Shareholders play an important role in preserving balance in the corporate governance of a company. While shareholding is intended to enable passive investment participation in a company, shareholders have legitimate interest in the governance of a company and a right to hold the board accountable. Management have traditionally often been able to push through their agenda without much shareholder resistance in Singapore, but the trend is changing slowly but surely.
II LEGAL AND REGULATORY FRAMEWORK
Shareholder rights and engagement in Singapore are regulated by a combination of statutory and non-statutory instruments as well as under common law. The Companies Act (CA) and the Securities and Futures Act (SFA) make up the relevant core statutory framework, which is supplemented by non-statutory instruments such as the Listing Manual of the Singapore Stock Exchange (Listing Manual), the Singapore Code of Corporate Governance (Governance Code) and the Singapore Code on Takeovers and Mergers (Takeover Code). The full breadth of the legal options, strategies and pitfalls relevant to an activist shareholder is beyond the scope of this publication, but key considerations are summarised below.
i Requisitioning or calling a general meeting
The CA empowers shareholders to either requisition for a general meeting, or directly call a general meeting, if they have not less than 10 per cent of the total number of issued shares of the company. The key difference between requisitioning for, and calling, a general meeting respectively, is that requisitioning shareholders will need to give the company's directors up to 21 days to proceed to convene a general meeting at a date no later than two months after the receipt by the company of the requisition, and only if the directors fail to act within the specified 21 days, will the requisitionists (or any of them representing more than 50 per cent of the total voting rights of all of them) may themselves convene a general meeting at a date no later than three months from the requisition date. In contrast, shareholders wishing to directly call for a general meeting may do so under a more expedited procedure without having to exhaust any timeline given to the directors to act. However, while the company must pay the requisitionists all reasonable expenses incurred to call a general meeting (in the event of a failure by the directors to do so), no equivalent provision exists in relation to the direct calling of a general meeting by shareholders. A meeting will require 14 days' notice or such longer period as is provided in the constitution of the company, unless it is convened for the passing of a special resolution, which requires at least 21 days' notice.
ii Shareholder transparency
An activist shareholder of a listed company will be able to identify all key shareholders having an interest in not less than 5 per cent of the total voting shares of the company, as well as the shareholding interest that any of the company's director or chief executive officer may have in the company, information that is required to be publicly disclosed under the CA and the SFA.
iii Removal of director
Unlike a private company where it is possible for the directorship of a person to be entrenched in the constitution, a director of a public company can always be removed by an ordinary resolution of its shareholders, regardless of anything to the contrary in the company's constitution or in any agreement between the company and such director. The person proposing the resolution must give a special notice to the company at least 28 days before the meeting to be convened to approve the resolution, and a copy of the resolution must be sent to the director concerned, who will be entitled to be heard on the resolution at the meeting.
iv Concert party obligations
Where shareholders act in concert to obtain or consolidate effective control of a company, implications arising under the Takeover Code should be borne in mind, including the obligation to make a general offer for the shares in the company upon crossing sensitive shareholding thresholds. Shareholders voting together on resolutions at a general meeting would not normally be regarded as an action that would lead to an offer obligation, but coordinated voting patterns in more than one general meeting may be taken into account as an indication that the shareholders are acting in concert. Shareholders who requisition or threaten to requisition the consideration of a ‘board control-seeking' proposal at a general meeting will generally, however, be presumed to be acting in concert with one another and with the proposed directors, such that subsequent acquisitions of shares of the company by any member of the concert party group could give rise to an obligation to make a general offer for the company under the Takeover Code.
v Derivative action
Directors who have committed wrongdoings or have otherwise breached their fiduciary duties to the company would naturally have little incentive to procure the company to bring an action against themselves. To ensure accountability, the CA provides for a statutory derivative action that gives shareholders an ability to bring an action on behalf of the company against errant directors or third parties in respect of the directors' conduct, which is subject to obtaining leave of court and is dependent on the company itself having a claim, given that the action is brought in the company's name. The complainant is required to give 14 days' notice to the board of his or her intention to apply for the action if it is not pursued by the board, and is required to demonstrate that he is acting in good faith and that the action is prima facie in the interests of the company. The statutory derivative action is available to all companies incorporated in Singapore, including listed companies. While foreign-incorporated companies do not currently fall within the scope of the statutory derivative action regime, they may avail themselves of the common law derivative action, the requirements of which entail the complainant establishing that the errant directors committed fraud on the minority.
