Shareholders play an important role in preserving balance in the corporate governance of a company. Even small minority shareholders have a legitimate interest in the governance of a company and a right to hold the board accountable. Substantial shareholders or management, or both, have historically been able to push through agendas without much shareholder resistance in Singapore, but this is changing: Singapore, like elsewhere in the world, is currently witnessing growing shareholder activism.
Recent noteworthy cases involving shareholder activism include Noble Group (Noble), Hyflux Ltd (Hyflux), Challenger Technologies Ltd (Challenger), HC Surgical Specialists Ltd (HC Surgical) and Magnus Energy Group Ltd (Magnus), as further 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) with which companies listed on the Singapore Exchange (SGX) have to comply. 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:
- requiring a company to make specified disclosures;
- objecting to the appointment of individual directors or executive officers for a period not exceeding three years;
- requiring an issuer to appoint special auditors, compliance advisers, legal advisers or other independent professionals for specified purposes; and
- halting or suspending trading of listed securities of a company.
i Restrictions on shareholding
Generally, there are no restrictions on shareholding ownership for Singapore companies. However, in certain key sectors including telecommunications, media, banking and real estate, there are specific legislative restrictions on foreign ownership. Such restrictions include requiring prior approval from the relevant regulatory authority:
- before a person can become a substantial shareholder (who has an interest of five per cent or more of the total voting shares of the company) or controller of a company operating in the key sector; and
- in respect of any funds from a foreign source invested into such a company. For property companies that own residential properties that are subject to foreign ownership restrictions under the Residential Property Act, foreign ownership of such property companies will be prohibited except in limited cases (such as where such property companies are housing developers developing the residential properties for sale).
These requirements may limit foreign ownership in these key industries and the possibility of foreign-based activists.
ii 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 at least 10 per cent of the total number of issued shares of the company. When requisitioning for a general meeting, the 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 requisitioning shareholders 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 requisitioning shareholders 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 general meeting will require 14 days' notice or a longer period as may be 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.
iii Shareholder transparency
Under the SFA, public disclosure is required of substantial shareholders. This interest of 5 per cent or more must be disclosed by a substantial shareholder even if the shares are held through nominees. However, in respect of a shareholder who holds an interest of less than 5 per cent as a nominee, the actual beneficial shareholder(s) may not be apparent. A listed company is also required to disclose all interests in shares and other securities issued that its directors and chief executive officer have in the company.
iv 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.
v 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.
vi 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. The CA, therefore, 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. Such action 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 require the complainant to establish the higher threshold that the errant directors committed fraud on the minority.
vii 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 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.
viii 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 others, 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 and other shareholders, it is possible that insider information may have been divulged, in which case the activist shareholder must not deal or encourage another to deal in the company's securities until the material price-sensitive or trade-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 suits. Though defences such as justification and fair comment are available, the law in this area in Singapore is very extensive and an activist shareholder should seek expert advice.
III KEY TRENDS IN SHAREHOLDER ACTIVISM
i Hedge fund activism
The corporate landscape in Singapore is changing as new hedge funds are set up with a focus on influencing the way local listed companies are run and maximising returns for its investors. For example, smaller companies with substantial cash or reserves may be targeted by activists who may push for payment of special dividends or share buy-backs. Though such activist pressure on companies is generally welcomed by minority shareholders, these initiatives may not be successful given that it is quite common for Singapore companies to have significant controlling blocks of shares.
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, primarily on strategy, financials and corporate governance. SIAS also conducts workshops on the analysis of 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.
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 stated that it prefers a conciliatory approach to resolving investors' rights issues.
iii Media and commentators
Corporate governance analysts and commentators are often 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. When such issues are highlighted, companies may be requested by regulatory bodies to publicly address its shareholders' concerns or may be compelled to make appropriate disclosure.
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 garner support from other investors to call for a meeting to change the REIT manager. As a result, key changes were made by the REIT manager, including the departure of its CEO, partial waiver of management fees and termination of a contentious acquisition.
