New bill likely to prolong fundraising, leadership change for firms critical to national security

Legal experts believe cybersecurity and AI entities are likely to be affected by the measure.

Singapore has passed a measure that will screen significant investments in, and control of, entities considered critical to national security. Legal experts believe this will affect fundraising strategies and the process of leadership change and renewal of selected companies.

The Significant Investments Review Bill requires “designated entities” or companies identified as crucial to Singapore’s national security to perform enhanced due diligence on potential investors, particularly for those acquiring a stake of 12% or more, said Bird&Bird counsel Jolie Giouw.

“[They may need to] adjust their fundraising strategies if certain investors are unable to obtain the requisite approvals to hold interests in such designated entities,” Giouw told the Singapore Business Review.

Under the legislation, designated entities must also do a check on their potential investors’ associates.

“[This] may have far-reaching implications when the investor is part of a large group or conglomerate,” Giouw said.

“For individuals, in addition to family members, two individuals are also associates of each other if they are employees of the same employer, which means that individual investors may potentially have to undertake such checks on all their colleagues employed by the same company,” the law expert explained.

Giouw said investors of “designated entities” will need to notify or seek approval from the government of a possible investment if it reaches shareholding thresholds which is calculated on an aggregated basis between the investor and its associates.

The enhanced due diligence provided for by the bill will also affect the appointment of key personnel like board of directors, board chairperson, and CEO, in the designated entity.

“[The measure] will lengthen the process of leadership change and renewal, and may require companies to ensure sufficient buffer for handover when senior management resigns in order to ensure the approval process can be completed in good time,” Giouw said.

The legal expert added that exiting a company that is a designated entity will be more difficult, especially for certain large shareholders, given that an approval must be sought before cessation of such shareholding interest.

Likewise, designated entities will not be able to be voluntarily wound up or dissolved without approval.

“There is no turnaround time prescribed for the review of such applications unlike in other jurisdictions such as the United Kingdom. This could potentially create a significant amount of uncertainty and delay in transactions,” Giouw said.

Designated entities

As of this writing, the government has not identified the designated entities, but according to Yang Eu Jin, partner at RHTLaw Asia, the list could include entities involved in critical infrastructure or those developing or using sensitive technologies or government-linked corporations such as Singapore Airlines and Keppel.

Other sectors such as cybersecurity and artificial intelligence (AI) could also become sectors of concern to the government given the advancement of technology and the increased risk of cyber-attacks.

“In deciding whether an entity should be a Designated Entity, various factors will be considered, including whether the entity is a key provider of security-related functions, particularly where there are limited or no alternatives,” Yang said.

Giouw said entities providing goods and services that are critical to Singapore’s sovereignty and security, including continued delivery of essential services that are not currently covered by existing regulations may also be included in the list of designated entities.

Financial institutions and utilities providers follow sectoral legislations.

“In light of the recent pandemic, these could include large scale critical private sector healthcare providers, suppliers to emergency services or critical suppliers within the food supply chain in Singapore. Examples provided by the government are key providers of security-related functions where there are few or no alternatives,” Giouw said.

Not an interference

Whilst the government plans to impose restrictions on designated entities, like requiring prior approval for significant ownership or control, it asserts no intention to intervene in routine commercial decisions or operations.

Giouw added that the “call-in” power of the government is also limited in Singapore compared with other jurisdictions.

“In Singapore, the minister may only review ownership or control transactions involving entities that are not designated entities if the entity has acted against national security interests, not merely pose potential threats, and such transactions occurred within two years prior to the action against national security interest,” Giouw said.

Given this context, Singapore’s proposed measure could be perceived as offering greater assurance to potential investors that their transactions will not be subject to the government’s call-in powers until “stringent thresholds are met,” she said.

“This obviates the uncertainty and delays created in other jurisdictions where investors may err on the side of caution in order to validate their investments and ensure that there is no risk of potential call-in by making voluntary filings and obtaining positive responses from the relevant government prior to any investment in any ‘sensitive’ sectors or related sectors where there may be further uncertainty as to whether a company’s operations is deemed sensitive or not,” Giouw said.

Should investors exercise caution?

Given the call-in powers constituted in the bill, Giouw believes that the measure may even provide more “certainty to investors in Singapore” compared to other jurisdictions with similar investment regulations.

“The absence of a definition as to what constitutes ‘national security’ may actually provide additional comfort in that an entity is either designated or it is not. There is no judgement call required on the part of investors or the company to determine whether or not it could be caught by the relevant legislation,” she said.

“Whilst there may be fear that an entity may be designated arbitrarily under the new bill after an investment has occurred, there should be no retrospective application to past investments, unless the trigger that the entity has in fact acted against national security interests have been met,” the Bird & Bird expert added.

RHTLaw Asia partner (foreign lawyer), Erwan Barre, believes that the bill will prompt investors to consider additional factors when investing in major key entities in Singapore, including “the percentage of share capital represented by their investments.”

“Discussions are likely to occur amongst investors and their advisors in terms of balancing their interests and risks in investments in key entities, especially if they are a designated entity,” Barre told the Singapore Business Review. “These discussions are likely to arise due to the need for notifications at the various shareholding levels, decisions in relation to key management that can be reversed and transactions that can be reviewed retrospectively for a period of two years.”

He said that principles stipulated in the bill are “not too different from foreign investments regulations in many other major economies.”

“We believe that global investors and MNCs are used to navigating similar regulatory landscapes. We believe that when the bill comes into force, further guidance, such as providing specific situations which fall foul of the regulations, will be issued to allay concerns from investors,” he said.

Yang also believes that the bill is unlikely to have a major impact on foreign investments in general.

“The introduction of the Bill does not suggest a deviation from the government’s overall approach to attracting foreign investments.  Given that there are no separate requirements for local and foreign investors, this supports the belief that the country remains open to investments from investors near or far,” Yang said.

“With political and military instability globally, it can be said that the focus on national security interests is now generally widespread and hence the introduction of the Bill is not likely to lessen investors’ appetite for investing into Singapore,” he added.