21. Membership of holding company

Question 1

21. Membership of holding company
    - subsidiary cannot be member of holding co
    - to preserve capital maintenance rule subsidiary prohibited from holding shares in its holding co. If happens to dispose shares within 12 mths or longer if court allows n these shares not disposed to be treated as treasury shares
    - prevent the company from returning money to the shareholders, to the detriment of creditors

Answer 1

General overview
[21.01] This section preserves the capital maintenance rule by prohibiting a subsidiary from holding shares in its holding company, and for the disposal of such shares within 12 months or such longer period as the court may allow. These shares are to be treated as treasury shares and governed by ss 76J and 76K. The only exception is book-entry securities.

[21.02] Section 21 prohibits a corporation from being a member of its holding company, and any allotment or transfer of shares in a company to its subsidiary is void. Basically, this preserves the capital maintenance rule that a company shall not, whether directly or indirectly, in any way purport to acquire shares or units of shares in its holding company or ultimate holding company, as the case may be: s 76(1A)(a)(ii). The rationale for this rule is to prevent the company from returning money to the shareholders, to the detriment of creditors

Question 2

Disposal of shares held in the holding company

Answer 2

[21.03] Subsection (4)(b) provides that the subsidiary which held shares in its holding company has to dispose of all of its shares in the holding company within 12 months or such longer period as the court may allow.

Question 3

Treasury shares

- no voting rights no dividend rights

Answer 3

[21.04] Act No 36 of 2014 introduced new subsections (4A) and (4B) to s 21. Subsection (4B) provides that any shares not disposed of in accordance with subsection (4)(b) may, subject to subsections (4C) and (6E), continue to be held as treasury shares.

[21.05] Section 21(4C) provides that the treasury shares that are created under subsection (4B) shall be governed by ss 76J(1), (2), (3), (5) and (6) and 76K, i.e. they do not carry any voting rights or dividend rights. In addition, their use or disposal is governed by s 76K.

Question 4

Amalgamation and schemes of arrangements
- can transfer shares in holding co to subsidiary but shall dispose of within 12 mths or longer if court allows. If not dispose to treat as treasury shares

Answer 4

[21.06] Subsection (6A) allows the transfer of shares in a holding company to a subsidiary by way of a distribution in specie, amalgamation or scheme of arrangement. However, all such shares shall be disposed of within 12 months or such longer period as the court may order. Any shares not disposed of shall be held as treasury shares and governed by ss 76J(1), (2), (3), (5), (6) and 76K.

Question 5

Maximum number of treasury shares
- subsidiary’s can hold max treasury shares of 10% of total number of shares (for each class of share profits f more than 1 class) of the holding company

Answer 5

[21.07] The aggregate number of treasury shares allowed to be held by a subsidiary or all of the subsidiaries in the holding company is 10% of the total number of shares of the holding company. For example, if Company X acquires Company Y which owns Company X’s shares, those Company X shares owned by Company Y should be aggregated with all other Company X shares owned by Company X (be it through X or X’s subsidiaries) in order to determine the 10% limit.

Question 6

Where there is more than one class of shares

Answer 6

[21.08] The maximum number of treasury shares shall be 10% of each class of shares held by the subsidiary in the holding company.

Question 7

Dividends

• if wholly owned subsidiary owned shares in holding, no dividend will be paid to this subsidiary incl winding up
• if it is not wholly owned subsidiary then can pay dividends to this subsidiary so as not prejudice minority shareholders in this subsidiary

Answer 7

[21.09] Where the subsidiary is a wholly owned subsidiary, no dividend may be paid and no other distribution (whether by cash or otherwise) of the holding company’s assets (including on a winding up) may be made to the subsidiary. On the other hand, where the subsidiary is not a wholly owned subsidiary, such dividend or distributions may be made. The rationale is not to prejudice any minority shareholder in the subsidiary that is not wholly owned.

Question 8

Book-entry securities

- subsidiary can hold shares in holding co if the latter’s shares is listed on sgx

Answer 8

[21.10] Act No 36 of 2014 introduced a new subsection (1A) which provides that the prohibition of subsidiaries holding shares in their holding companies shall not apply to book-entry securities, i.e. shares that are listed on the Singapore Exchange.