Venture capital investment in Singapore: market and regulatory overview

A Q&A guide to venture capital law in Singapore.

The Q&A gives a high level overview of the venture capital market; tax incentives; fund structures; fund formation and regulation; investor protection; founder and employee incentivisation and exits.

To compare answers across multiple jurisdictions visit the Venture Capital Country Q&A Tool.

This Q&A is part of the global guide to venture capital. For a full list of jurisdictional Q&As visit www.practicallaw.com/venturecapital-guide.

Contents

Market overview

1. What are the main characteristics of the venture capital market in your jurisdiction?

Venture capital and private equity

The most common categories of private equity funds in Singapore are buyout, mezzanine, distressed investment and venture capital funds.

Generally, most people have in mind buyout funds when referring to private equity – such funds focus on making investments in which a company or a unit of a company is acquired from its existing shareholders, typically with the use of significant financial leverage.

Venture capital is a subcategory of private equity that refers to early-stage equity funding provided to high-growth private companies, usually following a founder's self-funding and seed-funding stages from angel investors.

Sources of funding

Early-stage companies typically obtain funding from dedicated venture capital funds, corporate venture capital provided by in-house venture capital divisions of companies and funding programmes administered by government agencies. Venture lending is also available as a source of funding, but the take-up rate is not high.

The National Framework for Innovation and Enterprise administers schemes and programmes designed to launch start-ups, commercialise research and development and catalyse technology entrepreneurship, such as:

  • The Early Stage Venture Fund, where the National Research Foundation (NRF) invests with venture capitalists on a 1:1 matching basis, with a focus on Singapore-based early-stage tech companies.

  • The Technology Incubation Scheme, where the NRF co-invests in start-ups incubated by selected tech incubators.

  • The Innovation Cluster Programme, which encourages the formation of innovation clusters for quick commercialisation, job creation and sector growth by deepening ties between companies and research and development institutions such as universities and government agencies.

SPRING Singapore (Singapore's enterprise promotion agency) also offers dollar-for-dollar co-investment programmes with independent third party investors (SPRING SEEDS) and pre-approved business angels (the Business Angel Scheme), and the Monetary Authority of Singapore (MAS) provides support for "proof of concept" trials, where it funds 50% of the costs (up to S$200,000 per project) for Singapore-based trials of promising FinTech ideas.

Types of company

The technology, internet, mobile and e-commerce sectors appear to be most active in attracting venture capital investment in Singapore.

Market trends

The level of venture capital investment in Singapore is expected to remain high despite signs of a global deceleration. Investee companies are likely to be based in Singapore to take advantage of the well-developed infrastructure and investor-friendly environment, but are likely to be regionally focused to service the booming markets of Southeast Asia, with its favourable demographics and nominal GDP of US$2.4 trillion. Consumer-focused companies, particularly those in the technology, internet, mobile and e-commerce sectors have seen high levels of interest as more consumers go online. Financial technology firms are also beginning to flourish, after the MAS introduced a number of initiatives aimed at boosting FinTech innovation and helping FinTech startups collaborate with banks.

Are there any recent or proposed regulatory changes affecting the venture capital industry?

Under the current regulations, the marketing of a collective investment scheme (including venture capital funds) to investors in Singapore may potentially trigger the licensing requirements for dealing in securities under the Securities and Futures Act (SFA) and the marketing of any collective investment scheme, under the Financial Advisers Act (FAA).

In this regard, the Monetary Authority of Singapore (MAS) has recognised the overlap between the two regulated activities and proposed consolidating the two under the regulated activity of "dealing in securities". If implemented, this is expected to simplify the licensing analysis for fund managers that wish to market their funds in Singapore.

Changes to the investor class definitions have also been proposed. If adopted, an opt-in regime will be implemented for "accredited investors" (which includes high net worth individuals) and the definition of an "institutional investor" will be refined to include, among others, sovereign wealth funds and foreign financial institutions.

