Tweaking the Companies Act

SINGAPORE - After four years of comprehensive review and public consultation, the announced changes to the Companies Act (the Act) come with wide-ranging tweaks. The majority of the 217 changes, put forth by the Steering Committee for Review of the Companies Act (Steering Committee), were accepted by the Ministry of Finance (MOF).

Targeted to be effective in 2013, the amended legislation is intended to keep it current and to sustain an environment that remains attractive for business and better maintain Singapore's position as a global business hub.

These are the largest number of changes to the Act since it was enacted in 1967. We look at what the changes may imply for businesses, in particular, in areas related to shareholders' rights, corporate governance, cost and flexibility and audit.

One key change is to give CPF investors full access to their shareholders' rights, similar to cash investors. Unlike the case at present, investors using CPF monies will in future be able to exercise voting rights similar to cash investors, such as the ability to vote at company meetings.

This will enfranchise such investors significantly. They will do so through a new "multiple proxies" approach which is in turn another key amendment. For investors who are beneficial owners of shares held indirectly via nominee or custodian institutions, such as the CPF investors, the new multiple-proxies approach will allow more of them to participate in shareholders' voting through a show of hands.

Key beneficiaries

Given the trend of more active participation by investors, such changes may see more attendance in shareholder meetings and participation in voting, whether from institutional or individual retail investors. We should not be surprised if future shareholder meetings experience a rise in tabling of resolutions or robustness in discussion.

Another change is the lowering of the threshold to propose or requisition a vote by poll. Providing what we view as a suitable balance of interests between various types of investors, the lowering of the threshold from the current 10 per cent to the revised 5 per cent of voting rights will make it much easier for minority or substantial shareholders to requisition a vote by poll, without negatively impacting majority shareholders' ability to request such vote by poll.

Institutional investors, such as investment fund entities, looking to vote by poll are likely to be the main beneficiary of this amendment.

Such investors tend to hold substantially more shareholdings than retail ones, with many of their holdings not crossing the 10 per cent mark.

These developments, together with the revised Code of Corporate Governance 2012, would likely mean, especially for listed companies, an environment that is more demanding in terms of corporate governance. Board members and senior management will have to be prepared.

Reinforcing such demands on corporate governance, there were also quite a number of amendments intended to enhance transparency. Changes were made towards encouraging various matters to be expressively clear. For example, the Act will in the future explicitly express how a director may resign or be removed in private companies, unless the company's articles state otherwise.

The amended Act also makes clear the limit in compensating directors for the loss of office, with the limit based on the total emolument for the past one year. CEOs will also be required to disclose their interests in transactions and shareholdings in the company and related corporations, similar to board directors.

Further, an auditor of a public interest company or its subsidiary will need to seek the consent of Accounting and Corporate Regulatory Authority's (Acra) and publicly disclose the reason for resigning prematurely. This can serve as an alert to any issue of concern to other relevant regulatory bodies.

The acceptance of recommendations by the MOF towards giving businesses greater flexibility and reducing regulatory burden or costs should also be viewed positively. The allowance for public companies to issue dual class of shares or a tiered share structure is a key change. This will introduce greater flexibility in terms of possible equity structures, allowing such companies to cater to the more diverse needs or preferences of different segments of investors as well as enable more varied approaches to raise capital.

Audit matters

Regulatory burden would also be reduced by not mandating an age limit or retirement for directors. Electronic transmissions of notices and documents will also be made less restrictive and prescriptive. Hence, companies will have more flexibility in their modes of communication, enabling them to reduce the administrative burden as well as costs of physical copies.

On audit matters, the MOF accepted the establishment of a notion of "small company" applicable to audit exemption. Under this recommendation, companies meeting two of three criteria would qualify as a "small company" and be exempt from the statutory requirements of an annual audit.

The criteria are first, total annual revenue of not more than $10 million; second, total gross assets of not more than $10 million; and third, not having more than 50 employees. These criteria are consistent with the definition in the Singapore Financial Reporting Standards for Small Entities.

Undoubtedly, such a change will help reduce compliance costs, with the recommendation welcomed by many in the business community, particularly the small and medium enterprises (SMEs).

However, external audits will continue to have their benefits such as providing added assurance to the quality of financial statements and acting as a deterrent to fraud, just to name a few. SMEs which will be exempted, under the recommendation, should therefore consider the merits of continuing with an audit of their financial statements before deciding to do without one.

On the other hand, small and medium audit practices (SMPs) offering external audit services face the prospect of dwindling revenue given their main clientele are SMEs. To cope with the change, SMPs may have to evolve their business strategy to one that focuses on other services such as taxation and corporate advisory services such as internal audit, valuation and training, which respondent SMEs to a survey conducted in 2012 by the Institute of Certified Public Accountants of Singapore indicated as some of the more important services needed.

Alternatively, SMPs wishing to continue providing external audit services may contemplate merging their resources to take on larger engagements.

Expectation gap

The MOF also accepted the Steering Committee's recommendation not to introduce any statutory provision on the limitation of liability of auditors, but to have Acra monitor the issue. Auditors looking to have "statutory protection" in the form of legislated provisions limiting the liability of auditors will be disappointed.

Given the rising number of corporate scandals reported in the media in recent years, some quarters have inevitably pointed the finger at the role of auditors, or the lack of it. There remains an expectation gap of what the auditor can do and what the public expects from the auditor. Essentially, auditors will continue to face high professional indemnity costs.

To avoid being embroiled in any legal suits, auditors will need to work hard in achieving the all-important audit quality. Vigilance will also be needed when executing the audit procedures, exercising auditor professional judgment and exhibiting professional scepticism at all times.

Coupled with stringent auditing requirements and complex financial reporting standards, audit costs are likely to increase. Auditors will then have to address the difficult question of whether to absorb the rising costs or to increase audit fees charged to their clients.

Chan Sze Yee is head of research and Kang Wai Geat is deputy head of technical standards development and advisory with the Institute of Certified Public Accountants of Singapore.