IV RECENT SHAREHOLDER ACTIVISM CAMPAIGNS
Noble announced a debt restructuring plan in January 2018, which would dilute existing shareholders to a mere 10 per cent stake in the restructured entity, whereas Noble's management stood to receive a 20 per cent stake in the restructured entity without any capital injections. This 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 previous 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 technically 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 of 20 per cent in the restructured entity, 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.
Since filing for bankruptcy protection in May 2018, Hyflux has entered into agreements with the investor consortium Salim-Medco (in October 2019) and UAE utilities provider Utico FZC (Utico) (in November 2019) for its restructuring. Retail investors comprising Hyflux's perpetual securities and preference shares actively sought to rally support to reject the company's restructuring plans due to the steep haircuts that would have been imposed. They also protested the Public Utilities Board's decision to take over Tuaspring, Hyflux's desalination and power plant for zero cost, and their activism included organising a public demonstration. Neither restructuring plans proceeded – with Hyflux cancelling its restructuring agreement with Salim-Medco, citing 'no confidence'3 that the investor will complete the deal in April 2019, and Utico's restructuring agreement ceasing in May 2020 following the lapse of the long-stop date.
Hyflux and its current and former directors are now under criminal investigation by the Criminal Affairs Department, Accounting and Corporate Regulatory Authority (ACRA) and Monetary Authority of Singapore (MAS) over corporate governance lapses. SIAS has called for the directors of Hyflux to step down and has stated that it had been approached by investors to initiate legal action against Hyflux's directors.
iii Challenger Technologies Ltd
In March 2019, Challenger, together with Digileap Capital Limited (a partnership between Loo family that founded Challenger and Dymon Asia Private Equity) (Digileap), announced a voluntary delisting proposal, under which Digileap will make an exit offer for Challenger's shares. Shortly after the announcement, Pangolin Investment Management (Pangolin), a minority shareholder, engaged the media to proffer its views that the offer price was too low and unfair for minority shareholders, notwithstanding that the exit offer was ultimately opined by the independent financial adviser appointed by the company to be 'fair and reasonable'. Reaching out to other like-minded minority shareholders, Pangolin managed to consolidate a shareholding block of more than 10 per cent and were able to derail the privatisation of Challenger by voting down the voluntary delisting resolution at the general meeting (based on the voluntary delisting regime prior to the changes implemented by the SGX in July 2019).
iv HC Surgical
In April 2020, an article by a corporate governance analyst raised the implications of the dismissal of a defamation suit filed against Ms Serene Tiong by Dr Julian Ong on HC Surgical. Dr Ong previously sold a total of 70 per cent shareholding stake in his medical practice Julian Ong Endoscopy & Surgery Pte Ltd (JOES) to HC Surgical. It surfaced in the dismissed defamation suit that Ms Tiong had filed a complaint to Singapore Medical Council in June 2018 against Dr Ong and another doctor, alleging that they had been taking advantage of vulnerable female patients. The article raised questions on whether HC Surgical had made necessary timely disclosures and if the board had acted in its shareholders' interests when it purchased a further 19 per cent shareholding in JOES in September 2019, notwithstanding knowledge of the serious complaint made against Dr Ong. This triggered a list of queries from the SGX to HC Surgical, resulting in more detailed disclosure from HC Surgical. Subsequently, Ms Tiong (as a shareholder) gave notice to HC Surgical of her intention to apply to the Court under Section 216A(2) of the CA to bring an action on behalf of the company against Dr Heah Sieu Min (CEO and Executive Director of HC Surgical), for breaching his duties as a director in relation to the acquisition of the additional interest in JOES.
v Various shareholder-initiated general meetings
Another indicator of growing shareholder activism in Singapore is the increasing number of shareholder-initiated meetings. These shareholder-initiated meetings involved, among others, proposals to remove existing directors and to appoint new directors on the board of the relevant companies.