On 16 November 2016, the MAS released its response to the feedback received from the public consultation on the proposed guidelines for a "regulatory sandbox" and published its FinTech Regulatory Sandbox Guidelines, which set out the objective and principles of the regulatory sandbox, and provide guidance to interested firms on the application process. The regulatory sandbox will enable firms to experiment with innovative FinTech solutions in an environment where actual products or services are provided to the customers but within a well-defined space and duration. For the duration of the regulatory sandbox, the MAS will relax specific regulatory requirements which an applicant would otherwise be subject to.

Finally, the MAS has also indicated that it is reviewing the current regulatory regime for venture capital managers. In particular, it is looking to simplify and shorten the authorisation process for new venture capital managers and to exempt venture capital managers from the applicable business conduct requirements where there are contractual safeguards that provide sufficient protection to the venture capital manager's sophisticated investor base.

 

Tax incentive schemes

2. What tax incentive or other schemes exist to encourage investment in venture capital companies? At whom are the schemes directed? What conditions must be met?

Approved venture funds

Description. A tax incentive scheme relevant to venture capital funds.

Benefits offered. An approved venture fund may be granted tax exemption on specified income from approved investments.

Who can claim it. A company whose business consists wholly or mainly in the making of approved investments and the principal part of whose income is derived from them, and which is approved under the scheme by the Minister for Finance or another person that the Minister may appoint.

Conditions. The tax exemption applies only to specified income from approved investments. The approval under this scheme cannot be granted to venture companies on or after 1 April 2020.

Approved fund management company

Description. A tax incentive scheme relevant to venture capital fund management companies.

Benefits offered. This provides for a concessionary tax rate of 5% on management fees and performance bonuses derived by an approved fund management company from managing approved investments of an approved venture fund.

Who can claim it. A company incorporated in Singapore that is a fund manager, and which is approved under the scheme by the Minister for Finance or another person that the Minister may appoint.

Conditions. The total period of approval of a fund management company (with extension) must not exceed 15 years. The Minister for Finance or an appointed person may, when granting the approval, impose such conditions on the fund management company as the Minister or the appointed person considers appropriate. The approval under this scheme cannot be granted to fund management companies on or after 1 April 2020.

Angel investors tax deduction scheme

Description. A tax incentive scheme to encourage individuals to invest in start-up companies and help the companies grow through their management expertise/business networks and so on.

Benefits offered. The amount of tax deduction for each year of assessment is based on 50% of the cost of qualifying investment, subject to a cap of S$500,000 of investment costs (that is, a deduction cap of S$250,000). The qualifying deduction will be offset against the individual's total taxable income. Any unutilised deduction in any year of assessment will be disregarded.

Who can claim it. The tax incentive is for approved angel investors who invest in qualifying start-up companies from 1 July 2010 to 31 March 2020.

Conditions. There are different qualifying criteria for the various parties to an angel investment deal. Individuals who are interested must first apply to SPRING Singapore which administers the scheme, to be approved as an angel investor. No approval under this scheme is to be granted to individuals on or after 1 April 2020.

Certainty of non-taxation scheme

Description. Provides certainty of tax exemption of gains from the sale of shares which meet specified conditions.

Benefits offered. Under this scheme, upfront certainty of non-taxation will be given on gains derived by a company from disposal of ordinary shares that meet the specified conditions.

Who can claim it. This scheme applies to disposals of ordinary shares in an investee company made during the period 1 June 2012 to 31 May 2022.

Conditions. This scheme provides that gains derived by a divesting company from its disposal of ordinary shares in an investee company during the period 1 June 2012 to 31 May 2022 are not taxable if, immediately prior to the date of the disposal, the divesting company has held (legally and beneficially) at least 20% of the ordinary shares in the investee company for a continuous period of at least 24 months. The shares in the investee company must be ordinary shares (and not preference, redeemable or convertible shares) and the minimum 20% shareholding in the investee company must be (legally and beneficially) held continuously.

The scheme applies irrespective of whether the investee company is incorporated in Singapore or elsewhere, or whether the investee company is listed (in Singapore or elsewhere) or unlisted. However, the scheme does not apply to:

  • A divesting company whose gains or profits from the disposal of shares are included as part of its income as an insurer.

  • An unlisted investee company that is in the business of trading or holding Singapore immoveable properties (other than the business of property development).

