7. Interests in shares Flashcards
- Interests in shares
General overview
[7.01] This section defines what an “interest in shares” is for the purpose of the declaration of substantial shareholdings under Division 4 of Part IV of the Act and directors’ holdings under s 164 and prohibitions of loans to persons connected to directors of the lending company under s 163.
“interest in shares”
[7.02] Act No 36 of 2014 provides for a general definition of an interest in a share. The definition contained in s 7 of the Act differs from the definition of “interest in securities” in s 4 of the Securities and Futures Act (Cap 289) (“SFA”). Section 4(1) and (2) of the SFA deem a person who has the right to dispose of securities as having an interest in those securities.
Person with authority to dispose
[7.03] Subsection (1A) defines a person having an “interest in shares” as a person who has authority (whether formal or informal, or express or implied) to dispose of, or to exercise control over the disposal of, those shares. Subsection (1B) qualifies subsection (1A) by providing that such a person has an interest in the shares even if his authority to dispose of the shares is subject to “restraint or restriction”.
[7.04] Subsection (1A) is very helpful as it is a clear definition of what having an “interest in shares” means. The previous s 7 merely enumerated examples and situations of when a person is deemed to have an interest in shares he holds but never sought to define it.
[7.05] The CLRFC has opined that the term “interest in shares” should be consistent with the term “interest in securities” in the SFA as it is more applicable to listed companies. Many investment managers consider themselves as having the right to dispose of securities, as would those in brokerage services and banking activities. It is to be noted that banks, financial institutions and those whose business is the lending of money who hold shares as security for a loan are regarded not to have an interest in those shares.
Restraints and restrictions
[7.06] In some situations, shares may be issued with a “restraint or restriction” on the holder’s authority to dispose of them or exercise control over their disposal. For example, the constitution of the Hong Leong Group stipulated in the company’s internal rules that “the directors may without assigning any reason refuse to register any transfer of shares to any person who is not a spouse or lineal descendant of a member”. Similarly, article 26 of Wee Investments Limited (the holding company for the family interests in the United Overseas Bank Ltd) provides that “… the Directors may, without assigning any reason therefor, refuse to register the transfer of any share …”. In both of these situations, subsection (1B) clarifies that the holder of shares issued with restraint or restrictions has an interest in those shares.
Deemed interest in shares
[7.07] The following denotes situations where the Act deems the person concerned to have an “interest in a share”:
(a) Section 7(2) – A person who knows, or has reasonable grounds for believing that he has an interest in property held under a trust which comprises or includes shares. This would include a beneficiary under a trust.
(b) Section 7(6)(a) – A person who has entered into a contract to purchase a share. In this situation, the transferee of shares, pending the registration of the transfer under s 126 (private companies) and s 130 (public companies), would be deemed to have an interest in those shares.
(c) Section 7(6)(b) – A person who has a right, otherwise than by reason of having an interest under a trust, to have a share transferred to himself or to his order, whether the right is exercisable presently or in the future and whether on the fulfilment of a condition or not. An example of this situation would be the beneficiaries of shares transmitted by operation of law such as under a probate of letters of administration.
(d) Section 7(6)(c) – A person who has a right to acquire a share, or an interest in a share, under an option, whether the right is exercisable presently or in the future and whether on the fulfilment of a condition or not. An example would be a holder of an option or warrant to purchase shares or interests in shares which may be exercised presently or at a future date.
(e) Section 7(6)(d) – A person who is entitled to exercise or control the exercise of a right attached to a share, not being a share of which he is the registered holder. An example of such persons would be the nominees of shares held by a nominee bank. It is to be noted that persons who are deemed to have an interest in shares under s 7(4) and (4A) would not fall into this category.
(f) Section 7(7) – A joint-holder of a share shall be deemed to have an interest in the share.
Economic interest in shares
[7.08] Section 7(6)(c) might pose a problem as regards the disclosure of interests in shares deriving from equity derivatives. Under s 135(1) of the SFA, a substantial shareholder has to disclose his interests, and the nature and extent of the interests, in the voting shares of the listed corporation. A “substantial shareholder” is one who holds not less than 5% of the voting shares in the listed corporation: see ss 81, 82, 83 and 84. Hence, the disclosure of interests in voting shares does not require the disclosure of any interests in securities such as derivatives.
Relevant interest
[7.09] The UK Financial Services Authority plans to implement a disclosure regime for long contracts for different positions. In Australia and New Zealand, there are similar plans to implement the disclosure of such equity derivative holdings, in takeover positions or otherwise. The Australian Takeover Panel outlined plans to prohibit the use of equity derivatives to mask the ownership of takeover targets, or by controlling interests to hide “substantial holdings”. Generally, see and , effective on May 31, 2017.
Where it is not an interest in shares
[7.10] The following are situations where the Act disregards a person’s interest as an “interest in a share”:
(a) The subscriber or purchaser of a unit or units in a collective investment scheme within the meaning of s 2 of the SFA.