One such recent case involved Magnus and a group of its minority shareholders. Unhappy with the poor financial performance of Magnus, the minority shareholders garnered sufficient support to reject all resolutions put forward at Magnus' AGM in October 2019. This resulted in the ousting of three directors, blocking the reappointment of the auditor as well as the mandate to issue shares or pay directors' fees. These minority shareholders then pressed on to requisition Magnus' board for a general meeting to appoint their own directors They also initiated a proceeding against present and past directors of Magnus for breaches of their fiduciary duties. In January 2020, all resolutions proposed by requisitioning shareholders at a general meeting were passed, and the new shareholder-elected board took over management of Magnus.
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, which meant that not all views of their investors were represented. Under the multiple proxies regime, specified intermediaries, such as banks whose business includes the provision of nominee services and hold shares in that capacity, and capital markets services licence holders providing custodial services and hold shares in that capacity, are allowed to appoint more than two proxies to attend and vote at general meetings. This legislative change enfranchises such 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.
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. 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.
iii Enhanced continuous disclosure obligations for listed companies
In February 2020, amendments were made to the Listing Manual to strengthen the continuous disclosure requirements. Specifically, the SGX updated its guidance on continuing obligations of listed companies in respect of the disclosure of material information to explicitly include information necessary to avoid the establishment of a false market in listed securities – 'trade-sensitive information', and information likely to materially affect the price or value of listed securities – 'materially price-sensitive information'. The corporate disclosure policy in the Listing Manual was amended to provide assistance to listed companies in the determination of whether information is trade-sensitive or materially price-sensitive. Additional events requiring immediate disclosure were also included. Since then, RegCo has issued some guidance on its expectations of disclosure of information:
- on significant litigation;
- during covid-19 outbreak; and
- to shareholders in connection with a general offer.
iv Enhanced audit disclosure
Two key changes have been made to audit reports to provide more pertinent information on companies to investors and other users in their decision-making.
First, auditors of listed companies will be required to communicate 'key audit matters' (KAMs) in their audit reports beyond the current 'pass or fail' opinion. KAMs are matters that auditors judge to be of significance in the audit of financial statements. This move to compel the disclosure of KAMs enables investors to gain insights on the significant audit risks identified and to have more focused and meaningful discussions with the board.
Second, auditors are 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.
vi Revised Code of Corporate Governance
The MAS revised and streamlined the Governance Code in August 2018 to make it more concise and less prescriptive. This was to encourage thoughtful application and move away from a 'box-ticking' mindset. Important requirements and baseline corporate governance practices have been shifted to the Listing Manual for mandatory compliance. It will also be mandatory to comply with the core broad principles of corporate governance set out in the Governance Code.
The changes put 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.
vii 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 has an advisory role, without 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 chair and members are appointed by the MAS.
viii Changes to the voluntary delisting regime
Following the delisting of Vard Holdings, whereby its controlling shareholder, Fincantieri Oil & Gas, pushed through the delisting as it could vote on the offer despite an outcry from minority investors and opposition over what they considered was a low ball offer, RegCo sought feedback on proposed amendments to the voluntary delisting regime to protect the interests of minority shareholders in privatisations. Consequently, the SGX implemented changes to the voluntary delisting regime in July 2019. Under the revised rules, the SGX may agree to a voluntary delisting application if the voluntary delisting resolution has been approved by a majority of at least 75 per cent of the listed company's total number of issued shares (excluding treasury shares and subsidiary holdings) held by the shareholders present and voting at the general meeting. Although the 10 per cent blocking threshold has been removed, the offeror and parties acting in concert with it are now required to abstain from voting on such resolution. Additionally, the rules have been enhanced such that an independent financial adviser must be appointed to opine that an exit offer is not merely reasonable but also fair. The practice to require an exit offer to include a cash alternative as the default alternative has also been codified as a Listing Manual requirement.
Shareholder activism has risen and is expected to continue to increase in Singapore as a result of a confluence of factors, including increasing investor sophistication, louder voices by investor lobby groups and some facilitative regulatory changes. Companies and their boards in Singapore need to prepare for a changing corporate landscape by proactively developing a shareholder engagement plan, so that mutual understanding and different expertise can converge. 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.