One-tier corporate tax system

Description. The one-tier corporate tax system provides that the tax on corporate profits is a final tax.

Benefits offered. Tax exemption of dividends paid.Who can claim it. With effect from 1 January 2008, all Singapore-tax resident companies are under the one-tier corporate tax system.

Conditions. Dividends paid by a Singapore-tax resident company are tax exempt in the hands of a shareholder, regardless of whether the shareholder is a company or an individual and whether the shareholder is a tax resident of Singapore.

Fund Management Tax Incentive Schemes

Description. To promote fund management in Singapore, the following tax incentive schemes are currently available:

  • The Offshore Fund Scheme.

  • The Resident Fund Scheme.

  • The Enhanced-Tier Fund Scheme.

Benefits offered. Specified income from designated investments of such funds under each of these schemes is exempt from tax.

Who can claim it.

  • Offshore Fund Scheme. Prescribed persons (for example, an individual, a company, a trustee of a trust fund) deriving specified income from designated investments managed in Singapore by a licensed fund manager or a fund manager who is exempt from the requirement to hold such a licence.

  • Resident Fund Scheme. Companies which are incorporated and resident in Singapore deriving specified income from designated investments managed in Singapore by a licensed fund manager or a fund manager who is exempt from the requirement to hold such a licence.

  • Enhanced-Tier Fund Scheme. Approved fund vehicles (whether in or outside Singapore) (for example, a company, a trustee of a trust fund, a partner of a limited partnership) deriving specified income from designated investments managed in Singapore by a licensed fund manager or a fund manager who is exempt from the requirement to hold such a licence.

Conditions. Various conditions must be met in respect of each of the three schemes, for example the fund structure, type of investors and fund manager, and so on. The Monetary Authority of Singapore (MAS) can also specify further conditions. These schemes are due to expire on 31 March 2019.

 

Funding sources

3. From what sources do venture capital funds typically receive funding?

There is a growing pool of high net worth individuals, corporations and institutional investors who are keen to invest in venture capital. Apart from private sources of funding, the Singapore government actively encourages the setup of incubators and investments into start-ups through a variety of programmes. Initiatives led by governmental bodies such as SPRING Singapore and the National Research Foundation (NRF) seek to support local start-ups by leveraging on the expertise of third-party investors and encouraging investments through co-investment schemes. Further, the government also allocates resources for venture investing through the Economic Development Board's investment arm and Singapore's two sovereign wealth funds, the Government Investment Corporation of Singapore and Temasek Holdings. The Monetary Authority of Singapore (MAS) also announced its commitment to invest S$225 million over the next five years in FinTech projects.

 

Fund structuring

4. Can the structure of the venture capital fund affect how investments are made?

A venture capital fund set up as a Singapore limited partnership is typically managed by the general partner or a separate investment manager. As the Singapore limited partnership does not constitute a separate legal personality, investments made by the limited partnership are not held by the limited partnership in its name. This can be contrasted with a venture capital fund set up as a Singapore company, managed by an investment manager. As the Singapore company constitutes a separate legal personality, it holds investments in its name. Depending on the structure, the ability of the venture capital fund to rely on tax incentives and double taxation treaties may also be affected.

 
5. Do venture capital funds typically invest with other funds?

It is relatively common for venture capital funds to co-invest with other funds and large investors such as sovereign wealth funds and institutions. In addition, as mentioned in Question 4, such funds may also seek co-investment opportunities with the relevant government-linked organisations in Singapore.

 
6. What legal structure(s) are most commonly used as vehicles for venture capital funds?

Venture capital funds established in Singapore typically take the form of a limited partnership or a private limited company. The Cayman exempt limited partnership is also a vehicle commonly used by fund managers in Singapore due to the familiarity with Cayman laws.

There are also fund managers that adopt a master-feeder structure, which involves a limited partnership acting as the pooling vehicle with the investments carried out through a master fund incorporated as a company.

