The Enterprise Fund III Ltd & Ors v OUE Lippo Healthcare Ltd [2019] SGCA 48 (13 September 2019) involved the prohibition in section 76 of the Companies Act against a company acquiring shares in itself. In this case, at the time of the acquisition, the company (Company), which was listed on the Singapore Exchange, was known as International Healthway Corp Ltd.
Sometime in 2015, the then board of the Company had concerns about a potential short-selling attack on the Company’s shares. To fend off the attack. the Company entered into various agreements with three companies in the Crest Funds group (the Crest Funds Companies), under which:
- the Crest Funds Companies would provide the Company with a standby credit facility;
- one of the Crest Funds Companies would purchase shares in the Company from the open market using funds from the standby credit facility; and
- that Crest Fund Company would hold those shares in trust for the Company (collectively, the Transaction).
Subsequently, the Company underwent a change of management. The new management considered that the acquisition of its own shares by the Company was in breach of section 76 and sought to avoid the transaction, including the standby credit facility. It brought an application to the High Court where it succeeded. The Crest Funds Companies appealed.
Legal Background
Generally speaking, the Companies Act prohibits a company from owning its own shares unless certain specified requirements (for example, obtaining a whitewash resolution) are followed. This prohibition is set out in section 76(1A)(a)(i) which provides as follows:
“Except as otherwise expressly provided by [the Companies Act], a company shall not whether directly or indirectly, in any way acquire shares or units of shares in the company".
Section 76A(1)(a) goes on to provide that “a contract or transaction by which a company acquires or purports to acquire its own shares or units of its own shares” shall be void.
Before the Court of Appeal, the issues were:
- Whether the Transaction or any of its component parts were void as being in violation of section 76(1A)(a)(i) of the Companies Act?
- If only one or some of the Transaction’s component parts were void, whether any of the other component parts of the Transaction would be regarded as related to a void component of the Transaction and would hence be voidable at the Company’s option?
- Whether the Company could be estopped from claiming that the Transaction was void?
The issues, in particular the first two issues, were framed in this way because the High Court had held that the open market transactions for the purchase of the Company's shares and the trust arrangement whereby the Company's shares were held on trust for it had to be analysed separately. As such, only the last step, the trust arrangement, amounted to the prohibited acquisition. It had then held that the open market transactions and the standby credit facility provided by the Crest Funds Companies were related to the prohibited acquisition (i.e., the trust arrangement) and hence voidable by the Company.
The Transaction was to be regarded as a single whole
The Court of Appeal stated that the first question was whether there had been an indirect acquisition within the meaning of section 76(1A)(a)(i) of the Companies Act. It noted that the language of section 76(1A)(a)(i) is very broad. Accordingly, even those parts of a transaction that are not the final or most proximate step in a series of steps taken to effect a company’s acquisition of its own shares might be caught by the prohibition. They would be caught if they were sufficiently proximate to the intended outcome of the company acquiring its own shares.
Applying section 76(1A)(a)(i) to the facts of the case, the Court was of the view that to separate the Transaction into individual component parts was overly technical. The commercial substance of the Transaction was that the component parts collectively made up a single whole, the very purpose of which was the Company acquiring its own shares. It ruled that the commercial substance of the entire Transaction seen as a whole included not only the open market purchases by the relevant Crest Funds Company and the trust arrangement but also the provision of the standby facility to the Company. In response to the objection by the Crest Funds Companies that lenders could not be expected to verify the use to which loans were made, the Court noted that the evidence showed that the Crest Funds Companies knew from the very outset that the standby credit facility was to be provided for a specific purpose, namely, to fend off a potential short-selling attack by buying up the Company’s shares.
The Court also observed that the purpose behind the prohibition against a company owing its own shares was, among other things, to ensure that a company’s capital and/or assets are not depleted or put at risk because of steps taken to acquire its own shares. Here, the obligation to pay back the loan was an obligation that would have to be met out of its capital and/or assets. Accordingly, including the standby credit facility as part of the prohibited transaction would meet the purpose of the prohibition.
The Court therefore held that the entire Transaction, comprising the standby credit facility, the open market acquisitions and the trust arrangement constituted one single, composite transaction that was caught by the prohibition in section 76(1A)(a)(i).
Acquisition of the shares on the open market was not void
The Court next considered whether the carve-out contained in section 76A(1A) applied and if it did how it applied. Section 76A(1A) states that “a disposition of book-entry securities” is not rendered void even if it is or is part of a prohibited acquisition.
The Court noted that the purpose behind section 76A(1A) was to maintain confidence in the scripless trading system as a whole: a third party who had sold his shares on the market should not have to take the risk that the sale could be avoided under section 76A. However, because the section was an exemption to the general rule, it should be applied only to the extent needed to satisfy its purpose. Accordingly, the carve-out only applied to the transfer of legal title to the shares. It did not apply to the trust arrangement under which the Company held the beneficial title to the shares.
Accordingly, the Court held that the Crest Funds Company remained the owner of the shares in the Company, and as the trust arrangement was void under section 76A(1), its ownership of the shares included both legal and beneficial title.
Company not estopped from claiming the Transaction was void
Finally, the Court considered whether the Company should be estopped from claiming that the transaction was void because it had represented and warranted in the agreement for the standby credit facility that “all actions, conditions and things required to be taken, fulfilled and/or done … to enable …[the Company]… to lawfully enter into … the Transaction Documents … have been or will be taken, fulfilled and done…” It reviewed the prior cases and noted that the rule was that whether the Company could be estopped from making such a claim depended on whether allowing the estoppel would result in a state of affairs which the law has positively declared should not be allowed to subsist. In this case, if as a result of having made the representation the Company were estopped from claiming that the transaction was void, it would result in the Company owning its own shares which was precisely what was prohibited by the Companies Act.
Conclusion
While the Crest Fund Companies were unable to enforce the standby credit facility agreement, they effectively had security from the shares in the Company which remained their property. In this case, the Court noted that the Crest Fund Companies knew clearly the purpose for which the funds were intended to be used and hence found on the facts that the standby credit facility was an intrinsic part of the Transaction. The case might have had a different result if Crest Fund Companies had granted the credit facility for general purposes only and the facility had subsequently without their knowledge been used by the Company for the prohibited acquisitions.