Fixing the shareholder holdout problem in Singapore
By Stephanie Yeo and Clayton Chong (WongPartnership LLP)
When a company is attempting a restructuring via a scheme of arrangement in Singapore, shareholders often wield significant blocking power. If a scheme involves a debt-to-equity conversion, the issuance of new shares requires the approval of the shareholders under section 161 of the Companies Act 1967 (“Companies Act”). If the scheme involves a transfer of a substantial part of the company’s assets to an acquirer or a new shell entity, the transfer requires the approval of the shareholders under section 160 of the Companies Act.
Shareholders can block a restructuring by refusing to grant their approval for such matters, even if they are clearly out of the money. The cross-class cramdown provisions in the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”) only allow cramdown of dissenting classes of creditors, not shareholders. In practical terms, this gives shareholders a de facto veto against a restructuring plan – a bargaining chip that was deftly deployed by an activist shareholder in the restructuring of Noble Group in 2018 to secure an increased equity stake in the restructured group.
The shareholders’ veto is especially problematic when considered from a game theory perspective. The shareholders have ‘nothing to lose and all to gain’ by leveraging their veto to extract concessions under the restructuring plan. On the other hand, if the restructuring fails, the creditors will lose the going concern surplus of the viable restructured company. It is an asymmetric prisoner’s dilemma where, in the absence of cooperation, one side (the creditors) stands to lose a lot more than the other side (the shareholders).
Other jurisdictions
Other leading restructuring jurisdictions have addressed the shareholder holdout problem through cramdown mechanisms and other facilitative provisions which remove the need for shareholders’ approval for corporate actions required under a restructuring plan.
In the United States, a reorganisation plan can be confirmed even without the shareholders’ acceptance of the plan, provided that they do not receive less than they would in a liquidation and no class of interests junior to the shareholders receives or retains any property on account of their interests under the plan (§ 1129(a)(7)(A)(ii) and §1129(b)(2)(C)(ii) of the US Bankruptcy Code). There are also provisions which enable a plan to provide for the transfer of property, amendment of the debtor’s charter and issuance of securities of the debtor, among other actions (§ 1123(a)(5) of the US Bankruptcy Code).
In the United Kingdom, a cross-class cramdown mechanism was introduced in 2020 under Part 26A of the Companies Act 2006. The court may approve a scheme without the approval of shareholders if they have no genuine economic interest in the company (Section 901C(4) of the UK Companies Act 2006). The approval of shareholders is also not required for the issuance of shares pursuant to a scheme sanctioned under Part 26A (Section 549(3A) of the UK Companies Act 2006).
Following closely on the heels of UK restructuring reforms, a cross-class cramdown mechanism was also introduced in the Netherlands in 2021 pursuant to the Act on Court Confirmation of Extrajudicial Restructuring Plan (Wet Homologatie Onderhands Akkoord (“WHOA”)). Under the WHOA, a restructuring plan can be approved by the court without the shareholders’ approval, provided that at least one class of creditors has agreed to the plan (Article 383(1) of the WHOA) and the shareholders are not worse off under the plan than in a liquidation (Article 384(3) of the WHOA). The WHOA also expressly provides that, insofar as the implementation of a plan requires any resolution of the shareholders, the plan approved by the court will take its place (Article 370(5) of the WHOA).
Time to fix the shareholder holdout problem in Singapore?
Despite the early head-start that Singapore gained with the introduction of a creditor cross-class cramdown mechanism in 2017, Singapore’s regime now appears to be the outlier compared to jurisdictions like the UK and the Netherlands which have more robust cross-class cramdown mechanisms that bind both creditors and shareholders. This inability to compel a resolution of the shareholder holdout problem arguably hampers the effectiveness of the Singapore restructuring regime and may make Singapore a less attractive forum for restructuring as compared to other jurisdictions such as the US and the UK.
In 2017, the Singapore Parliament made a considered decision not to introduce shareholder cramdown for debt restructuring schemes as it required a “fundamental paradigm shift to the regime” (then Senior Minister of State for Finance Ms Indranee Rajah in the Second Reading of the Companies (Amendment) Bill (“Second Reading”). However, such a shift might not seem so radical today, given the inroads made with the introduction of creditor cross-class cramdown, which has been in the statute books for close to 5 years.
First, the adoption of creditor cross-class cramdown already signifies the recognition that, where there are adequate safeguards, it is desirable to facilitate beneficial restructurings and not give unwarranted veto power to dissenting classes of stakeholders. Rather, the application of this policy rationale to creditors and not to shareholders is a particularly hard pill for unsecured creditors to swallow. After all, why should creditors who theoretically own the company when it is insolvent and have priority over shareholders in a liquidation be susceptible to cramdown while shareholders are not?
Second, any concerns of potentially subjective and contentious valuation disputes arising as a result of allowing a cramdown on shareholders (one of the major issues raised in the Report of the Insolvency Law Review Committee in 2013, at Chapter 7, paragraphs 50 to 52, when the introduction of cross-class cramdown was being debated in Singapore) are arguably no longer as prominent, as such valuation exercises are now familiar to the Singapore regime. For example, one of the key requirements for cramming down on a dissenting creditor class is that no creditor in that class receives less under the scheme than it would in the most likely scenario if the scheme is not approved (section 70(4)(a) of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”)). The test for classification of creditors also requires a comparative assessment of the creditors’ recoveries under the scheme and the appropriate comparator (Pathfinder Strategic Credit LP v Empire Capital Resources Pte Ltd [2019] 2 SLR 77 at [87]-[88]). These comparative valuation assessments are part and parcel of the Singapore restructuring regime, and the Singapore courts are well equipped to handle them.
Proposed reforms
It might be argued that introducing shareholder cramdown will discourage entities (in particular, family businesses) from restructuring in Singapore. However, it could equally be said that the lack of shareholder cramdown makes Singapore a less attractive restructuring forum for creditor-led restructurings, since the need to obtain shareholder approval for certain corporate actions required under a restructuring plan introduces additional variables to execution certainty. As these countervailing considerations need to be weighed against each other, a more targeted and incremental approach to law reform might therefore be more appropriate.
Carve-outs can be introduced under section 160 and 161 of the Companies Act empowering the court to dispense with the need for shareholder approval (whether under the Companies Act, the company’s constitution or any shareholders’ agreement) for the transfer of the company’s property and issuance of shares, where such steps are required under a debt restructuring scheme. Such an approach is consistent in principle with the carve-out prescribed under section 160(4) of the Companies Act, which dispenses with the need for shareholder approval for the sale of the whole or substantially the whole of a company’s undertaking by a receiver and manager or a liquidator in a voluntary winding up.
To safeguard the shareholders’ interests under the proposed carve-outs, it should be demonstrated to the court that the shareholders are not worse off under the scheme than they would be in the most likely scenario in the absence of a scheme (mirroring the test used in section 70(4)(a) of the IRDA). It bears mentioning that in any scheme of arrangement, the Singapore court retains the discretion as to whether the scheme should be sanctioned. This allows the court to take into account issues of whether the shareholders are being treated equitably under a scheme that seeks to dispense with the need for shareholder approval.
These targeted reforms will enhance the efficacy of the Singapore scheme of arrangement by facilitating debt restructurings that involve debt-to-equity swaps and hive-offs and provide a balanced solution for the shareholder holdout problem. They will help to sustain the momentum generated in recent years through our wide-sweeping legislative reforms and the expansion of the Singapore International Commercial Court’s mandate to hear cross-border restructuring and insolvency proceedings.