vi Oppression or unfair prejudice
Shareholders may also apply to court for what is commonly known as the ‘oppression remedy' under the CA if they can establish essentially that they have been treated in a manner that is ‘commercially unfair', which is an exception to the principle of ‘majority rule' in companies. As contrasted with a statutory derivative action, the ‘oppression remedy' is not brought in the name of the company but is personal to the complainant. However, the ‘oppression remedy' is often considered difficult to succeed and is usually a remedy of last resort. It is very rarely seen in the context of listed companies.
vii Market manipulation and insider dealing
When pursuing any activist strategy, shareholders should be careful not to fall afoul of regulations against market manipulation, making false or misleading statements or fraudulently inducing persons to deal in securities, among other offences relating to dishonesty, all of which attract civil and criminal penalties under the SFA. Where an activist shareholder engages with the board on matters not otherwise made available by the board to the rest of the shareholders, it is possible that insider information may have been divulged, in which case the shareholder must not deal or encourage another to deal in the company's securities until such price-sensitive information has been disseminated to the public.
An activist shareholder wishing to launch a media campaign and level criticisms against a company or other individuals in the public domain should be aware of the risk of defamation. While defences such as justification and fair comment are available, the law in this area is complex and an activist shareholder should ideally seek expert advice on what is legally permissible in order not to end up at the wrong end of a libel action.
III KEY TRENDS IN SHAREHOLDER ACTIVISM
i Hedge fund activism
Corporate raids, which were common during the 1980s in the US, where hedge fund activists buy a large stake in a company and then engage in proxy fights for control of the board to break up the company, have hitherto been rare in Singapore. It appears that only 15 per cent of activist hedge funds focus their activities in the Asia-Pacific region2 and less than one-fifth of the city state's approximately 750 public listed companies have a free float in excess of S$200 million,3 limiting its appeal to institutional investors. Where there is hedge fund activism, media campaigns are more commonly used in the local context to influence shareholders and to put pressure on the target's board of directors and its management.
However, the corporate landscape in Singapore may change as new hedge funds are now being set up with the exclusive focus on influencing the way local listed companies are run.4 Smaller construction and engineering companies, which often have a lot of cash or reserves due to the recent building boom may be targeted by activists, who may push for payment of special dividends or share buy-backs by way of open confrontation or with much less fanfare through the exercise of voting power. While such activist pressure on Singapore companies are, when exerted responsibly, generally welcome by minority shareholders, such demands may not always be successful given that it is not uncommon for founder shareholders in many smaller to mid-cap issuers to hold a significant block of shares in such companies.
ii Influential investor lobby groups
In July 2016, Securities Investors' Association (Singapore) (SIAS) launched an initiative to empower retail shareholders by guiding them to ask relevant questions at annual general meetings (AGMs).5 The initiative kicked off with SIAS engaging a team of analysts to research the annual reports of 200 listed companies, which will be gradually increased over the course of the next five years to cover all listed companies in Singapore, subject to funding.6 The analysts will, based on the annual reports of the companies, compile relevant questions to be asked, which will primarily focus on strategy, financials, and corporate governance. Companies are encouraged to address SIAS's questions at their AGMs and publish the answers on SGX. SIAS also conducts workshops on how to analyse annual reports for retail and novice investors to help them ask relevant questions at AGMs.
SIAS actively advocates progressive industry practices and organises investor education programmes through collaborative arrangements with financial institutions and listed companies interested in investor education as part of its corporate social responsibility agenda. On an annual basis, SIAS tracks and grades listed companies for their corporate governance practices and rewards those who have excelled with the Singapore Corporate Governance Award.
SIAS is one of the biggest investor lobby groups in Asia and has mediated many high-profile shareholder issues in Singapore and the region. The association was formed in 1999 during the Central Limit Order Book (CLOB) saga when, as part of Malaysia's capital control measures, the Malaysian authorities froze the shares of more than 100 Malaysian listed companies worth more than US$4.47 billion, which were held by 172,000 minority shareholders in Singapore.7 When negotiations between Malaysia and Singapore were deadlocked for months, SIAS canvassed a global media campaign to convey the public angst and outcry in Singapore. However, Malaysia refused to relent even when foreign investors threatened to withdraw their existing investments from Malaysia, US-based MSCI Index declined to admit Malaysia and foreign direct investments into the country declined. SIAS subsequently approached the Singapore authorities to consider taking the issue to the World Trade Organization, a course of action that had already been within the contemplation of Singapore and was subsequently announced in Parliament.8 Eventually in 2000, Malaysia and Singapore agreed to settle the issue by a staggered release of the affected shares back to the minority shareholders in Singapore.
