What Rules Apply To Foreign Listings: The Case Of Primary Listings Incorporated Overseas

Published September 23, 2017

By Mak Yuen Teen

Note: This is part 4 of a series of posts explaining foreign listings on SGX and certain risks that investors should be aware of.

In my last article, I talked about how overseas companies listed on SGX can be classified into primary and secondary listings, and how the primary listings can be further classified into those that are incorporated overseas and those that are incorporated in Singapore. I also discussed the regulatory framework for secondary listings.

For the 238 overseas companies with a primary listing on SGX as of August 2017, I estimate that about 115, or 48%, are incorporated overseas and 52% are incorporated here. In this article, I will discuss those incorporated overseas.

Foreign companies incorporated overseas with a primary SGX listing

In terms of the four main sources of corporate governance rules – Companies Act, Securities and Futures Act, Listing Rules and Code of Corporate Governance – the latter three sources would apply to foreign companies incorporated overseas with a primary SGX listing. However, the Singapore Companies Act would not apply.

About half of the overseas companies with a primary listing here are incorporated in Bermuda, with another quarter incorporated in Cayman Islands, and the rest in various other countries. The companies legislation of the particular country would apply to these listings.

Although these companies legislation may contain similar provisions to the Singapore Companies Act, they are not necessarily identical.

Since the companies legislation contains core corporate governance requirements such as those relating to director duties and liabilities, shareholder meetings, annual accounts and audit, and shareholder rights and treatment, there could be significant disparity in the protection available to shareholders of a Singapore-incorporated company compared to an overseas-incorporated one.

However, even if the provisions in the companies legislation for an overseas company are similar to those for a Singapore-incorporated one, enforcement is an issue. Where a Singapore-incorporated company breaches the Singapore Companies Act, the Accounting and Corporate Regulatory Authority (ACRA) can probe for possible breaches and take action, or where more serious action is required, the Commercial Affairs Department (CAD) may be involved. For instance, if there are allegations that directors have breached their fiduciary duties or failed to exercise reasonable diligence, the local regulators can investigate and take actions if necessary. Of course, the reality is that actions for breaches of director duties under the Singapore Companies Act are extremely rare – nevertheless, the hammer is there to be used if necessary. In the case of an overseas company incorporated overseas, similar breaches of duties would be breaches of the companies legislation in the overseas country of incorporation. It is therefore up to the regulators of that country to take enforcement action, a far less likely outcome than for a Singapore-incorporated company.

In addition to weaker regulation for foreign companies incorporated in overseas, especially in “tax haven” jurisdictions such as Bermuda, Cayman Islands and British Virgin Islands (BVI), investors in such companies also face significant information disadvantages.

I will now use three actual cases – two from Singapore and one from Hong Kong – to illustrate the weaker regulation and lack of access to information for such companies and how they impact investors.

YuuZoo Corporation

Let’s consider the case of YuuZoo Corporation, a company incorporated in Bermuda. Recently, a shareholder wrote to me saying that the company had made two issues of “drawdown shares” to GEM Global Yield Fund, one involving 53.452 million shares at S$0.1359 per share in January 2017 and another involving 7.5 million shares at S$0.0585 per share on 14 August 2017, both at a 10% discount from their recent closing bid prices. The shareholder had pointed out that YuuZoo’s shares have a par value of US$0.10 per share and that the issue price for both issues were below the par value based on the prevailing exchange rates at that time.

Unlike the Singapore Companies Act, the Bermuda Companies Act requires all shares to have a par value and does not permit the issue of shares below par value. Therefore, it appears that YuuZoo has breached the Bermuda Companies Act. I suggested that the shareholder write to the relevant authorities in Bermuda to highlight the issue. However, I would be surprised if he hears from them.

Celestial Nutrifoods

(Note: This writeup on Celestial Nutrifoods is based on the case “Celestial Nutrifoods: From Heaven to Hell” which is in the forthcoming volume 6 of the Corporate Governance Case Studies edited by me and published by CPA Australia)

Celestial, an S-chip listed in Singapore, was incorporated in Bermuda in 2003. It  listed on the SGX Mainboard in late 2003 through an issue of 118 million shares at S$0.28 a share and its share price almost doubled its IPO price at S$0.51 per share in early 2004.

Celestial had three immediate wholly owned subsidiaries incorporated in the BVI, and these subsidiaries were in turn the respective investment holding companies for each of their three wholly owned subsidiaries incorporated in the People’s Republic of China (PRC).

It had three independent directors, two of whom were resident in Singapore as required by SGX – Lai Seng Kwoon and Loo Choon Chiaw. Lai practises under the accounting firm he founded, SK Lai & Co., while Loo is the managing partner of a law firm in Singapore, Loo & Partners LLP. Lai was also a central figure in the China Sky Chemical Fibre case, where his firm was providing accounting-related services to China Sky while he was chairing its audit committee.

