution is to be signed by a director or a shareholder and their procedures for passing resolutions. For simple subsidiaries formed as a holding company, we often see cases where companies are wholly owned by a single shareholder and the sole director is also the appointed corporate representative of the shareholder. For such instances, it has to be borne in mind that resolutions passed in general meetings should be duly signed by the individual in his capacity as a shareholder and not a director, failing which, the resolution may be deemed invalid.

Further, it is not uncommon for a Singaporean subsidiary to engage a nominee local director, in addition to another foreign director from the head office, to satisfy the requirement for a Singaporean company to have at least one local resident director. While the local nominee director may have specific arrangements with the head office, it will be important to note that the nominee director is by default still a voting member of the board of directors of the Singaporean subsidiary and their assent is likely needed to pass resolutions. In particular, we highlight that the model company constitution for incorporation provided in the Companies (Model Constitutions) Regulations 2015 (which applies by default if a company does not opt for a customised constitution) requires that the written resolution of the directors be signed by all directors in order to be valid. Therefore, when passing written directors’ resolutions (as is often the case with a local subsidiary of a foreign company), if the company had adopted the default constitution, any nominee directors are also required to sign such resolution, otherwise the resolution would be rendered invalid and require rectification.

Properties, IP and Other Material Assets or Contracts

The Singaporean law firm would need to verify if the assets of the Singaporean subsidiary are subject to encumbrances and if the Singaporean subsidiary has good, valid and subsisting title to such assets. If there exists any risk that the subsidiary does not have good and unencumbered title to the assets or if the assets are the subject of a title dispute, they may need to be resolved prior to the parent company’s IPO launch. If the Singaporean subsidiary owns any property or intellectual property, appropriate title and registration searches will have to be performed to confirm ownership.

Ancillary to the above, the law firm would also need to examine if any of the subsidiary’s material contracts would be affected as a result of the parent company’s IPO. The subsidiary’s material contracts should be examined so as to (i) ensure that there are no significant related party transactions that are undisclosed; (ii) determine if there are any contracts due to expire, and renew them if necessary; and (iii) assess if the parent company’s IPO would trigger the operation of any particular clause, in particular change in control or liquidity event clauses. These are more likely to be seen in cases of facility arrangements.


The legal opinion will also be concerned with whether the Singaporean subsidiary is compliant with employment laws, particularly for an operating entity, as there are broad powers exercisable by the Ministry of Manpower (MOM) (e.g., revocation of work passes and fines) in an event of noncompliance that may severely affect the business of the subsidiary. Any noncompliance issue would need to be disclosed as the stability of the subsidiary’s business would affect the proposed issuer’s operations.

To this end, it is critical to obtain full details of:

  1. The subsidiary’s workforce, and in particular the validity of the work pass for foreign workers;
  2. The terms of employment, including leave entitlements and terms relating to overtime pay and rest times;
  3. All incentive and nonincentive stock option plans adopted for the benefit of employees;
  4. All welfare benefits plans; and
  5. The template employment contracts/handbooks of the subsidiary.

This would aid in determining if the subsidiary company has provided basic working conditions for its employees as necessitated under the Employment Act of Singapore 1968 (EA).

An issue we commonly encounter is that the employment contracts do not set out certain key employment terms required by the MOM to be notified to employees in writing, such as their leave entitlements or, if the employee is a lower-wage worker required to be paid overtime, the terms of their overtime (or such terms are below the statutory minimums). In addition, many contracts we have seen only grant statutorily required benefits (e.g., annual and sick leave) after a probation period, which may be extended at will. However, under Singapore employment laws, such entitlements generally commence after three months of employment, regardless of whether the employee is still on probation. These are offences under the EA, which may have to be rectified as a matter of ensuring compliance.

Compliance with Licenses/Regulatory Authorities

The legal opinion must set out whether the subsidiary has complied with the laws, legislation, regulations, guidelines and all statutory and other requirements applicable to the subsidiary, its business, operations and assets. This is often something that has to be confirmed specifically by the management of the subsidiary.

In the event that the subsidiary is aware of any allegation or complaint concerning any breach of the requirements and conditions of any license issued to the subsidiary or of any other compliance issues raised to it by any authority, such allegation or complaint is a material fact that has to be disclosed in the legal opinion.

Legal Proceedings

It is important to make sure that there are no pending legal proceedings involving the company or any member of its corporate group. While searches for ongoing litigation in the Singapore courts may be conducted, other nonreported forms of disputes or potential disputes (e.g., letters of demand, arbitration proceedings) will have to be confirmed by the management of the subsidiary.

The subsidiary should provide copies of all audit responses and summaries of all presently pending or threatened claims, actions, suits, injunctions, legal proceedings, arbitrations, amicable settlements or any other legal or administrative proceedings by or against the subsidiary as part of the due diligence exercise. This would include, without limitation, any employment or labour claims (e.g., grievances, administrative charges, wage-and-hour claims, workplace safety matters, civil litigation, unfair dismissal, unfair competition and workers’ compensation).


The ease of doing business in Singapore, its stable political climate and good trade ties have attracted many foreign companies (particularly Chinese companies) to set up subsidiaries in Singapore as their base of operations for Southeast Asia activities and for coordinating regional or global supply chains. However, a consequence of such ease of setting up is that many Singapore subsidiaries (particularly nonoperating shell subsidiaries) may not have in place the formal documentation or fully compliant regulatory filings, which have to be reviewed in the event its parent company seeks an IPO. For newly expanding companies or companies preparing for an IPO, it would be important to preempt such issues by seeking professional assistance to avoid encountering any compliance issues and to ensure that, in the event there are any, they are rectified prior to the commencement of the IPO process.

For More Information

If you have any questions about this Alert, please contact Leon Yee, Evan Teoh Ye Oon, any of the attorneys in our Singapore office or the attorney in the firm with whom you regularly in contact.


[1] A lawyers' working report essentially captures all discussions in the prospectus but would be only prepared from a PRC law perspective (e.g., company particulars, history, business, management, associated transactions, liabilities and assets, M&A deals, taxation, environment protection and use of the funds to be raised via the IPO).

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.