 

Investment objectives

7. What are the most common investment objectives of venture capital funds?

Venture capital funds established in Singapore typically have a term of eight to ten years, with an option to extend the term. Such extensions usually consist of two additional one-year periods. In relation to the investments, funds generally seek to exit an investment within three to five years and target returns of 12.5% to 20%.

 

Fund regulation and licensing

8. Do a venture capital fund's promoter, manager and principals require licences?

Fund management is one of the regulated activities under the Securities and Futures Act (SFA).

Accordingly, a corporation that carries on the business of fund management in Singapore must hold a capital markets services licence for fund management under the SFA (and its staff who conduct the regulated activities must be individually notified as representatives under the Representative Notification Framework), unless one of the licensing exemptions under the SFA can be invoked.

In addition, the marketing of collective investment schemes (such as a venture capital fund) is a financial advisory service regulated under the Financial Advisers Act (FAA). A venture capital fund's promoter must therefore be appropriately licensed or exempt for the marketing of any collective investment scheme before it carries out any marketing activities in or to investors in Singapore. Otherwise, a duly licensed (or exempt) Singapore intermediary must be appointed to market the fund on its behalf.

 
9. Are venture capital funds regulated as investment companies or otherwise and, if so, what are the consequences? Are there any exemptions?

The Monetary Authority of Singapore (MAS) does not regulate fund vehicles unless the fund vehicle itself conducts regulated activities under the Securities and Futures Act (SFA) and/or the Financial Advisers Act (FAA).

However, an SFA-compliant prospectus is required for all offers or invitations to persons in Singapore for the subscription or purchase of securities (such as interests in a venture capital fund), unless the offer falls within specific exceptions in the SFA. Some commonly used exemptions from the prospectus registration requirements include:

  • The Small Offering Exemption, where the total amount offered is less than S$5 million in any 12-month period.

  • The Private Placement Exemption, where offers are made to no more than 50 persons in any 12-month period.

  • The Institutional Investor Exemption, where offers are made only to institutional investors.

  • The "Section 305 exemption", where offers are made to "Section 305 persons". This includes high net worth individuals and persons who acquire the interests in the fund as principal if the offer is on terms that these interests can only be acquired for at least S$200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is paid for in cash or by exchange of securities or other assets.

 
10. How is the relationship between investor and fund governed? What protections do investors in the fund typically seek?

The relationship between investor and fund are governed by the constitutive documents of the fund, shareholders' agreements (where relevant) and general law. In addition, large investors may also enter into side letters.

Investors are typically concerned about provisions relating to fees, conflicts of interest, transfer rights, representation on the investment committee, additional reporting and other provisions to address legal, regulatory or policy issues.

 

Interests in investee companies and securities regulation

11. What form of interest do venture capital funds take in an investee company? Are there any restrictions on direct investment in a company's equity securities by foreign venture capital funds? What regulations govern the offer and sale of securities in venture capital transactions?

Forms of interest

Venture capital funds typically take their interest in the form of convertible notes and/or preference shares issued by investee companies.

Restrictions on direct investment

There are generally no restrictions on direct investment in a company's equity securities by foreign venture capital funds in Singapore.

Securities regulation

The offer and sale of securities in venture capital transactions in Singapore are often conducted privately among a small group of individuals or institutions (as opposed to being offered for sale to the public at large). The rules governing such transactions are therefore less stringent than those governing the raising of funds in the public sphere.

Public filings are required in connection with such transactions where:

  • A charge is created over certain types of assets belonging to the investee company.

  • New shares are issued by the investee company.

  • The investee company's constitution is amended (for example, to provide for the issuance of a new class of shares or to align the constitution with the terms of the shareholders' agreement to be entered into between the investee company and its investors).

 

Valuing and investigating investee companies

12. How do venture capital funds value an investee company?

While more traditional methods of valuation such as the discounted cash flows and comparable multiples methods are sometimes used, most venture capital funds will typically use the venture capital method of valuation. This method involves determining the future value (or terminal value) of the investee company, then calculating the investee company's post-money value by discounting the future/terminal value by the venture capital fund's expected or required rate of return.

Valuations can be set in the investee company's local currency, or the foreign investor's currency.

