Five Key Considerations for M&A in the Retail and Consumer Sector

While Singapore’s mergers and acquisitions (“M&A”) deals have declined slightly in Q1 of 2024, data from the London Stock Exchange Group showed that Consumer Products & Services is the most targeted sector by value in Q1 of 2024, with total M&A activity increasing six-fold from Q1 of 2023^[1]. In an ever-evolving landscape, M&A activities play a pivotal role in shaping the retail and consumer sector in Singapore – whether as a means to acquire distressed companies or to expand their consumer offering. Against this backdrop, we explore 5 key considerations for Buyers interested in acquiring a Singapore Target Company in the retail and consumer sector.

1. Focusing on Key Areas for Legal Due Diligence

Legal due diligence is a key step that Buyers will need to take before formally proceeding with any M&A transaction, to uncover risks or red flags associated with the Target Company. If areas of risk are identified, the Buyer would typically request for these to be rectified before the deal is closed, or include specific indemnities or warranties in the transaction documents.  Some key areas that should be scrutinised during legal due diligence for a Target Company operating in the retail and consumer sector are as follows:

1. Contracts with customers – Customers usually enter into contracts with the Target Company on the Target Company’s standard terms, which will need to be reviewed.
2. Contracts with suppliers – Supplier contracts are typically on the supplier’s standard terms, which are more favourable to the supplier. The legal due diligence process seeks to uncover any onerous terms or terms stipulating that the supplier’s consent is required prior to the completion of the transaction.
3. Employees – Employment contracts of key personnel will need to be reviewed for red flags and compliance with local laws. Where the Target Company engages foreign workers, a check into their work visas will also be warranted.
4. Any adverse claims – The Buyer will need to determine if there are any complaints by customers, threatened litigation or regulatory action, to investigate the Target Company’s legal exposure. For example, customer complaints of adverse reactions from treatments received in spas, or customer complaints of food poisoning at an F&B establishment, may expose the Target Company to significant legal risk.
5. Licences – Some businesses in the retail and consumer sector require a licence to operate (for example, hotels, clinics, F&B establishments, massage establishments). The Buyer will need to determine if the Target Company has been appropriately licenced, whether there are any restrictions in the licence conditions and whether approvals from the regulator are required prior to completion of the transaction.
6. Intellectual property – A thorough investigation into intellectual property (for instance, the Target Company’s trademark and website domain) is typically warranted for businesses in the retail and consumer sector, given the importance of branding and goodwill of the Target Company’s mark to its customers.

2. Strategically Structuring the Transaction

An acquisition of a retail and consumer business can take the form of a share purchase or an asset purchase. In a share purchase, the Buyer acquires the entire issued share capital of the Target Company, and the risks reside in taking on all the liabilities along with the assets in the company and contending with the existing shareholders which may need to be dragged along if the Target Company has a fragmented ownership structure and reluctant seller-shareholders. In an asset purchase, the Buyer can cherry pick the assets (i.e. goodwill, premises, stock, intellectual property, client records) but will have to deal with the formalities for the transfer of each category of assets and any consent for the transfer from counterparties. Licences can rarely be transferred and will have to be reapplied (for example, temporary occupation licence, food shop licence, and GST registration).

The exact structure will usually depend on the motivation for the acquisition. For instance, in transactions for cost or revenue synergies, a share purchase will usually be the preferred deal structure. A Buyer may also acquire shares (instead of assets) if it is seeking to aggressively expand its portfolio or to leverage distribution. In deals where the Buyer needs to diversify into new products or markets, an asset purchase may be preferred for the Buyer to start a new business line (though a share purchase may also work for smaller targets). In certain cases where the Buyer has set its sights on winning market share, the Buyer may acquire assets in the form of goodwill, customers, customer data and sales professionals from a competitor in order to replicate successful outlets / sales formula rapidly.

The deal structure will also almost certainly take into account any tax implications, and the need to incentivize top management. It was also reported^[2] that earn-out structures (where the full consideration for the deal will be paid against profit or revenue milestones revenues) which are less common in the retail and consumer sector are also starting to appear in deals as a way to reconcile price differences.

3. Assessing Work Visas for Foreign Employees

Manpower is a key facet of retail and consumer businesses. Given the nature of such businesses coupled with the manpower climate in Singapore, foreigners are often the key manpower supply source. For foreigners to live and work in Singapore, companies will need to apply for work passes or permits on their behalf. The work passes that a retail and consumer business will typically need to apply for will be the Employment Pass or the S Pass.

