David versus Goliath: Minority oppression, intimidation, defamation suits, what next?

By Mak Yuen Teen

Minority shareholders have long faced a problem in Singapore, more so than in many other markets, including even some emerging markets. This probably has to do with us wanting to be a “business friendly” place. We definitely do not pay enough attention to minority shareholder protection and this will ultimately harm valuations and liquidity on our market, making us an unattractive listing destination.

First, there are many companies with controlling shareholders but few effective safeguards to protect minority shareholders against abuses. Independent directors are in effect appointed by controlling shareholders. Some countries have introduced cumulative voting, two-tier voting, or even minority shareholders only voting (for at least one independent director) to increase the ability of minority shareholders to appoint at least someone on the board who is not beholden to controlling shareholders.

Whenever such proposals are put forward here, it is quickly pushed back by those who argue that all directors have the same duty to act in the best interests of the company, that this may cause a director to only look after the interests of minority shareholders which may be to the detriment of the company, or that this will cause the board to be dysfunctional. These conveniently avoid the fact that in many companies, independent directors are beholden to controlling shareholders and management; director duties are rarely enforced; and many existing boards put in place by controlling shareholders are hardly functional.

Other countries, like US and Israel, impose fiduciary duties on controlling shareholders to act in the best interest of the company and all shareholders. An excellent recent paper by two renowned law professors from Harvard Law School and Hebrew University called for the appointment of some “enhanced-independence directors” who require support from both controlling shareholders and minority shareholders for their initial election but leaves controlling shareholders with no say over their reelection and termination. Israeli corporate law already requires two-tier voting for “external directors” and Israeli companies listed here practise this.

In Singapore, controlling shareholders do not owe fiduciary duties to the company and other shareholders. Minority oppression suits, even if used, are difficult to win in the case of listed companies, purportedly based on the argument that in listed companies, “oppressed” minority shareholders can sell their shares. Shares of companies with oppressive controlling shareholders that refuse to pay dividends but obtain their “returns” from excessive remuneration, related party transactions and other forms of expropriation would undoubtedly be trading at a significant discount, so the exit price is closer to a fire sale price. Potential investors who are more informed are unlikely to want to buy the shares anyway, so liquidity is likely to be poor.

Since contingency fee-based class action is not available, minority shareholders will generally find it too costly to sue. In some of my recent articles, I have expressed dissatisfaction with our regulatory regime so there is no need to repeat it too much. Basically, regulatory enforcement has significant room for improvement and regulatory actions must extend to more than just executive directors and officers, but to include more independent directors who are often at least culpable for closing one or both eyes.

In some countries, regulators have taken civil action to seek compensation on behalf of public investors. Here, I am not aware of this ever happening, even though this is provided for under the Securities and Futures Act. Imposing penalties on companies penalises shareholders, but even imposing penalties on individuals do not address the losses that investors have suffered.

In light of all the above, the last thing we need is to have accounts of companies saying that they are recording proceedings of shareholder meetings and threatening to sue shareholders for defamation, or in fact doing so, if they criticise the board or did not use the appropriate words in questioning the directors. If a company has destroyed significant shareholder value, or is oppressing minority shareholders, what else can minority shareholders do except question and vent their anger?

If companies do not want to be criticised, then they should not be listed. Of course, they won’t delist, not at a reasonable price anyway, because they know that minority shareholders are essentially powerless against acts of oppression – especially when they have the resources of the company to sue shareholders for defamation. Perhaps we need to consider whether suing shareholders for defamation should be left to the board as part of its “business judgement”. Maybe we ought to consider imposing rules that require minority shareholders to approve the use the company resources to sue their own shareholders for defamation. If directors still want to sue, they can jolly well use their own money!

However, I do not see much will to address the lack of minority shareholder protection in a serious way. Perhaps this is the beginning of the end of our corporate governance journey, which started with so much promise.