Regulatory and market enforcement are complements, not substitutes

Published September 09, 2017


First published as “Regulatory, market enforcement key in shareholder activism,” Business Times, September 5, 2017

There is much in Thio Shen Yi’s article Time to open the gates for shareholder activism?, (BT, Sept 1) that I agree with. Indeed, there is a need for Singapore to provide shareholders with better access to justice. Despite the Companies Act now allowing shareholders of public-listed companies to initiate statutory derivative action against directors, there remain significant barriers to shareholder enforcement here, as Mr Thio has pointed out.

However, regulatory and market enforcement complement each other, and each has a role to play. For a well-developed capital market, both need to be strong. In the US, where shareholders have significant access to justice through contingency fee-based class actions, there is also strong regulatory enforcement for serious regulatory breaches. There are also signs that the UK, which introduced contingency fee-based litigation in 2013, has been enhancing regulatory enforcement, including investigations, public rebukes and fines of auditors of companies by the Financial Reporting Council. Likewise, the Financial Conduct Authority has been taking action against companies and individuals for rule breaches. There are calls for strengthening regulatory enforcement, not substituting it with stronger shareholder enforcement.

Where there are serious and clear regulatory breaches, regulators must remain primarily responsible for taking enforcement action. Regulatory sanctions, including criminal, civil and administrative ones, often have greater deterrent effect less cushioned by directors and officers liability insurance paid by the company.

In the case of foreign listings, which currently make up 36 per cent of all listings on the Singapore Exchange, shareholder action will likely need to be initiated in a foreign jurisdiction, further restricting their access to justice – although the reality is that for such listings, even regulators face considerable barriers in taking enforcement action. Investors must therefore take this into consideration when deciding whether to invest in foreign listings.

In certain cases, regulators should also be prepared to take action and seek compensation on behalf of investors. For example, in Hong Kong, the Securities and Futures Commission has done so for cases such as misselling of financial products, misleading financial disclosures, insider trading and market manipulation.

Regulatory actions do not preclude separate civil actions by boards and shareholders. Conversely, civil actions by boards or shareholders should not preclude regulatory actions. There have been instances of successful civil actions against directors or management for breaches of duties. In such cases, regulators should still consider pursuing their own actions for serious breaches. While justice may have been served, it may only be sufficient as the appetiser.

Boards should also not rely solely on regulators where they may be in a better position to take action. For example, if there are possible breaches of director duties, such as directors not exercising reasonable diligence or not using their powers for proper purposes, regulators may face constraints in taking action because these are currently criminal offences in the Companies Act where a high burden of proof is required.

While I believe civil penalties requiring a lower burden of proof are also necessary for such offences, the reality is that regulators’ ability to take actions for such offences under the current law is limited. Boards must nevertheless carefully consider whether they should pursue civil action to recover losses suffered by the company. Failure to do so may itself arguably be seen to be a breach of their duties to the company or even interpreted as collusion.

The bottom line is that regulators, boards and shareholders must all play their roles in protecting the interests of companies and minority shareholders. All three groups need to raise their game – it’s not one or the other.

Mak Yuen Teen

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