Changes in Singapore company law

In December 1999, the Company Legislation and Regulatory Framework Committee (CLRFC) was appointed by the authorities to undertake a 'comprehensive and coherent' review of Singapore company law and regulatory framework. The CLRFC released its report in October 2002 and it included numerous recommendations for legislative change. Most of these recommendations were accepted by the authorities and were implemented through the Companies (Amendment) Act 2003 and the Companies (Amendment) Act 2004.

In its review exercise, the committee essentially adopted the approach of keeping the UK Companies Act model and modernising it to meet current needs. Consideration was given to the recent UK experience of modernising company law. In addition, the extensive law reform initiatives in Australia and New Zealand were taken into account.

Some of the changes in company law have been radical and their consequences are far-reaching. Others are not earth-shattering, but rather expected changes which bring the law in line with the times. The objective of this article is to provide a concise overview of the more important changes, particularly as they affect students studying Singapore company law. The noteworthy changes can be divided into six categories:

  1. company formation
  2. company contracts
  3. alteration of memorandum and articles
  4. board/general meeting relationship
  5. company meetings
  6. directors' duties.

Company formation

The 2004 Amendment Act reduced the minimum number required to form a company to just one person (section 17(1), section 20A). This change has practical as well as conceptual implications. On the practical side, it enables a sole proprietor to start a company as a sole shareholder. On the conceptual side, Singapore company law now embraces the somewhat incongruous idea that an individual can form a company. Section 184G was also added to the 2004 amendment in order to facilitate the passing of resolutions by a one-member company.

As a concomitant to a company having one member, the 2004 Amendment Act also allows a company to have only one director (section 145(1)) - the sole member may also be the sole director. There are also consequential amendments to facilitate declarations (section 157B) and resolutions (Fourth Schedule to the Act) of one-member boards.

Another change is that private companies are no longer prohibited from raising capital from the public (section 18). They would, however, need to comply with the usual prospectus and other regulatory requirements.

Company contracts

Here, the changes affect two important areas of company law - corporate capacity and directors' authority.

As regards corporate capacity, the pre-2003/2004 amendment scenario was that a company has objects stated in its memorandum of association, and these objects are scrutinised to ascertain if a particular contract is within the company's capacity. If the contract is ultra vires, that is, outside of the objects, the effect depends on the operation of section 25 of the Companies Act. While section 25(1) essentially says that a contract is not invalid just because it is ultra vires, section 25(2) allows a shareholder or debenture holder to apply to the court to restrain the performance of an ultra vires contract. Upon such application, it is up to the court to decide whether to give such a restraining order and to award compensation as it deems fit.

The 2004 Amendment Act affects the position in two ways. First, by deleting section 22(1B) which required the objects to be stated in the memorandum, it is now not necessary for companies to state their objects. Secondly, section 23(1) now provides that a company shall have full capacity to carry on any business or activity and to enter into any transaction. New companies can therefore choose not to have objects, in which case they will have capacity to carry on any business and enter into any transaction. For these companies, section 25 has no application.

At the same time, section 23(1A) and (1B) allow a company to have objects in its memorandum and to restrict its capacity and powers. As a result there is the option of having objects and retaining the operation of the ultra vires doctrine. For these companies, the pre-amendment regime still applies.

As regards directors' authority, Singapore has finally done away with the rule of constructive notice. Previously, according to this rule, third parties dealing with a company are deemed to have notice of restrictions contained in its memorandum and articles and other public documents. For example, if the articles contain a provision restricting the authority of a director to transact on behalf of the company, the third party is affected by the restriction even though he is unaware of the article. The Companies Act now includes section 25A, which provides that a person, who deals with a company, is not deemed to have notice of the contents of its public documents.

Alteration of memorandum and articles

Previously, the memorandum of a company could only be altered to the extent and in the manner provided by the Act (section 26). For example, where (as in the case of objects) the Act made no provision for alteration, alteration was not possible. Following the 2004 amendment, the memorandum may be amended by a special resolution. One consequence of this is that if the requisite majority (75%) of the shareholders is in favour of amending an objects clause, the memorandum can be changed. The right to alter the memorandum is subject to the new section 26A, which deals with entrenching provisions. Section 26A(1) allows the inclusion of entrenching provisions in the memorandum or articles.

An entrenching provision is basically a stipulation that a certain provision may be amended only if a specified majority higher than the minimum 75% (which otherwise would be sufficient to alter a provision in the memorandum or the articles) agree to it (or only if some other condition is satisfied). For example, a provision which stipulates that a particular clause or article may only be amended if all the shareholders agree is an entrenching provision. In such a case, the entrenching provision has to be complied with. A special resolution would not be effective to amend the provision.

The objective of the entrenching provision regime is to provide statutory limits on majority rule in the context of alteration of the memorandum and articles.

Board/Shareholders relationship
The 2003 Amendment Act introduced a new section - section 157A. The section provides that:

  • the business of a company shall be managed by, or under the direction of, the directors
  • the directors may exercise all the powers of a company except any power that this Act or the memorandum and articles of the company require the company to exercise in a general meeting.

