Shareholders play an important role in preserving balance in the corporate governance of a company. Though 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.
Years 2018 and 2019 have seen a rise in shareholder activism in Singapore; noteworthy cases include Noble Group (Noble), YuuZoo Corporation (YuuZoo) and Hyflux Ltd, described in Section IV.
II LEGAL AND REGULATORY FRAMEWORK
Shareholder rights and engagement 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 2018 (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 to be listed on the Singapore Exchange (SGX). It empowers RegCo, the SGX'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 collectively have no 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 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 may the requisitionists (or any of them representing more than 50 per cent of the total voting rights of all of them) 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, although 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 or the CA, unless it is convened for the passing of a special resolution, which for public companies 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 no 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 a 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 the 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 public 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, however, will generally 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, whether private or public (including listed) companies. Though 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 to establish 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. The oppression remedy 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 capital markets products, 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 the 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. Though 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 to not to end up at the wrong end of a defamation 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. Though such activist pressure on companies is, 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 medium-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 their 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 involving companies listed on the SGX. 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 warned that it will not hesitate to take errant companies to court on behalf of their minority shareholders if the situation warrants it. Representative actions are available to enable one or more persons 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 SIAS members and retail investors have the option of joining SIAS in a representative action, and 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. Indeed, the Governance Code was revised in 2018 to fortify expectations in relation to director independence and board diversity.
Beyond traditional forms of media, shareholders have also taken to banding online through various social media and messaging platforms to air their grievances and to seek support for their positions. For example, a group of minority investors in Sabana Shariah-Compliant Real Estate Investment Trust (REIT), a Singapore-based real estate investment trust, organised themselves on a Facebook page, 'Vote out Sabana Manager', to keep minority investors abreast of latest developments, post their analyses of the REIT's performance and galvanise support from other investors to call for a meeting to change the REIT manager.
IV RECENT SHAREHOLDER ACTIVISM CAMPAIGNS
Noble announced a debt restructuring plan in January 2018, which would dilute existing shareholders to a 10 per cent stake in the restructured entity. However, Noble's management stood to receive a 20 per cent stake 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 off a record US$4.938 billion loss for the 2017 financial year and a payout of over US$35 million to the directors.2 RegCo eventually issued a notice of compliance requiring Noble to appoint an independent financial adviser to provide an opinion on whether the debt restructuring plan was fair and reasonable and not prejudicial 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. In June 2018, a revised restructuring deal was tabled giving shareholders a higher shareholding in the restructuring entity of 20 per cent, and giving Goldilocks a board seat in the restructured entity. On the back of this improved deal, a settlement was reached between Goldilocks and Noble, and the restructuring of Noble was eventually completed in December 2018.
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 SGX. Subsequently, YuuZoo's office was raided by the Commercial Affairs Department (CAD) on suspicions of possible breaches of the SFA.
Shareholders of YuuZoo have formed an association to urge the SGX to lift the trading suspension, but the SGX responded that the suspension will be lifted when it is satisfied the company's affairs can be ascertained and shares in YuuZoo can be traded on a fair, orderly and transparent basis. The SGX added that as the CAD investigation is ongoing, trading will continue to be suspended. In March 2019, YuuZoo announced that it was closing its Singapore operations.
iii Asiatic Group (Holdings) Ltd and Stamford Land Corporation Ltd
In early 2018, Jerry Low, a minority investor in Asiatic Group (Holdings) Ltd, wrote an open letter to the company criticising the poor performance of the company's power plants and the high remuneration of its senior management team. Asiatic responded with allegations of defamation in a cease-and-desist letter issued by its lawyers. Jerry Low subsequently removed his statements from the public domain and the company dropped the matter. In a separate case, Manohar Sabnani, a minority investor in Stamford Land Corporation Ltd, criticised the high executive pay and low dividends to shareholders via statements made at its AGM in July 2018, and also published on Facebook and in a letter to the newspapers. The company responded by commencing defamation proceedings against him. A settlement was subsequently reached, with Sabnani apologising and retracting his comments. Commentators have pointed to these as worrying illustrations of the use of defamation lawsuits to chill minority shareholder speech.
iv Hyflux Ltd
In March 2019, more than 100 retail investors of embattled water treatment firm Hyflux Ltd's perpetual securities and preference shares organised a public demonstration – rare in Singapore – to, among others, rally support for the rejection of the company's restructuring plan, which would have imposed a steep haircut on such investors. At the heart of the problems is Tuaspring, Hyflux Ltd's desalination and power plant, which accumulated losses due to a drop in power prices resulting from a glut in electricity caused by market liberalisation. Investors also protested the Public Utilities Board's decision to take over the desalination plant for zero cost. In recent developments to the saga, in April 2019, Hyflux Ltd cancelled its restructuring agreement with the investor consortium Salim-Medco, saying it has 'no confidence'3 the investor will complete the deal, and in May 2019, announced that it was in discussions with a new white knight, UAE utilities provider Utico FZC, among other potential white knights that had separately expressed interest in Hyflux Ltd.
