Out-Law Guide | 19 Oct 2022 | 2:10 pm | 5 min. read
Multinational companies that wish to establish operations in a new jurisdiction need to think about what vehicles are available to allow them to do so, and which option is the right one for their business.
This is the second in a three-part series of guides providing basic information on the legal framework for foreign investment and operations in Singapore:
Part 1 – Overview;
Part 2 – Establishing a business in Singapore;
Part 3 – Practical considerations.
There are several ways in which an investor can carry on business in Singapore. Certain business vehicles have become popular for foreign entities seeking to engage in business in Singapore.
A company is a business entity registered pursuant to the 1967 Companies Act of Singapore. It has a separate legal personality from that of its members. As a result, it will generally be responsible for its own debts and liabilities. It has the right to own property, to sue or be sued in its own name, and has perpetual succession. However, companies in Singapore are generally subject to greater statutory regulation than the other forms of business vehicles. This includes various ongoing compliance requirements under the Companies Act.
There are various types of companies in Singapore:
It is common for foreign companies that wish to set up subsidiaries in Singapore to choose to structure the subsidiary as a private company limited by shares. This is because the foreign company can retain control over the Singapore subsidiary by being the sole or a major shareholder of the Singapore subsidiary.
An exempt private company must prepare its balance sheet and profit and loss account annually, but it need not submit these documents with its annual return. An exempt private company is also permitted to make loans to its directors and to companies in which its directors are interested.
In addition, a company limited by guarantee is generally prohibited from distributing profits to its members. As such, the public company limited by guarantee structure is typically used by not-for-profit organisations.
Where a company limited by guarantee is wound up and does not have sufficient funds to meet the claims of its creditors, each member’s liability is limited to the amount it has agreed to guarantee, which is typically provided for in the constitution.
A foreign company may opt to register a branch under the Companies Act. A branch is not a separate legal entity – its debts and liabilities are attributed to the debts and liabilities of the head office of the foreign corporation. The foreign company must have a registered office in Singapore. There is also an obligation on the foreign corporation to appoint one person resident in Singapore as its authorised representative (‘the representative’) to accept service of process and any notice required to be served on the corporation.
A corporation cannot be appointed as a representative. The representative must be ordinarily resident in Singapore. A Singapore citizen, Singapore permanent resident or a foreigner living in Singapore and holding an employment pass or dependant pass issued by the controller of immigration will be deemed to be ordinarily resident in Singapore.
The functions of the representative are limited and, as long as the obligations under the Companies Act are complied with, the role and responsibility of the representative is generally less demanding and onerous than that of a director of a company incorporated in Singapore.
In the case of a foreign investor which is a corporation that does not wish to conduct business activities in Singapore, but nevertheless desires to have some presence in Singapore for promotion and liaison purposes, it may consider establishing a representative office.
A representative office is a temporary set-up with no legal status, hence it is prohibited from engaging in any trading or business activities which yield a profit.
An application to register a representative office must be submitted to Enterprise Singapore. All new applications of foreign commercial entities must fulfil the following criteria:
• Sales turnover of the foreign entity must be more than US$250,000;
• Number of years of establishment of the foreign entity must be three years and above;
• Proposed number of staff for the representative office should be fewer than five people.
Businesses seeking to establish themselves in Singapore may also look to mergers and acquisitions as means to do so. A company acquisition or investment, and business or asset acquisition, are common structures of mergers and acquisitions among private companies in Singapore.
This usually involves acquisition of shares by way of a sale and purchase agreement.
A share acquisition has minimal impact on contracts concluded by the seller with third parties such as customer and suppliers. The contracts will be ongoing and binding even after the acquisition. However, the buyer must diligently scrutinise the contracts for a ‘change of control’ clause that may confer the counterparty with the right to terminate the contract if there is an ownership change.
A share acquisition also has minimum impact on the employees of the seller. The employment contract concluded by the seller continues to be in effect and valid under the buyer after the transfer. The buyer should examine the terms of the employment and may need to renegotiate to retain key employees or to redefine the terms.
A share transfer will cost stamp duty of 0.2% on the higher of the consideration paid or value of the shares.
This usually involves the acquisition of a business or assets by way of a business or an asset purchase agreement.
The process is usually tedious as all the assets must be individually identified, assessed and transferred separately. Some asset transfers may require third-party consent.
The contractual rights and obligations of existing contracts of the seller may not be conveyed to the buyer in the case of asset acquisition. Although the buyer can selectively seek some of the contracts to be novated or assigned, in some cases, these may have to be renegotiated and new contracts signed between the buyer and the counterparty.
In the case of an asset acquisition that involves a transfer of a business undertaking, the seller usually must consult the affected employees as well as the trade unions, where relevant, before effecting the transfer.
An asset transfer will require a stamp duty of up to 3% to be paid on the value of the assets.
Compared to other countries in the Southeast Asia region, Singapore has relatively minimal foreign investment controls save in a few specific sectors. These are generally addressed in our separate guide on foreign direct investment in Singapore.