On 12 June, 2006, Celestial issued five-year zero coupon convertible bonds worth S$235 million, with an option to redeem after three years. On 23 May, 2009, a significant proportion of Celestial’s bondholders exercised their redemption right amounting to S$234.8 million, but Celestial was unable to redeem the bonds. On 16 June, 2009, SGX suspended the trading of Celestial’s shares, and subsequently delisted the company in 2010.

In 2010, Celestial was placed under liquidation. The liquidator faced great difficulty in obtaining cooperation from Celestial’s overseas subsidiaries. He first attempted to seek the cooperation of the BVI holding companies by registering a change in their board of directors. However, the registered agent of the BVI subsidiaries refused to acknowledge him as Celestial’s provisional liquidator. They only cooperated after the liquidator sought the recognition of his Appointment Order from the Supreme Court of Bermuda in early 2011.

Through the BVI subsidiaries, the liquidator then attempted to change the board and legal representatives of the PRC subsidiaries to gain access to their documents. However, this was rejected by the Daqing branch of the Administration for Industry & Commerce (AIC) as it turned out that the BVI subsidiaries no longer owned the PRC subsidiaries. Share transfers registered by the Daqing AIC revealed that 100% of issued shares of the PRC subsidiaries had been transferred to three different companies between August and December 2010. The transfers were mainly the result of the China Construction Bank (CCB) exercising their collateral rights to the shares in the PRC subsidiaries, which were pledged as security for certain loans to the BVI subsidiaries in 2009 and 2010. This resulted in a disposal of Celestial’s assets, making Celestial’s shares and bonds essentially worthless. The share pledges and share transfers were not disclosed to SGX [so much for the continuous disclosure obligation!].

Based on the documents that the liquidator managed to obtain, a few other questionable transactions between 2006 and 2010 were identified.

In March 2016, it was reported that the liquidator was suing the founder and the two Singapore independent directors for breach of director duties. In addition to the suspicious transactions which they allegedly authorized, the liquidator also claimed that they unjustly authorised the company to pay S$316,022 to SK Lai & Co., and Loo & Partners LLP. They were also accused of taking S$5.79 million worth of company funds through directors’ fees, performance bonuses and expense reimbursements, while creditors affected by the bond defaults only managed to recoup US$0.07 on the dollar. In an announcement on 13 June, 2017, it was reported that the liquidator “has confidentially resolved the action before the High Court of Singapore” against the abovementioned parties, plus others he was suing.

If the directors had indeed breached their director duties, they would have breached the Bermuda Companies Act, not the Singapore Companies Act as Celestial was not incorporated here. Investors should not expect Singapore regulators to investigate and take enforcement actions (of course, having said that, it is also rare for directors of Singapore-incorporated companies to be prosecuted for breach of director duties).


(Note: This writeup on G-Resources is based on the case “BlackRock versus G-Resources: From Active to Activism” which is in the forthcoming volume 6 of the Corporate Governance Case Studies edited by me and published by CPA Australia)

G-Resources is a Bermuda-incorporated company listed in Hong Kong. It was a gold mining and exploration company which counted BlackRock as an institutional investor. In August 2015, it announced it was diversifying into financial services, and then in November 2015, shocked investors by announcing that it was selling its main prized mining asset, which accounted for 97.1% of its revenues, for up to US$905 million. This required shareholders’ approval.

Investors such as BlackRock and proxy advisory firms, Institutional Shareholder Services and Glass Lewis questioned the decision, and BlackRock and other investors wanted to be fairly compensated. BlackRock took the unusual step of taking their activism public in this case and were hoping to sway minority shareholders to vote against the sale.

In G-Resources’ case, the major shareholder and other directors effectively held only about 19.2% of the total shares, which appears to make the task of blocking the sale easier.  BlackRock had access to the proxy voting statistics which revealed strong influence from its proxy advisor’s ‘Against’ vote, swaying as much as 38% of shareholders to vote in line with BlackRock. With approximately 70% of shareholders voting, BlackRock was convinced that the 38% swayed was half the battle won.

However, only 41.18% of shareholders voted against the sale of the mine. BlackRock had underestimated the stake effectively controlled by G-Resources’ directors. The shareholding information did not provide for the directors’ individual interests and significant influence in CST Mining, which was a substantial shareholder of G-Resources.

G-Resources’ incorporation in Bermuda proved to be a major stumbling block. BlackRock’s access to G-Resources’ shareholding structure was severely restricted as it was unable to obtain the company’s shareholder registry. Its sole source of information was its proxy solicitation firm, providing it with institutional filings made in the United States. This allowed BlackRock to glean knowledge of only about 48% of the shareholders, which excluded the board members’ individual interests in CST Mining.

For the reasons I have explained, and illustrated with examples above, investors should be particularly cautious when investing in foreign companies listed here that are incorporated overseas, especially in places like Bermuda, Cayman Islands and BVI.

In this article, I have only briefly touched on enforcement challenges for foreign companies listed on SGX. In the next article, when I discuss foreign companies that are incorporated in Singapore, I will discuss enforcement challenges in more detail. This is an even more important reason why investors should be extremely cautious when investing in foreign issuers with a primary listing on SGX.


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