 
13. What investigations do venture capital funds carry out on potential investee companies?

Venture capital funds typically carry out the following investigations on potential investee companies:

  • Business and financial due diligence covering matters such as the potential investee company's market, business model, product or service, as well as its financial condition and financial projections.

  • Management team interviews and due diligence to assess if they have the experience and the vision to make the potential investee company a success.

  • Legal due diligence on the potential investee company's constitution and corporate records, licences, permits and approvals, material commercial contracts, related party contracts, shareholders' agreements, financing arrangements, employment contracts and terms of employee share schemes, title to (or right to use) key assets (including intellectual property) and potential litigation.

 

Legal documentation

14. What are the principal legal documents used in a venture capital transaction?

The principal legal documents typically used in a venture capital transaction are:

  • A subscription agreement which sets out the terms and conditions of the investor's investment (which will usually take the form of preference shares) in the investee company. The terms of the preference shares, as well as representations and warranties given by the investee company to the investor, are also set out in this agreement.

  • A shareholders' agreement, which regulates the affairs and management of the investee company and the respective rights and obligations of shareholders among themselves.

  • The investee company's constitution, which sets out the investee company's structure and aims and the regulations which govern the investee company. The provisions of the constitution often overlap with those set out in the subscription agreement and shareholders' agreement (for example, the terms of the preference shares will usually be set out in both the subscription agreement and the constitution, and certain shareholder rights and internal governance procedures may be set out in both the shareholders' agreement and the constitution). In such cases, the usual approach is to provide that the terms of the subscription or shareholders' agreement will prevail. The constitution is a publicly available document.

  • Employment agreements with key persons, to ensure that such persons are committed to making the investee company a success.

In cases where the investor prefers to structure its investment as convertible debt rather than preference shares, the principal legal documents will include a note purchase agreement setting out, among other things, the terms and conditions of the convertible debt instrument to be purchased by the investor.

 

Protection of the fund as investor

Contractual protections

15. What form of contractual protection does an investor receive on its investment in a company?

An investor will usually receive the following contractual protections on its investment in a company:

  • Comprehensive representations and warranties given by the company and its founders.

  • Liquidation preference and redemption and other exit rights in connection with the preference shares issued to the investor.

  • Anti-dilution protections in the form of ratchets and pre-emptive right.

  • Information and access rights and right to appoint board members and/or board observers.

  • Veto rights over important matters.

  • Restrictive covenants on the founders/key persons, and restrictions on the ability of the founders/key persons to transfer their shares in the company.

Forms of equity interest

16. What form of equity interest does a fund commonly take (for example, preferred or ordinary shares)?

A fund commonly takes equity in the form of preferred shares, rather than ordinary shares.

Preferred shares

17. What rights does a fund have in its capacity as a holder of preferred or preference shares?

Venture capital funds will usually require preferred or preference share terms that grant them:

  • Preferential rights to dividends (which may be cumulative or non-cumulative) and other distributions (including on a liquidation or sale of the investee company's business).

  • Conversion rights that allow the preferred or preference shares to convert into ordinary shares according to a formula (usually on a one-for-one basis). The conversion terms usually allow for price-based anti-dilution adjustments, under which the conversion ratio of the preferred or preference shares is increased if the investee company issues shares at a price that is lower than the issue price of the original investment. Such adjustments are usually structured as broad-based weighted average adjustments, and narrow-based weighted average adjustments and full-ratchet adjustments are quite rare.

  • Redemption rights that allow the venture capital fund an alternative liquidity route if the investee company does not achieve a public offering or sale within a specified period.

  • Co-sale rights where the venture capital fund will have the right to participate on a pro rata basis in any sale of shares by the founder(s) and/or majority shareholder(s) of the investee company.

Management control

18. What rights are commonly used to give a fund a level of management control over the activities of an investee company?

The investment documentation usually includes provisions giving the fund a right to appoint a director or an observer. This ensures that the fund can effectively monitor the board of the investee company.

It is also common for the investment documentation to include reserved matters which cannot be undertaken by the investee company without the fund's consent. Such reserved matters are generally matters outside the investee company's ordinary course of business (for example, changes to the business model and the appointment or removal of individuals to key management positions).

