Significant Investments Review Bill: Singapore’s Approach to Scrutinize Investment Activity and comparison to prior reforms in Australia

Introduction to Singapore’s FDI regime

Reflective of its status as an international financial and business hub, Singapore recorded inward direct investment flows of $195 billion in 2022,a 10% increase from the previous year and maintaining a consistent upward trajectory^[1]. With a favourable tax regime, the availability of government incentives, and a stable political and legal environment, there is no surprise that Singapore continues to enjoy high levels of foreign direct investment (“FDI”) activity.

Whilst the inbound investment numbers bode well for Singapore and business confidence generally, a resultant consequence is that direct investment exposure (as opposed to conduit financing into the region), can lead to foreign investors having interests in key sectors of the economy.  The current FDI regime in Singapore only goes so far as to “police” certain key industries such as real estate, financial services, telecommunications and media without broader protectionist concepts such as ‘national interest’, ‘national security’ or ‘strategic assets / entities’. The Ministry of Trade and Industry of Singapore is now seeking to take a more holistic view on FDI regulation through the passing of the Significant Investments Review Bill (“Bill”) on 9 January 2024 which will introduce a new investment management regime so as to ensure there are adequate and effective investment management measures to safeguard Singapore’s national security, and to ensure that Singapore’s economy remains resilient.

The new regime in Singapore is conceptually similar to reforms in other countries in the region in recent years aimed at regulating foreign investments in the interests of protecting national security.   In 2021, Australia introduced significant changes to Australia’s foreign investment policy framework as part of a broader national security reform.^[2]  The Australian reforms included the introduction of a national security test to sit alongside an existing national interest test.  The national security test covers acquisitions of “national security land” and “national security businesses”.  Further changes to the Australian regulatory regime included streamlining the process in relation to less sensitive investments to reduce red tape for investors, and to also provide for stronger penalties, compliance and enforcement powers.

Notable provisions proposed under the Bill

Some notable provisions that are proposed under the Bill are as follows.

“Designated entities”

The Bill introduces a new concept of a “designated entity”, i.e. an entity that is so designated by the Minister of Trade and Industry (the “Minister”) if:

1. there is a prescribed nexus to Singapore – where such entity is:
   1. incorporated, formed or established in Singapore;
   2. carries out any activity in Singapore; or
   3. provides any goods and services to any person in Singapore; and
2. the Minister considers such designation necessary in the interests of Singapore’s national security.

Various factors will be considered by the Minister in considering whether an entity should be designated, including, without limitation:

1. whether the entity provides a critical function in relation to Singapore’s national security interests (e.g. where it is a key provider of security-related functions and there are few / no alternatives); and
2. whether it is adequately covered by existing sectoral legislation.

“Designated entities” and cancellations of such designations will be notified in the Gazette to provide certainty to the entities and potential investors.

Ownership and control requirements

Beyond the existing regulatory requirements, “designated entities” will become subject to certain ownership and control requirements:

1. Notification and Approval Requirements –
   1. Buyers, sellers and “designated entities” are required to notify the Minister or obtain the Minister’s prior approval where there are any changes in the ownership or control (including indirect control) of “designated entities”.^[3]
   2. Parties are also required to seek the Minister’s approval if they are becoming an indirect controller or acquiring parts of the business or undertaking as a going concern.
   3. Where a transaction is completed in contravention of the relevant approval requirements, it would be deemed void under the Bill. However, the Minister may validate a transaction by notice upon the application of materially affected parties or where the Minister is satisfied that it is in the interest of Singapore’s national security to do so.
2. Appointment and Removal of Key Management –
   1. The appointment of the key management personnel of a “designated entity”, such as its chief executive officer, directors, or chairperson of the board, is subject to the Minister’s approval. Such approval requirements have also been observed under existing sectoral legislation, such as those regulated by the Monetary Authority of Singapore.
   2. The Minister would consider relevant factors in determining whether approval for such appointments should be granted, for example, the appointment may be rejected by the Minister if such individual has a track record of engaging in conduct / activities that could undermine Singapore’s national security interests.
3. Restrictions on Winding up – The consent of the Minister is required for the voluntary winding up, voluntary dissolution or termination and the making of judicial management orders of a “designated entity”.

Minister’s broad powers

The Minister is conferred with broad powers under the Bill, including but not limited to:

1. powers to remove a “designated entity’s” chief executive officer, director, or chairperson of the board if prior approval has not been obtained, and/or if it is necessary in the interest of Singapore’s national security;
2. powers to issue remedial directions, such as directions for a buyer to cease to be a controller of a “designated entity” or directions for a transfer / disposal of equity interests held in a “designated entity”; and
3. powers to review, and issue remedial directions, in relation to, certain transactions after those transactions have taken place, if the relevant entity to which the transaction relates has acted against the national security interests of Singapore.