v 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 could 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 granted by such shares being clearly specified in the company's constitution and certain other safeguards, including requiring the approval of shareholders by way of a special resolution for the issuance of those shares, and requiring holders of non-voting shares to have equal voting rights for resolutions on winding up or on the variation of 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. At the same time, the SGX implemented a new framework allowing issuers with a dual-class structure to be listed, subject to certain safeguards, on its mainboard. 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 that, in Singapore, 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 Singaporean 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) and public agencies (to administer or enforce any written law) upon request. A foreign company is required to keep a register of its members at its registered office in Singapore or the registered office of its registered filing agent. A director of a company who is a nominee, unless exempted, is also required to disclose his or her nominee status and nominator to the company. The company must keep a register of nominee directors and make it available to ACRA and public agencies (to administer or enforce any written law) upon request.
iv Enhanced audit disclosure
Two key changes have recently been made in respect of audit reports to help investors and other users in their decision-making by giving them more pertinent information on companies. First, auditors of listed companies will be required to communicate '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 regarding management's judgement and assessment on going concern even if the circumstances do not lead to any material uncertainty over the company's going concern. This is more stringent than the previous 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'4 to encourage company directors and management to become more transparent in their engagements with shareholders. Previously, KAMs were communicated by auditors to the audit committees of companies but were 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 Revised Code of Corporate Governance
The Monetary Authority of Singapore (MAS) revised the Governance Code in August 2018, replacing the previous Governance Code issued in May 2012. The Governance Code has been streamlined to be more concise and less prescriptive, to encourage thoughtful application and to move away from a box-ticking mindset. Important requirements and baseline corporate governance practices have been shifted to the Listing Manual, making compliance with them mandatory. It will also be mandatory to comply with the core broad principles of corporate governance set out in the Governance Code. The changes put a heavy emphasis on strengthening director independence and enhancing board composition and diversity. For example, the shareholding threshold in determining a director's independence has been reduced from 10 to 5 per cent, independent directors are expected to make up a majority (increased from 'at least half') of the board where the chair is not independent, and with effect from 1 January 2022, independent directors must comprise at least one-third of the board and a director who has been on the board for more than nine years will not be considered as an independent director unless approved by a two-tier shareholder vote. The changes also seek to promote transparent remuneration practices and stakeholder engagement.
vi Corporate Governance Advisory Committee
A Corporate Governance Advisory Committee (CGAC) was established in February 2019 to advocate good corporate governance practices among listed companies in Singapore. The CGAC is a standing industry-led body, and its role is advisory in nature and does not have any regulatory or enforcement powers. It will identify risks to corporate governance and take a lead in advocating good practices, and will monitor international trends and recommend updates to the Governance Code. The members of the CGAC may include practitioners who have served as directors on the boards of listed entities, corporate governance experts and representatives from various stakeholder groups. The chair and members are appointed by the MAS.
vii Changes to the voluntary delisting regime
In November and December 2018, RegCo sought feedback on its proposed amendments to the voluntary delisting regime to protect the interests of minority shareholders in privatisations. The first key proposal is that, in respect of a voluntary delisting resolution, the offeror and its concert parties must abstain from voting on the resolution (currently, they are not required to abstain) to strengthen the protections for minority shareholders. Given the proposed abstention requirement, to strike an appropriate balance and ensure that the power accorded to minority shareholders is not unduly disproportionate, RegCo proposes that the approval threshold be reduced to a simple majority of 50 per cent from the current threshold of 75 per cent, and the current blocking threshold (whereby 10 per cent of the total number of issued shares held by shareholders present and voting can block the resolution) be removed. The second key proposal is that the exit offer made in connection with a voluntary delisting must be both fair and reasonable. Currently, it is required to be reasonable but not required to be fair. The appointed independent financial adviser must give the opinion that the exit offer is reasonable and fair. In addition, RegCo proposes to codify the existing practice that the exit offer must include a cash alternative as the default alternative. Subject to the feedback received, RegCo expects to implement the new rules in 2019. The proposed changes come off the back of the delisting of Vard Holdings, a shipbuilder that was previously listed on the SGX, whereby its controlling shareholder, Fincantieri Oil & Gas, pushed through the delisting of the shipbuilder as it could vote on the offer despite an outcry from minority investors and opposition over what they considered was a low ball offer.
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.