A similar provision appears in the amended article 73 of the Fourth Schedule. This section is a restatement of the legal position as regards the power dynamics in a company. While the shareholders own the company, the directors (or, more accurately, the board of directors) hold the management power. Apart from what is reserved for the shareholders at a general meeting, management power lies with the board. This section merely reflects the legal and practical situation in the corporate world - no significant change in law has been introduced.

Company meetings
Previously, the shareholders of a company could make a decision by issuing a written or curricular resolution instead of holding a meeting if all of the shareholders agree. The requirement of unanimous consent severely limited the availability of written resolutions. As a logical development, the 2003 Amendment Act introduced new provisions (section 184A-F) to increase the scope of written resolutions and to provide for the relevant procedures.

Section 184A(1) lays down the general principle that a company may pass resolutions by written means. Section 184A(3) and (4) follow this up by confirming that for special resolutions and ordinary resolutions, a written resolution is passed if agreed upon by a 75% majority or a simple majority respectively. As a safeguard for minority interests, section 184D provides that holders of 5% of the voting rights may give notice to the directors requiring that a general meeting be convened instead of proceeding with a written resolution. Upon receipt of such notice, it is mandatory for the directors to convene the general meeting (section 184D(2)).

The 2003 Amendment Act also altered the notice period for special resolution of private companies, reducing it from 21 days to 14 days (section 184(1)), thus enabling special resolutions to be passed more quickly.

Another practical change made by the 2003 Amendment Act is that private companies may now dispense with annual general meetings (AGMs) if, at a general meeting of the company, a resolution to that effect is passed by all members entitled to vote at the meeting (section 175A). Provision is however made for a member to give notice, requiring an AGM to be held (section 175A(4)).

Directors' duties
Amendments were also made in the realm of directors' duties. On the whole, they are small changes, and serve to improve the corporate governance regime.

Section 156, which deals with a director's duty of disclosure, was amended in two ways. First, the duty is now in respect of transactions rather than contracts, thus widening its scope. Secondly, the section now spells out the categories of person who fall within the expression 'member of a director's family' - namely, his spouse, son, adopted son, step-son, daughter, adopted daughter and step-daughter.

To alleviate the burden faced by nominee directors, section 158 makes provision for disclosure by such a director to the person who nominated him. The section allows a director to disclose information (which he has in his capacity as a director or employee of a company) to a person whose interests the director represents or to a person 'in accordance with whose directions or instructions the director may be required or is accustomed to act'. Such disclosure, however, must satisfy three requirements:

  1. the director had declared at a board meeting the details of the information to be disclosed and of the recipient of the information
  2. the board had authorised the disclosure
  3. the disclosure would not be likely to prejudice the company.

The 2003 Amendment Act also made refinements to the regulation of giving loans to directors, in particular, housing loans. The section now specifies that the loan should be for a home 'occupied or to be occupied by the director' and clarifies that a director should not have more than one housing loan outstanding at any time.

The 2004 Amendment Act introduced another new provision dealing with directors' duties under section 157C. The section states that a director, in exercising and performing his duties as a director, may rely on reports, data and advice given by:

  • an employee whom the director reasonably believes to be reliable and competent
  • a professional adviser or an expert on a matter which the director reasonably believes to be within the person's competence
  • a director or a committee of directors (of which he was not a member) on matters within the director's or committee's designated authority.

Such reliance is permitted only if the director acted in good faith, made proper inquiry, if inquiry was needed, and had no knowledge that reliance was unwarranted. Considering the caveats which the section contains, it is questionable whether the new provision gives directors any real additional protection.

The next change is a significant one. As part of the corporate governance regime, the policy of the law has been that in general, a director should not be allowed to escape his duties - hence, the statutory invalidation of any form of exemption or indemnification given to a director (or officer). Before the new amendment, as an exception to the rule, section 172(2)(A) allowed a company to purchase insurance on behalf of a director in respect of his liability. This concession was, however, subject to the important qualification 'except where the liability arises out of conduct involving dishonesty or a wilful breach of duty'.

Surprisingly, this qualification was deleted in 2003, with the result that a director may now be covered by insurance for a dishonest or deliberate breach of duty. Finally, a minor amendment was made in 2003 to section 391, making it clear that relief can be given in respect of a director's liability to account for profits.

The recent rounds of amendments have brought about radical change. It will be some time before the corporate world and the legal fraternity fully appreciate the changes and their implications. Moves are also afoot for a complete rewrite of the Companies Act, which is a monumental task. Mention should also be made of the proposal for a Limited Liability Partnerships Act (probably along the lines of the UK Limited Liability Partnerships Act 2000). Certainly, these are turbulent times in the Singapore company law scene. Hopefully, when the storm subsides, there will be an even better company law regime in place which facilitates the conduct of business in the modern competitive world, as well as protecting the interests of all stakeholders.