Improving investor recourse in Singapore: new promise or false dawn?

This morning, I had an interview with Ryan Huang of MoneyFM 89.3 on the MAS proposals to improve investor recourse. The interview can be accessed below.

There are many issues to consider and given the time constraints, the interview only touched on some of them.

I want to first state that greater investor recourse should not be used as an excuse to lower standards. Investors have needed greater investor recourse since SGX was demutualised and listed and we moved to a disclosure- based regime – so we are about 25 years too late. The proposals if properly implemented may go some way to closing the gap with other markets which already have much stronger investor protection, including class actions. These include China, Japan and Taiwan, just to name a few Asian markets. In HK and Malaysia, the securities regulator has long had the ability to take civil liability action on behalf of investors and compensate them. They have only done so sporadically but they do have such a power. Here, MAS, which is the securities regulator, does not have this power.

We are now proposing to introduce measures to basically close the gap but concurrently proposing measures that will allow issuers with greater governance risks to list and to remain listed. As someone said in response to one of my posts, allowing poor listings and improving investor recourse is like giving lifejackets to people after putting them on a leaky boat. And I would add that the lifejackets may be full of holes.

Let me talk about each of the proposals. A caveat – MAS has not provided full details and my views may change when I see the full proposals.

First, on the proposal to allow investors to ride on a court action or civil penalty to seek compensation, my concern is the willingness of regulators to take such action in the first place, and also the timeliness and the willingness to share information on enforcement actions. There are many cases where enforcement actions seem warranted but there have been no indications that they are being pursued. When I visited Taiwan and spoke to stakeholders there, I asked about this issue because their Securities and Futures Investor Protection Centre (SFIPC) often initiate civil actions when regulators commence enforcement actions. I asked – what if regulators do not take any action even if cases seem clear cut? I was told in Taiwan, regulators are expected to act – almost legally obliged to do so I was told. SFIPC can also initiate their own legal action without any regulatory action – if at least 20 investors approach them, they are expected to consider initiating action.

I was also told there is sharing of information by the regulators and stock exchanges to support the civil actions.

In Singapore, we often only learn of enforcement actions after the conclusion of such actions, which can sometimes be more than 10 years after the misconduct.

Would this cause a problem in terms of time bar for civil action if regulatory actions take a long time? Would regulators be open to sharing more information? Would they increase their appetite to take action?

For the second proposal on allowing representatives like SIAS to organise or carry out legal action on behalf of investors, my concerns are SIAS’ long-held position of preferring to resolve issues “in the boardroom rather than the courtroom”, and their perceived lack of independence given the funding they get from listed issuers and also organising awards and dinners lauding issuers and corporate leaders. Would SIAS be prepared to advise investors how to sue an issuer that it has recently handed out a best governance or most transparent company award to? How about against corporate leaders they have honoured or who are patrons? MAS should be open to others doing this and be prepared to provide funding to build such capacity in other organisations.

For the third proposal on helping to defray legal costs, the costs could be very high as issuers may have considerable resources and D&O policies to engage in drawn-out lawsuits lasting for years. I know of a current case that this has happened. Would this scheme cover the costs of everything from exploring viability to conclusion of the case, including appeals, which could run into millions?

There are other issues to consider.

First, are the bars for liability in our laws currently too high for certain offences to start with? For instance, s199 of the Securities and Futures Act for false or misleading statements require many conditions to be satisfied before an offence is committed. The Airocean case, where the guilty verdict was reversed upon appeal, showed how difficult it was to prove an offence under the section. Although the section subsequently went through a minor amendment, the paucity of enforcement by statutory regulators for offences under this section arguably suggests that the bar for an offence remains very high.

Second, as one senior lawyer has pointed out, access to information for investors to make their case is something that needs to be looked into. There is considerable information asymmetry that investors face. How can they make a prima facie case of an offence when they only have access to public information?

Third, there are jurisdictional issues that need to be considered. Certain laws are not applicable to foreign listings, which currently still make up about 35% of all listed issuers here. There may also be issues as to whether Singapore is the proper forum for litigation if the offence, personnel, evidence, etc are overseas, which would likely be the case for most foreign listings (the Biotreat Technology case is instructive in this regard). There would likely be even greater difficulties in obtaining information, and even if investors win, there may be greater challenges in enforcing judgements. Again, SFIPC in Taiwan shared with me the challenges they faced in enforcing judgements for an issuer with a secondary listing there and a primary listing on SGX.

In 2015, statutory derivative actions for public companies became available under our Companies Act. Can anyone name one successful case of such action for a pulbic company over these 10 years? I can’t. My point is that it takes much more than good intentions and some legal amendments to improve investor recourse.

So we should be wary of a false dawn – while facing a deluge of listings of poor quality.