Arming the Silent Minority

By Thio Shen Yi, SC
and Kelvin Koh
and Niklas Wong

Minority shareholders – often forced to silently accept the rule of the majority – should be given a voice.

In May last year, Jerry Low, a minority investor in Asiatic Group (Holdings), wrote an open letter to the management highlighting concerns regarding the SGX-listed company’s poor performance, juxtaposing this against the high remuneration enjoyed by its senior management team. The return on equity was less than 1 per cent over five years, it alleged, with profits ranging from a mere $32,000 to $627,000. This was on the back of a $28.7 million cash injection from shareholders. Yet three directors paid themselves nearly $1 million yearly during the same period. Also on the executive payroll are their father, uncle, cousins and spouse. On the other hand, the $11.9 million raised in the company’s 2013 rights issue had yielded paltry dividends in 2014 and 2015, with none being declared in 2016 and 2017. This criticism was countered with allegations of defamation in a cease-and-desist letter from Asiatic’s lawyers.

In a separate incident, Manohar Sabnani aired dissatisfaction with what he perceived as overly high executive pay, coupled with low dividends to shareholders at Stamford Land Corporation’s annual general meeting (AGM) in July 2018. The company and five of its directors commenced defamation proceedings against the former investment banker and prominent financial journalist. An amicable settlement was reached, with Sabnani apologising and retracting his comments.

These incidents highlight a significant gap in Singapore company law – while the board of a company owes a fiduciary duty to shareholders, in practice management powers are vested in the directors. Minority shareholders wanting to impose a check on management are often disadvantaged by the inequality in financial muscle and information access.

Taking the battle to the PR front

Small shareholders, with a limited range of legal options, have taken the battle to the public relations arena.

Minorities objected to what they considered too low an exit offer price, when Vard Holdings’ controlling shareholder, Fincantieri Oil & Gas, sought to delist and privatise the company. Their efforts to rally opposition were, however, hamstrung by the inability to contact other shareholders. They had to resort to using chat groups on social media platforms to gain support. The vociferous complaints aired at the shareholders’ meeting eventually resulted in the stock exchange requiring Vard to re-convene an extraordinary general meeting, but their actions failed to galvanise sufficient attendance, with less than a third attending and voting.

Other challenges against the control of majority shareholders have been more effective – but usually only when the activist has deep pockets. In the well-known Noble Group saga, Goldilocks Investment Company, with an 8 per cent stake, succeeded in achieving a better deal for the shareholders in the restructuring. Through a coordinated and well-funded campaign that involved media engagement, appeals to the regulators and a battery of law firms (which commenced legal action against Noble, including at one juncture, obtaining an injunction from the High Court to block an AGM), the final deal structure doubled shareholder returns. Goldilocks’ aggressive strategy was also rewarded with a $5 million legal costs reimbursement by Noble.

Green shoots from grassroots shareholder activism

Regulators have been quick to respond.

In October 2018, the SGX RegCo announced that it would be producing a “best practices” guide for AGMs. In November 2018, changes to stock exchange rules for voluntary delistings, in favour of the minority, were put on the table.

While such prompt action is welcome, there are limits to regulatory intervention that is, by its nature, reactive. The authorities can only step in when a wrong has been committed and the time needed to investigate the facts fully may mean that action comes too late.

Shareholder activism in Asia is growing – the number of activist campaigns has more than doubled between 2014 and 2017, according to a JPMorgan report in May 2018. While it is not productive for management to constantly look over its shoulder to appease shareholders – and it is certainly not ideal for shareholder objections to be aired principally in the media – effective activism may help to highlight real issues of concern and result in positive change. For instance, Elliott Management Corporation, a hedge fund known for playing the role of a vocal activist shareholder advocating changes, has significantly outperformed the market, generating a net compound annual return of approximately 14 per cent over the past four decades.

Time for the law to be changed?

One of the reasons that public shareholders have had to resort to publicly calling out management teams is the lack of available legal avenues. Singapore company law vests the power of management in the board; any dissenting shareholder faces the uphill task of unearthing enough evidence to support his objections, which is not readily available. Further, as the law currently stands, the court is more likely to tell a lone shareholder to sell his shares if he believes his rights to have been prejudiced. Practically speaking, he can walk – or suffer in silence. 

When a shareholder chooses to make his objection heard, as in the case of Stamford Land or Asiatic, he can be effectively silenced by the threat of legal action. The opposition by pockets of Vard shareholders resulted in regulatory amendments affecting future delistings, but did not reverse the outcome for Vard. Ultimately only the better-resourced activists such as Goldilocks or Elliot, with sufficient firepower to put up a legal fight, have brought about more immediate results.

Singapore law needs to change, giving minority shareholders the ability to enforce their rights more effectively. Allowing class action lawsuits and greater flexibility for litigation funding would go some way to address the imbalance in resources between the majority and minority.

A class action lawsuit would allow a large number of small minority shareholders to pool their resources to bring one combined action, or for one plaintiff to claim damages on behalf of an entire class of aggrieved persons. Flexible funding arrangements would also help litigants with legitimate claims to bring their claims more easily. Together, such reforms would allow valid claims to be pursued where the losses to individuals may not warrant pursuing the claim on their own.

Access to information is also essential for legal rights to be practically enforced. Minority shareholders need to take coordinated action to commence lawsuits. The absence of a mode for communication poses a challenge, as retail investors do not have the ability to contact other, potentially like-minded, stakeholders. One solution might be to implement a mechanism allowing shareholders, on the payment of a small fee, to communicate with other shareholders on important matters via the Central Depository (so that no private contact information needs to be disclosed).

Any changes to the legal framework must, however, be calibrated to allow the management to conduct business without the sword of Damocles of shareholder action hanging over its collective head. But the dearth of legal options available now means that listed companies are exposed to corporate shaming in the media or coming across as heavy-handed when they bring defamation suits against shareholders.

Ultimately, a credible threat of legitimate legal action may be all that is needed to foster greater accountability. Good governance demands that the minorities should no longer be silenced.  


TSMP law corporation