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 a legitimate interest in the governance of a company and a right to hold the board accountable. Management has historically been able to push through its agenda without much shareholder resistance in Singapore, but the trend is changing, and we are seeing, like elsewhere in the world, growing shareholder activism.
2018 has seen a rise in shareholder activism in Singapore; noteworthy cases include Noble Group Limited and YuuZoo Corporation, described in more detail below.
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 Exchange (the Listing Manual), the Singapore Code of Corporate Governance 2012 (the Governance Code) and the Singapore Code on Takeovers and Mergers (the Takeover Code).
The Listing Manual sets out the obligations (including disclosure obligations) that companies have to comply with in order to be listed on the Singapore Exchange. It empowers RegCo, the Singapore Exchange's regulatory unit, to issue enforcement and administrative orders to ensure that the market is fair, orderly and transparent, including: (1) requiring a company to make specified disclosures; (2) objecting to the appointment of individual directors or executive officers for a period not exceeding three years; (3) requiring an issuer to appoint special auditors, compliance advisers, legal advisers or other independent professionals for specified purposes; and (4) halting or suspending trading of listed securities of a company.
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 a 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 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 or she 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 public as well as 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 in Singapore is very developed 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
The corporate landscape in Singapore is changing as new hedge funds are now being set up with the exclusive focus on influencing the way local listed companies are run. Smaller construction and engineering companies that often have a lot of cash or reserves because of 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, these 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
The Securities Investors' Association (Singapore) (SIAS) seeks to empower retail shareholders by guiding them to ask relevant questions at annual general meetings (AGMs). SIAS analysts, 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 SGXNet. 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. SIAS has often stated that it prefers a conciliatory approach to resolving investors' rights issues. 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. 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. 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.
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. 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.
IV RECENT SHAREHOLDER ACTIVISM CAMPAIGNS
i Noble Group Limited
Noble Group Limited (Noble) announced a debt restructuring plan on 14 March 2018, which would dilute existing shareholders to a 10 per cent stake (with an option to acquire a further 7.5 per cent) in the restructured entity. On the other hand, Noble's management stood to receive a 10 per cent stake (with an option to acquire a further 7.5 per cent) in the restructured entity without providing any capital injections. Noble's proposed debt restructuring aroused widespread concern among shareholders, including substantial shareholder Goldilocks Investment Company Limited (Goldilocks), and perpetual bondholders. To compound matters, Noble's debt restructuring plan came on the back of a record US$4.938 billion loss for the 2017 financial year and a payout of over US$35 million to four directors. RegCo eventually issued a notice of compliance requiring Noble to appoint an independent financial adviser to opine on whether the debt restructuring plan was fair and equitable to shareholders. Goldilocks also commenced a derivative action against Noble's previous and incumbent directors and management for breaches of fiduciary duties, and sought to requisition for the nomination of five non-executive directors at Noble's AGM on 30 April 2018. However, Noble refused to acknowledge Goldilocks' requisition on the basis that the Central Depository (and not Goldilocks) was reflected on Noble's member register. This culminated in Goldilocks applying for and obtaining an injunction against Noble's holding of the AGM. The restructuring is now progressing following a settlement between Goldilocks and Noble, which is a positive outcome for both shareholders and creditors of Noble.
ii Yuzoo Corporation
YuuZoo Corporation (YuuZoo) faced public scrutiny over potential lapses in its unaudited financial results for the 2017 financial year, which were announced in early 2018. This eventually led to RegCo issuing a notice of compliance requiring YuuZoo to appoint a statutory auditor to provide an opinion on the veracity and reasonableness of its unaudited financial results for the 2017 financial year. Although YuuZoo sought to engage shareholders through a dialogue session moderated by SIAS, YuuZoo was unable to comply with the notice of compliance resulting in RegCo suspending YuuZoo's shares from trading on the Singapore Exchange. Subsequently, YuuZoo's office was raided by Singapore's Commercial Affairs Department on suspicions of possible breaches of the SFA.
iii Various shareholder-initiated general meetings
Another indicator of growing shareholder activism in Singapore is the increasing number of shareholder-initiated meetings. 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 many instances resolutions proposed by the shareholders were eventually passed.
V REGULATORY DEVELOPMENTS
i Multiple proxies
A multiple-proxies regime has been 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 that 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
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. Subject to certain safeguards, dual-class share structures are now permissible for companies listed on the Singapore Exchange, and pending conclusion of the review, the existing policy of Singapore Exchange 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. This is a recognition in Singapore that such listings are increasingly being considered in industries such as information technology and life sciences.
iii Increase in transparency of ownership and control
Unless exempted, all Singapore companies, foreign companies and limited liability partnerships are now required to maintain and keep up-to-date a register of controllers that will have to be made available to the Accounting and Corporate Regulatory Authority (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 or her nominee status and nominator to his or her 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
Two key changes have recently been made in audit reports to help investors and other users in their decision-making by giving them more pertinent information on companies. 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. 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.
Shareholder activism has risen and is expected to continue to increase 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 senior director at Morgan Lewis Stamford LLC.