SIAS continues to champion investor rights today and has often stated that it prefers a conciliatory approach to resolving investors' right issues.9 However, in the wake of recent market and corporate governance lapses in listed companies, SIAS fired warning shots for the first time that SIAS will not hesitate to take errant companies to court on behalf of their minority shareholders if the situation warrants it.10 Representative actions are available in Singapore to enable an individual or a large number of people to sue, for themselves and on behalf of others, a wrongdoer for a common harm inflicted upon all of them provided that there is a common interest among the claimants. SIAS has commented that it may set up a litigation fund to which minorities can contribute, although SIAS itself, as a registered charity, may not contribute to the fund.11 Nonetheless, SIAS emphasised that representative actions should be a last resort to avoid unnecessary adverse publicity for the board and the company, which has serious consequences for share value.12
iii The media's catalytic role
The media has played a catalytic role in the ascendancy of shareholder activism in Singapore, with corporate governance analysts and commentators often being the first to highlight shortfalls in corporate governance best practices, define issues and set the agenda for change. Shareholders are thus galvanised to hold the relevant boards and management to account, with companies caught in the crosshairs of the media often feeling compelled to respond publicly to concerns raised. Unrelenting media storms have sometimes created enough damage to public perceptions of the targeted companies and their boards that the relevant directors announce their retirement from their positions even before shareholders vote on whether to keep the incumbents in office at the next re-election cycle.
Companies whose board composition does not meet best practice expectations, such as where it lacks diversity, or where existing directors have served for very long periods, continue to come under the spotlight. While the Governance Code recommends progressive renewal of the board and discourages the reappointment of independent directors who have served for more than nine years, the nine-year mark is not a hard line, unlike other jurisdictions. Indeed, more than a quarter of independent directors in Singapore have tenures that exceed nine years,13 although as pointed out by the Singapore Institute of Directors, some of these companies have nonetheless outperformed large-cap companies in Australia and the UK in terms of total shareholder returns.14 There are now calls for independent directors who have served beyond nine years to be subject to annual election or to an annual vote on their independence, and the regulators have also been exhorted to consult stakeholders as to whether some form of ‘say on pay' for senior executives should be introduced.15
IV RECENT SHAREHOLDER ACTIVISM CAMPAIGNS
i Metro Holdings
Activist investor, Quarz Capital Management, which is reported to hold between 15 and 20 positions in companies in Germany, Austria, Switzerland and the US, has turned its sights to Singapore because of the reliability and transparency of the country's accounting and regulation, and has disclosed that it ‘has a pipeline of stocks which it intends to target' as it considers Singapore ‘as a treasure trove of undervalued small and mid-cap companies'.16 For a start, Quarz Capital Management has, in October 2016 in an open letter to the management and board, called on retailer and real-estate developer Metro Holdings, to return excess cash to investors by way of a one-off dividend that would translate into Metro deploying S$175 million of its cash, highlighting that the company's net cash accounts for more than half of its market capitalisation.17 Quarz has accumulated a stake of about 2 per cent in Metro since the beginning of 2016 and at the time of the letter, Metro shares traded about 40 per cent below book value. Quarz's open letter resulted in the highest increase in Metro's share price in more than seven years, and also elicited a formal response from Metro, which clarified that the excess cash was a recent occurrence due to the divestment of properties over the past one to two financial years. Metro said that it continues to evaluate new projects to reinvest capital, and expects its net cash levels to decline as it capitalises on property development and investment opportunities when they materialise.
ii Geo Energy
In October 2016, Dektos Capital's founder expressed in an interview with Bloomberg that coal miner Geo Energy was ‘massively undervalued' by as much as 60 per cent, and his fund had urged the company to change its debt structure and pay a dividend once earnings recover. Geo Energy announced a coal management agreement a few days later, sending its share price to an 11 per cent two-day gain. Dektos had sold its stake in Geo Energy before it made its comments but subsequently sought to invest in convertible bonds in the company.18
iii Various shareholder-initiated general meetings
Another indicator of growing shareholder activism in Singapore is the increasing number of shareholder-initiated meetings. While there were several general meetings requisitioned or called by shareholders of six listed companies in 2015, shareholders requisitioned or called for meetings in eight listed companies in 2016, namely in Cordlife Group, Magnus Energy, Imperium Crown, Oriental Group, SBI Offshore, International Healthway Corporation, Tritech Group, and Natural Cool Holdings.19 All of such shareholder-initiated meetings involved, among others, proposals to remove one or more existing directors and to appoint new directors on the board of the relevant companies. In some cases, requisition notices were later withdrawn or the meetings not held as originally planned, but in up to half of them, at least some, if not all, resolutions proposed by the shareholders were eventually passed.