Information rights provisions ensure that the fund has timely access to important business and financial information about the investee company. The fund will typically require the investee company to provide them with information relating to the company's financial position and operations, which may include management accounts, audited accounts, business plans, and so on. The fund will often also require the right to audit and inspect the investee company's books, records and operations at any reasonable time, and to meet with company executives and officers.

Share transfer restrictions

19. What restrictions on the transfer of shares by shareholders are commonly contained in the investment documentation or the company's organisational documents?

The following restrictions are commonly contained in the investment documentation or the company's organisational documents:

  • Moratorium on transfers. This serves to ensure that the founding shareholders continue to remain as shareholders in the company for a certain period of time and continue to have skin in the game.

  • Pre-emption rights. These give existing shareholders the opportunity to acquire shares that other shareholders may want to sell, and typically take the form of either a right of first offer or a right of first refusal.

  • Co-sale rights. These operate when an existing shareholder is looking to offload a proportion of his shares in the company to a third party. In such a situation, the selling shareholder must afford all other shareholders the opportunity to sell the same proportion of their shares to the third party on the same terms.

  • No transfer to competitors. This prohibits shareholders from transferring their shares in the company to a competitor of the company. Competitors may be specifically identified or described by the type of business activity conducted.

 
20. What protections do the investors, as minority shareholders, have in relation to an exit by way of sale of the company?

Investors who are minority shareholders usually enjoy the following protections in relation to an exit by way of sale of the company:

  • Generally, the restrictions on transfer described in Question 20 (that is, moratorium on transfers, pre-emption rights, co-sale rights and no transfer to competitors) will apply.

  • Where the investors are subject to a drag-along right, the drag-along right can only be exercised in the following cases:

    • in the event of a bona fide third party transaction;

    • after all material terms offered by the third party are disclosed to the investors;

    • where the selling party is accepting an element of non-cash consideration, a mechanism exists to verify that the price offered to the investors has been fairly valued; or

    • if a minimum price (which is usually pegged to the issue price of the original investment plus the required rate of return) is met, and the investors will usually not be required to give representations and warranties other than as to title.

Pre-emption rights

21. Do investors typically require pre-emption rights in relation to any further issues of shares by an investee company?

Investors typically require pre-emption rights in relation to further issues of shares. Some investors can also require consent rights in relation to further issues of shares, but such consent rights are usually resisted by investee companies, especially those that expect to go through additional rounds of fundraising. In each case, carve-outs for issues of shares to employees under the terms of an employee share plan are customary.

Consents

22. What consents are required to approve the investment documentation?

From the fund's perspective, board and investment committee approval is usually required.

From the investee company's perspective, board and shareholder approval are usually required to approve the investment documentation. Depending on the terms of the shareholders' agreement and the investee company's constitution, simple majority approval, supermajority (typically a three-fourths majority) approval or even unanimous approval can be required. Singapore law requires simple majority approval at the shareholder level to issue new shares in a company, and a three-fourths majority of the shareholders to approve amendments to a company's constitution (such amendment will be necessary where a new class of shares is to be issued by the company).

Third party consents can also be required if the investee company has entered into agreements with third parties that contain restrictions on changes to the shareholding of the investee company, or holds licences or approvals that contain such restrictions.

 

Costs

23. Who covers the costs of the venture capital funds?

It is common for the investee company to reimburse the venture capital funds for expenses incurred in connection with their investment in the investee company. These costs typically relate to the legal, accounting and closing costs of the transaction, and range from US$25,000 to US$50,000 for a typical Series A investment.

 

Founder and employee incentivisation

24. In what ways are founders and employees incentivised? What are the resulting tax considerations?

Incentives

Founders and employees are often incentivised through a company's share option plan (where eligible participants are given the right to acquire a specified number of the company's shares at a pre-determined price within a prescribed timeframe) or share plan (where eligible participants are given shares in the company outright). Phantom stock plans and stock appreciation rights are also used by some companies to incentivise their founders and employees.

Tax

Generally, any gains or profits derived by an individual from his employment exercised in Singapore are taxable. For share options or awards not subject to vesting, the gains are taxable when the options are exercised or when the shares are awarded, respectively.