Applicants of an Employment Pass (new applications or renewal applications alike) will need to satisfy a 2-stage eligibility framework. The first criterion is that the candidate must earn a fixed monthly salary comparable to the top one-third of local PMET salaries (starting from S$5,000 and above). The second criterion will be to pass the points-based Complementarity Assessment (“COMPASS”) framework. The COMPASS framework considers both attributes of the candidate and attributes of the company, such as the candidate’s salary, educational qualifications and the company’s manpower diversity and support for local employment. Bonus criteria do apply, but these are generally limited to jobs where skills shortages exist or where there are certain strategic partnerships with economic agencies, amongst others.

For a M&A transaction involving retail and consumer businesses, it will be pertinent for the Buyer to be privy to and understand these manpower and work pass-related requirements to operate these businesses smoothly subsequent to the takeover and/or purchase.

1. Employment Pass: Employment Passes are work passes suitable for foreign professionals, managers and executives (“PMET”). In a retail and consumer business, candidates that may qualify for Employment Passes would be in the senior management or C-suite level. These candidates may have particular expertise in operating in the local market or in the Asia-Pacific region. For a Buyer of a retail and consumer business, continuity of the business’ growth ongoing operations will be critical post-purchase and retaining these senior management individuals for a transitional period can be a consideration.
2. S Pass: S Passes are generally appropriate for mid-skilled workers. In a retail and consumer business, these would typically be the retail staff working in the store premises or office staff who do not meet the eligibility criteria for an Employment Pass. Candidates will need to draw a salary comparable to top one-third of local Associate Professionals and Technicians (“APT”) salaries, which translates to a minimum qualifying salary of S$3,000 presently (S$3,150 effective 1 September 2024 and S$3,300 effective 1 September 2025). Unlike employees under Employment Passes, employers are subject to a quota and levy for S Pass employees. For retail and consumer businesses in the services sector, the number of S Pass holders a company can hire is capped at 10% of its total workforce. A monthly levy of S$500 is also payable for each S Pass holder within the quota.

4. Considering M&A for Franchised Businesses

International franchised businesses may consider expanding into Singapore by purchasing the shares or assets of a local Target Company in a similar field, and then rebranding the Target Company to take on the franchisor’s branding. Compared to starting up in Singapore from scratch, this approach allows the franchisor to tap on the expertise of local key management personnel, any licences that may have already been approved, and Target Company’s existing customer base.

There are no statutory laws in Singapore relating to franchising agreements nor franchise registration requirements, and the legal obligations are generally found in the franchising agreement between the parties or the franchise operations manual (if provided). The legal documents will need to reflect the concept of the franchise essentially being a contractual licence whereby, in exchange for royalties and fees, the franchisor grants the operator (i.e. the Target Company) the right to use the intellectual property and know-how, such as trademarks, logos, systems and processes of the franchisor's business, under certain restrictions.

Therefore, in an M&A transaction by an international franchisor, the franchising agreement (and related franchising legal documents) will need to be negotiated and agreed alongside work done on the substantive purchase agreements. Rebranding of the Target Company will typically be done concurrent with the completion of the transaction.

5. Evaluating Potential Competition Law Concerns

Parties in an M&A transaction will also need to consider whether any competition law issues arise. The Competition and Consumer Commission of Singapore (“CCCS”), which oversees and enforces the Competition Act 2004, has the power to review any merger (including joint ventures) that result or may result in a substantial lessening of competition (“SLC”) within any market in Singapore, either on its own initiative or upon notification. The indicative thresholds for when a SLC is likely to occur are where (a) the merged entity has a market share of 40% or more, or (b) the merged entity has a market share of more than 20% and the combined share of the 3 largest firms post-merger is 70% or more.

The merger notification regime in Singapore is voluntary, but notification is strongly recommended if the indicative thresholds are met or if parties believe there may be otherwise be a SLC. Under certain conditions, parties may also approach CCCS for confidential advice and indication on whether the merger would infringe the Competition Act 2004. Failure to notify CCCS of the merger is not itself an offence, but may be an aggravating factor if eventually found to be in breach.

If found to be in breach, CCCS may (a) issue directions for parties to maintain the status quo and prohibit any integration or giving effect to the merger, (b) impose behavioural and structural remedies, (c) issue directions to unwind a merger, or (d) impose financial penalties of up to 10% of parties’ turnover for the period of the infringement up to a maximum of 3 years.

Parties to an M&A deal should seek legal advice in conducting the self-assessment exercise to determine whether a merger notification is required. Compared to M&A involving B2B businesses, competition law concerns may be more pronounced in retail and consumer businesses where the consumers are directly affected. Depending on the legal assessment, parties may also explore other options for collaboration to mitigate risk of competition law infringements.

Overall, a successful M&A strategy in the retail and consumer sector hinges on thorough preparation, due diligence, strategic alignment, and regulatory compliance. As global trends and local market dynamics evolve, Buyers must carefully navigate these key considerations to effectively position themselves to capitalize on growth opportunities in Singapore's retail and consumer sector.