V REGULATORY DEVELOPMENTS
i Multiple proxies
In January 2016, a multiple-proxies regime was introduced in the CA. Previously, nominee shareholders were limited to appointing only two proxies, as a result of which not all the views of their indirect investors can be represented. Under the new regime, specified intermediaries, such as banks whose business includes the provision of nominee services and that hold shares in that capacity, and capital markets services licence holders providing custodial services and which hold shares in that capacity, are allowed to appoint more than two proxies to attend and vote at general meetings. The legislative change enfranchises indirect investors by enabling them to participate in shareholders' meetings with the same voting rights as direct shareholders, and also raise any queries they may have to the board of the company. This may potentially enhance attendance at shareholders' meetings and increase the number of shares that are voted.
ii Dual-class share structure
With effect from January 2016, public companies in Singapore may offer shares with different voting rights to investors, subject to the rights of such shares being clearly specified in the company's constitution and certain other safeguards, including requiring the approval of shareholders by way of special resolution for the issuance of such shares, and requiring holders of non-voting shares to have equal voting rights for resolutions on winding-up or resolutions to vary the rights of non-voting shares. The dual-class share structure provides greater flexibility in capital management and gives investors a wider range of investment opportunities. However, to be clear, the Monetary Authority of Singapore (MAS) and SGX are still reviewing whether dual-class share structures should be permitted for companies listed on the SGX, and pending conclusion of the review, the existing policy of SGX of not listing issuers with dual-class share structures will continue to apply. Proponents of dual-class share structures argue that weighted voting would allow founding shareholders more protection to pursue their long-term vision for the company against shareholder demands for short-term returns. Detractors point out that such structures remove a significant channel of accountability by the management, who are typically the ones holding shares with superior voting rights, and who could potentially exercise untrammelled control over the company despite owning much less equity than the rest of the investors. Nevertheless, recognising that such listings are increasingly being considered in industries such as information technology and life sciences, the Committee on the Future Economy (CFE) recommended that dual class structures be permitted with appropriate safeguards. In February 2016, SGX released a public consultation paper to seek feedback on possible safeguards against risk that come with such a listing structure, including among other things, a proposal that the multiple-vote share be automatically converted to one-vote shares when it is sold or transferred, and a sunset clause, where the dual class structure is converted into a single class at a future date. If market consensus positive, SGX will in due course issue a follow-up consultation paper to amend the listing rules to accommodate a dual-class share structure.
iii Increase in transparency of ownership and control
With effect from 31 March 2017, unless exempted, all Singapore companies, foreign companies and limited liability partnerships are required to maintain and keep up-to-date a register of controllers that will have to be made available to ACRA or law enforcement authorities upon request. A foreign company is required to keep a register of its members at its registered office in Singapore or at some other place in Singapore. A nominee director of a company, unless exempted, is also required to disclose his nominee status and nominator to his company. The company must keep a register of nominee directors and make it available to ACRA and law enforcement authorities upon request.
iv Enhanced audit disclosure
From 2017 onwards, two key changes will be made in audit reports to help investors and other users in their decision-making by giving them more pertinent information on companies. The enhanced auditor reporting standards announced by the Accounting and Corporate Regulatory Authority (ACRA) and the Institute of Singapore Chartered Accountants (ISCA) will take effect for audits of financial statements for periods ending on or after 15 December 2016. First, auditors will be required to comment on ‘key audit matters' (KAMs) in their financial statement report beyond the current ‘pass or fail' opinion. KAMs are matters that, in the auditor's judgement, are of the most significance in the audit of the financial statements, and are typically areas that involve difficult or complex auditor judgements. Auditors are required to describe each KAM, include a reference to related financial statement disclosures if any, and address why the matter is considered to be one of significance in the audit and how it is addressed in the audit. Auditors are also expected to take into account areas of higher risk of material misstatement, and the effect on the audit of significant events or transactions that occurred during that year. Second, auditors are required to ensure that a company has made adequate disclosures on a going concern even if the circumstances do not lead to any material uncertainty. This is more stringent than the current standard, which only requires auditors to highlight issues that result in a material uncertainty over a company's going concern, such as the loss of a major customer. These two changes have been deemed by market observers as ‘a big step forward' to encourage company directors and management to become more transparent in their engagements with shareholders.20 Currently, KAMs are communicated by auditors to the audit committees of companies but are otherwise kept largely out of the public domain. The move to compel the disclosure of KAMs to the public will enable investors to gain insights on the significant audit risks identified and to have more focused and meaningful discussions with the board. To ensure that KAM reporting is relevant and useful, ACRA has assured investors that it will be focusing its audit inspection on auditors' compliance with the enhanced standards and has also issued an audit practice bulletin to guide auditors on ACRA's expectations on these standards.