For share options or awards subject to vesting, the gains are taxable in the following cases:

  • If there is no selling restriction on the shares, the gains are taxable when the individual exercises the options or when the shares awarded vest, respectively.

  • If there is a selling restriction on the shares, the gains are taxable when the selling restriction ceases.

The amount of gains or profits brought to tax should be the price of the shares in the open market on the relevant date, less any amount paid by the individual for the shares.

 
25. What protections do the investors typically seek to ensure the long-term commitment of the founders to the venture?

Investors typically seek to ensure the long-term commitment of the founders to the venture by introducing leaver provisions and restrictive covenants in the shareholders' agreement binding on the founders as shareholders and employment contracts entered into between the investee company and the founders.

Leaver provisions usually provide that, if a founder ceases to be involved in the investee company's business, the investee company and/or its other shareholders can exercise a call option over the founder's shares in the investee company. The exercise price of the call option will depend on the circumstances under which the founder ceases to be involved in the investee company's business. Generally, the exercise price where the founder is a bad leaver will reflect a discount on the fair value of the shares to be acquired, and the exercise price where the founder is a good leaver will tend to be at fair value. Leaver provisions can also incorporate a vesting schedule, such that the number of shares held by the founder that is subject to the call option reduces over time.

Restrictive covenants seek to ensure that the founder:

  • Will devote his full time and attention to the investee company's business while he is an employee of the investee company.

  • Will not compete against the investee company (including by soliciting its employees or customers or by divulging confidential information belonging to the investee company) for an agreed period after they cease to be an employee or a shareholder of the investee company.

Such restrictive covenants are generally void and unenforceable unless it can be shown that the restriction is reasonable, considering the interests of the parties and the public generally.

To be enforceable, the restraint must:

  • Protect a legitimate interest of the covenantee.

  • Be reasonable as between the parties and in respect of the scope, the geographical area and the duration of the restraint.

  • Not be contrary to the public interest.

 

Exit strategies

26. What forms of exit are typically used to realise a venture capital fund's investment in an unsuccessful company? What are the relative advantages and disadvantages of each?

If an investee company is unsuccessful, a venture capital fund will typically try to exit its investment in one of the following ways:

  • By demanding repayment of its convertible note or redeeming its preference shares, if the investee company has sufficient cash to make such repayment or effect such redemption. This option allows for a quick exit by the venture capital fund, but is not likely to be available as an unsuccessful company is unlikely to have sufficient cash to repay the amount due on the convertible note or to redeem the preference shares.

  • By requiring the company to be wound up by selling its assets to specialist buyers (and sometimes even competitors), paying off its creditors and distributing any remaining proceeds from the sale of its assets to its noteholders and shareholders. The winding up process can be time-consuming (often taking six months or more) and the company's shareholders will not have any control over this process if the company is insolvent.

 
27. What forms of exit are typically used to realise a venture capital fund's investment in a successful company? What are the relative advantages and disadvantages of each?

The forms of exit typically used to realise a venture capital fund's investment in a successful company are as follows:

  • A trade sale, which can be effected via an auction process or a negotiated sale. Compared to initial public offerings (IPO), trade sales give the sellers more control over the exit process and timing of the sale, and generally have a higher likelihood of consummation as there are fewer regulatory hurdles to cross. In the case of a trade sale effected by an auction process, the sellers can also take advantage of the competitive tension to try to secure a higher sale price. However, the pool of potential purchasers can be limited, especially if certain shareholders wish to retain a stake in the company.

  • A secondary buyout, where the venture capital fund sells to another investor or fund. Secondary buyouts share many of the same advantages of trade sales. The main disadvantage is that the sale price tends to be lower as the seller in a secondary buyout can be expected to leave something on the table for the incoming investor.

  • An IPO, where the shares of the company are listed for trading on a stock exchange. In an IPO, the founders and key management of the company will have the option of retaining their stake in the company, as well as their management position at the company. An IPO will also raise the company's public profile (as well as the venture capital fund that invested in it), but the IPO process can be time-consuming and expensive and mandatory lock-up requirements can restrict the venture capital fund's ability to exit its investment completely.