(b) Section 7(9)(a) – A bare trustee of shares shall not be deemed to have an interest in the shares he holds.
(c) Section 7(9)(b) – Banks, financial institutions and any person whose ordinary business includes the lending of money such as a licensed moneylender, who hold the shares as a security for the purpose of the loans or financial arrangements entered into in the ordinary course of their business.
(d) Section 7(9)(c) – A person who holds the shares in his capacity as an office holder.
(e) Section 7(9)(ca) – A company that buys back its own shares in accordance with ss 76B–76G.
Act in accordance with, controlling interest, associates, etc.
[7.11] The following sub-paragraphs enumerate when the Act deems an interest to be an “interest in shares”.
(a) “act in accordance with … instructions” – Company A owns 30% of the shares in Company B. Company A is, or its directors are, accustomed to act in accordance with Z’s wishes, then Z is deemed interested in Company A’s 30% interest in Company B: see s 7(4)(a).
(b) “controlling interest” – Company A owns 30% of the shares in Company B. Z has a controlling interest in Company A, then Z is deemed interested in Company A’s 30% interest in Company B. The Act has not defined what a “controlling interest” is. In a closely-held company like a family firm, if Z holds more than 50% of the shares in Company A, then Z would have a controlling interest as he controls the majority of the shares. In a more widely-held company where Z holds 30% of the shares in Company A, would Z have a controlling interest in Company A? It could be argued that Z has negative control in the sense that he could block a special resolution of the company. However, with 30% interest, Z is unable to pass any ordinary resolution of the company as he does not hold more than 50% of the shares. Yet, with a 30% interest in Company A, Z can secure a dominant presence on the board of directors if the other shareholders hold smaller quantities of shares in Company A. In Bermuda Cablevision Ltd v Colica Trust Co Ltd [1998] 1 BCLC 1 at 9, PC , Lord Steyn said that “expressions such as ‘control’ and ‘controlling interest’ take their colour from the context in which they appear. There is no general rule as to what the word ‘controlled’ means … The expression must be given the meaning which the context requires”: see s 7(4)(b).
(c) “Person or associates of person holding 20% voting power” – Where a person or associates of a person or a person and his associates are entitled to exercise not less than 20% of the voting shares in body corporate A, and body corporate A has or is deemed to have interest in shares in body corporate B, that person, his associates or that person and his associates shall be deemed to have interest in the shares of body corporate B: see s 7(4A).
[7.12] Section 7(4A) is amended by deleting the words “20% of the votes attached to voting shares” and substituting the words “20% of the voting power”. This amendment was necessary to accommodate multiple voting rights under the new s 64A where shares may be issued with special rights such as each share carrying more than one vote.
“associate”
[7.13] Under the previous s 7(5), there were five situations that were used to illustrate when a person is an associate of another person. These five situations were quite confusing and the new amendments which conflated them into three situations was much welcome. It is clearly stated that a person (X) is an “associate of another person” (Y), if X is:
(i) a subsidiary of Y;
(ii) X is accustomed to, or under an obligation to act in accordance with Y’s directions, instructions or wishes in relation to the 20% or more of the votes attached to the voting shares in the body corporate; or
(iii) X is a body corporate that is accustomed to act in accordance with the directions, instructions or wishes of Y, or the majority of the directors of X are accustomed to act in accordance with the directions, instructions or wishes of Y in relation to the 20% or more of the voting shares in the body corporate.
[7.14] The examples below show how subsections (4A) and (5) work together.
Subsection (4A)
[7.15] Company A owns 30% of the shares in Company B. A person, Z exercises or controls the exercise of 20% of the shares in Company A. Z is deemed interested in Company A’s 30% interest in Company B.
Subsections (4A)(b) and (5)(b)
[7.16] Company A owns 30% of the shares in Company B. X acts in accordance with Y’s directions, instructions or wishes in relation to X’s 20% interest in Company A, then Y is deemed interested in Company A’s 30% interest in Company B.
Subsections (4A)(b) and (5)(c)
[7.17] Company A owns 30% of the shares in Company B. Company X acts in accordance with Y’s directions, instructions or wishes in relation to Company X’s 20% interest in Company A, then Y is deemed interested in Company A’s 30% interest in Company B.
Subsections (4A)(c) and (5)(b)
[7.18] Company A owns 30% of the shares in Company B. X and Y are entitled to exercise or control the exercise of 20% of the shares in Company A, then X is deemed interested in Company A’s 30% interest in Company B. In this case, X is an associate of Y as he is accustomed to act in accordance with Y’s directions, instructions or wishes in respect of the 20% interest in Company A.
Subsections (4A)(c) and (5)(c)
[7.19] Company A owns 30% of the shares in Company B. Company X and Y are entitled to exercise or control the exercise of 20% of the shares in Company A, then Company X is deemed interested in Company A’s 30% interest in Company B. In this case, Company X is an associate of Y as it is accustomed to act in accordance with Y’s directions, instructions or wishes in respect of the 20% interest in Company A.