v Stewardship principles
In November 2016, the ‘Singapore Stewardship Principles (SSP) for Responsible Investors' was launched to promote good stewardship practices among the investor community.21 The SSP is drafted by the Singapore Stewardship Principles Working Group, which comprises industry players and organisations representing various relevant constituencies in the Singapore investment community, and supported by the MAS and the SGX. The SSP provides a view on the activities and functions that stewards should carry out, and how these principles relate to the boards and management of investee companies. The principles are not intended to be rigid rules to be enforced or prescriptive measures to be adhered to, nor are they intended to constitute a code but are intended as broad principles, with suggested ways that they could be applied. There is growing expectation that institutional investors should step up to undertake more responsibility towards improved stewardship and corporate governance as they are in a better position than retail investors to make a difference, given their sophistication, resources, as well as their international experience and influence to push for change in companies in which they have investments. The failure of institutional investors to adequately engage with their investee companies was seen by many as a material contributory factor to the global financial crisis in 2008.
Shareholder activism is expected to continue to rise in Singapore as a result of a confluence of factors, including the flood of facilitative regulatory changes, increasing investor sophistication, louder voices by investor lobby groups, and Singapore's growing role as one of Asia's leading economic and financial hubs. In the wake of such an unmistakable trend, companies and their boards need to prepare themselves for a changing corporate landscape by proactively developing a shareholder engagement plan so that mutual understanding and different expertise can converge through conciliatory dialogues. It is crucial for any company to understand its shareholder base, appreciate that their interests are not monolithic, and critically assess its own performance, practices and risk factors from time to time in preparation for the contingency of any activist campaign.
1 Lee Suet-Fern is the managing director and Elizabeth Kong Sau-Wai is a director at Morgan Lewis Stamford LLC.
2 Preqin Special Report: Hedge Fund Activist Report (June 2014).
3 Thomson Reuters Starmine; ‘Cheap buyout plans in Singapore? Not so quick, say minority shareholders', The Straits Times (Reuters), 28 March 2016.
4 Klaus Wille, ‘New Singapore activist hedge fund seeks to shake up companies', Bloomberg, 4 February 2015.
5 Lorna Tan, ‘AGMs need not be Annual Gluttons' Meetings', The Straits Times, 19 June 2016.
7 ‘About SIAS', SIAS website, at the following link: http://sias.org.sg/index.php?option=com_content&view=article&id=5&Itemid=6.
8 ‘David vs Goliath - The Incredible Story of a Fearless Asian Activist', The World Post, 10 February 2014.
9 See footote 5.
10 Michelle Quah, ‘SIAS says it will take errant companies to court if need be', The Business Times, 19 April 2016.
13 SID-ISCA Singapore Directorship Report, 2014.
14 Willie Cheng, ‘Are Singapore boards killing value?', The Straits Times, 19 April 2016.
15 Michelle Quah, ‘Shareholder activism, engagement improve, but not enough: study', The Business Times, April 2016.
16 Bloomberg, ‘Activist investor Quarz urges Metro Holdings to return cash to shareholders', The Straits Times, 4 October 2016.
17 ‘Quarz Capital Management Issues Open Letter to Metro Holdings' Board of Directors', Seeking Alpha, 4 October 2016.
18 Klaus Wille and Jonathan Burgos, ‘Activists Take Aim at Singapore's "Buy, Pray, Hope" Model', Bloomberg, 4 November 2016.
19 Mak Yuen Teen and Chew Yi Hong, ‘The Singapore Report on Shareholder Meetings: Dawn of Activism (Volume 3)', March 2017.
20 Michelle Quah, ‘Enhancing the audit report: the good, the bad and the (far from) ugly,' The Business Times, 2 August 2016.
21 ‘Stewardship for Singapore Investors: A Matter of Principles', Stewardship Asia, 3 November 2016.