 
28. How can this exit strategy be built into the investment?

The exit strategies (see Question 28) are usually built into the investment via provisions in the shareholders' agreement, where parties to that agreement agree on:

  • An appropriate timeframe within which to start exploring exit opportunities, which customarily include a trade sale and an IPO.

  • The circumstances under which the venture capital fund may drag-along the other shareholders of the company in an exit situation (for example, the venture capital fund must sell all of the shares held by it in the company, and the sale price must exceed an agreed minimum price).

  • The circumstances under which the venture capital fund can sell its shares in the company to a third party (for example, after complying with pre-emption rights given to the other shareholders and the sale must not in any event be made to the company's competitors).

 

Online resources

Singapore Statutes Online

W http://statutes.agc.gov.sg

Description. The official Singapore government website for the online publication of legislation. Up-to-date and managed by the Legislation Division of the Attorney-General's Chambers of Singapore.



Contributor profiles

Andrew M. Lim, Partner

Allen & Gledhill LLP

T +65 6890 7706
F +65 6302 3149
E andrew.lim@allenandgledhill.com
W www.allenandgledhill.com

Professional qualifications. Singapore, 1986

Areas of practice. Mergers & acquisitions (public and private companies, private equity, financial institutions, joint ventures); corporate govggernance; compliance; general corporate and commercial.

Publications.

  • M&A Squeeze-out Guide, International Bar Association, 2015.

  • Corporate Acquisitions and Mergers (Singapore chapter), Kluwer Law International, 2015.

  • Treasury Shares Online Guide (Singapore chapter), International Bar Association, 2014.

  • Mergers & Acquisitions in Singapore: Law & Practice (Short practitioner commentary on Conditions, Pre-conditions, Consideration and Offer-timetable), LexisNexis, 2013.

Christian Chin, Partner

Allen & Gledhill LLP

T +65 6890 7616
F +65 6302 3007
E christian.chin@allenandgledhill.com
W www.allenandgledhill.com

Professional qualifications. Solicitor, England and Wales, 2002; Singapore Bar, 2000

Areas of practice. M&A; private equity; corporate restructuring; joint ventures; employment law; general commercial contracts.

Non-professional qualifications. Masters of Business Administration, F.W. Olin Graduate School of Business, Babson College

Publications

  • The International Comparative Legal Guide to Private Equity 2016 (Singapore chapter), Global Legal Group, 2016.

  • Practical Law International Joint Ventures Practice Manual - Structures (Singapore section), 2015.

  • Treasury Shares Online Guide (Singapore chapter), International Bar Association, 2014.

Danny Tan, Partner

Allen & Gledhill LLP

T +65 6890 7738
F +65 6302 3109
E danny.tan@allenandgledhill.com
W www.allenandgledhill.com

Professional qualifications. Solicitor, England and Wales, 2002; Singapore Bar, 2000

Areas of practice. Investment funds; private equity

Publications. Asset Management Review, Law Business Research , 2012.

Lim Pek Bur, Partner

Allen & Gledhill LLP

T +65 6890 7096
F +65 6302 3150
E lim.pekbur@allenandgledhill.com
W www.allenandgledhill.com

Professional qualifications. Singapore Bar, 1998

Areas of practice. Tax

Recent transactions

  • Advised KV Asia Capital on tax issues in relation to the acquisition of Power Diesel Engineering Pte. Ltd. which provides diesel engine services supporting the offshore, marine, oil and gas and construction industries.
  • Advised Anchorage Capital Partners Pty Ltd, Sino International Strategic Pte. Ltd., Brian Pressley Smith, Allan Moss Personal Superannuation Fund Pty Ltd and Rippledot Capital Advisers Pte. Ltd. on tax issues in relation to the sale of all the shares in the capital of Anchorage Singapore Holdings Pte. Ltd., which indirectly wholly-owns First Engineering Limited, a precision plastics moulds maker.

Publications. Corporate Acquisitions and Mergers (Singapore chapter), Kluwer Law International (2015)


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