Published in Business Times, November 22, 2012
LETTER TO THE EDITOR
Complex structures for listed entities not investor-friendly
I REFER to the opinion piece “Time to tighten rules for business trusts?” by Teh Hooi Ling (BT, Nov 21).
The Business Trusts Act replicates many of the provisions in the Companies Act.
In addition, it imposes fiduciary duties on the trustee-manager and directors of the trustee-manager to act in the interest of unitholders, requires the directors of the trustee-manager to put the interests of all the unitholders taken as a whole above the interests of the trustee-manager where they conflict, and makes it clear that the fiduciary duties of the directors of the trustee-manager to the unitholders override their duties to the trustee-manager under the Companies Act.
The Business Trusts Act is also supported by regulations imposing safeguards such as stricter rules on independent directors, and the trustee-manager is expected to comply or explain to the Code of Corporate Governance. Therefore, even though three-quarters of unitholders are required to remove the trustee-manager and unitholders are unable to remove directors of the trustee-manager, the regulatory framework for business trusts is arguably robust – at least on paper.
If the threshold for removal of the trustee-manager is reduced to a majority, one would expect that the sponsors will increase their ownership of the trust accordingly, which together with their control of the trustee-manager, will ensure that they retain control over the trust. This means that the sponsors will be able to raise less money from the public, which may reduce the attractiveness of the business trust structure. Introducing further rules may either lead to irrelevant rules, or make the business trust structure irrelevant.
It is the ability of the sponsors to retain control while raising significant funds from the public at the same time that makes the business trust structure attractive to them, compared with the company structure. It is true that these sponsors can also retain control disproportionate to their ownership under the company structure, for example, through pyramid structures and cross-holdings. But it is arguably easier to do so under the business trust structure. If we start allowing companies to list here with dual class shares, there will be another avenue for sponsors to raise substantial funds while retaining control. Throw in the many forms of stapling that exist and that are being proposed here, gaining a proper understanding of the merits and risks of a particular investment becomes extremely challenging.
One day, we may have a business trust stapled to a real estate investment trust, stitched together with a company with non-voting ordinary shares stapled to non-cumulative preference shares redeemable in 2099. Where is it going to end?
We need to ask more fundamental questions. What are the true economic benefits of allowing increasingly diverse forms of business structure for listed issuers? Do they just end up transferring wealth from public investors to sponsors and intermediaries? Do they really give investors more investment choices or do they merely obfuscate? As we seek to increase retail participation in our markets, are these different structures too complex for ordinary investors to understand, especially as even so-called experts often have difficulty understanding these structures? Is it right to expose retail investors to such investments based purely on caveat emptor, and allowing sponsors and intermediaries to hide behind prospectuses that run into hundreds of pages?
We have also done almost nothing to improve the ability of investors to enforce their rights even as we become ever more adventurous in the types of listings we allow.
There has been no substantive debate on contingency fee-based class action, litigation funding or other mechanisms which can improve the ability of investors to take action against issuers, directors, trustee-managers and other intermediaries. Cross-border enforcement by regulators remains a challenge, not to mention by investors.
A disclosure-based system based on caveat emptor can only lead to grief for investors if it is not accompanied by effective enforcement by both regulators and investors.
Mak Yuen Teen associate professor, NUS Business School