These broad powers are similar to those in Australia, where, despite the clear need to balance national security concerns with the benefits of foreign investment, there has been an increase in the powers given to the relevant government authorities/agencies to ensure the national interest is protected.  For example, in Australia, the Treasurer has the power to impose conditions or block an investment if they consider that the investment may pose a national security concern, regardless of the value of investment.^[4]  The Australian Treasurer also has other wide ranging powers in relation to foreign investments, such as the ability to ‘call in’ investments to review investments that would not normally be notifiable under the mandatory pre-investment notification process.

Concluding Remarks

Whilst we can expect certain entities operating in Singapore to be delineated as “designated entities”, it will be interesting to see where the initial parameters are drawn. A key question that remains unanswered is what would be considered as falling within the “the national security interests of Singapore”. The Ministry of Trade and Industry of Singapore has (understandably) kept this definition broad given the Bill’s sector-agnostic approach and the need for Singapore to be flexible and agile in an ever-changing global economic environment.

From an M&A standpoint, there may be the need for buyers (both direct and indirect) to actively consider undertaking due diligence checks against the Gazette to ascertain whether the target is a “designated entity” and whether this could extend to any affiliates or subsidiaries. If so, the transaction documents may have to ensure that the relevant notification and/or approval requirements are appropriately included as conditions to completion. The Minister’s powers to review transactions may also leave buyers uneasy given the risk that a transaction may be unwound post-completion, leaving the buyer with sunk costs incurred for the transaction and any post-completion integration activities. Additionally, further consideration would have to be given to the individuals that the buyer wishes to appoint to the target’s board as such individuals may be subject to further requirements under the Guidelines on Fit and Proper Criteria.

The full text of the draft Bill that was read on 6 November 2023 can be found here: Significant Investments Review Bill (Bill No. 38/2023).

The full press release by the Ministry of Trade and Industry of Singapore can be found here: Introduction of the Significant Investments Review Bill; and the speech by the Minister of Trade and Industry during the second reading of the Bill can be found here: Speech by Minister Gan Kim Yong during the Second Reading of the Significant Investments Review Bill.

The information provided above does not, and is not intended to, constitute legal advice pertaining to the Bill; information, content, and materials stipulated above is based on our reading of the Bill and are for general informational purposes only.
^[1] https://www.singstat.gov.sg/-/media/files/news/fdiinflows2022.ashx

^[2] The Foreign Investment Review Board gives the Treasure the power to make decisions in relation to investment proposals in Australia in accordance with the Foreign Acquisition and Takeovers Act 1975 (Cth) and associated regulations.  Changes were implemented relating to national security reform in 2021 by way of the Foreign Investment Reform Protecting Australia’s National Security) Act 2020 (Cth) (which amended the Foreign Acquisitions and Takeovers Act 1975 (Cth)) and the Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020 (Cth) which amended the Foreign Acquisitions and Takeovers Regulation 2015 (Cth)).

^[3] Notification and approval requirements would apply depending on whether applicable thresholds* are met. Among other things:

1. Buyers are required to notify the Minister within 7 days after becoming a “Level A controller” (i.e. a person who, alone or together with its associates, holds 5% or more but less than 12% of the total equity interests in the designated entity, or is in a position to control 5% or more but less than 12% of its voting power).
2. Buyers are required to seek the Minister’s approval before becoming a “Level B controller” (i.e. a person who, alone or together with its associates, holds 12% or more but less than 25% of the total equity interests in the designated entity, or is in a position to control 12% or more but less than 25% of its voting power), “Level C controller” (i.e. a person who, alone or together with its associates, holds 25% or more but less than 50% of the total equity interests in the designated entity, or is in a position to control 25% or more but less than 50% of its voting power), or “Level D controller” (i.e. a person who, alone or together with its associates, holds 50% or more of the total equity interests in the designated entity, or is in a position to control 50% or more of its voting power).
3. Sellers are required to seek the Minister’s approval before ceasing to be a “Level Y controller” (i.e. a person who, alone or together with its associates, holds 50% or more but less than 75% of the total equity interests in the designated entity, or is in a position to control 50% or more but less than 75% of its voting power) or “Level Z controller” (i.e. a person who, alone or together with its associates, holds 75% or more of the total equity interests in the designated entity, or is in a position to control 75% or more of its voting power).

* The Minister has flexibility to prescribe, among other things, different percentages in respect of different designated entities / classes of designated entities / designated entities within a class of designated entities.

^[4] Otherwise, the thresholds in Australia do not operate in the same way as the ‘controller’ thresholds outlined above in Singapore.  For example, foreign persons will require approval in Australia for where a “substantial interest” (generally at least 20 percent) is to be acquired in an Australian entity that is valued above the relevant monetary threshold and approval for where a “direct interest” (generally at least 10 percent) is to be acquired in a national security business.  Other criteria apply depending upon the nature of the business (for example, thresholds apply to agribusinesses and media businesses).

Authors: Toby Grainger , Sam Ng , Leslie Tay, Jeremie Witt, Michelle Hall