Power to the People — Opening the Gates to Shareholder Activism

By Thio Shen Yi, SC

Instead of blaming the “Gahmen”, let’s rethink Singapore’s enforcement architecture that addresses corporate misfeasance.

Noble Group continues to draw fire from Iceberg Research more than two years after Iceberg first accused the listed commodities trader of questionable accounting practices. In August this year, Iceberg renewed its criticism of the group, but expanded its crosshairs to include Singapore’s regulators. It accused the Singapore Exchange and the Monetary Authority of Singapore of regulatory failure – notwithstanding the lack of any hard evidence to support the allegations.

It is a common refrain: when things take a turn for the worse, lay blame at the authorities’ door. Singaporeans love to pan the “Gahmen”; no wonder we joke that grumbling is the national pastime, and complaining, Singapore’s championship sport.

But the baying for regulatory bloodletting has consequences. Singapore, as a finance hub, must retain its status as a top global platform for commerce and maintain its business-friendly environment. The regulators walk a constant tightrope: over-regulate and companies may choose to list elsewhere because compliance costs go up; under-regulate and companies may choose to list elsewhere because fraudsters game the system.

Rather than dial up or down regulatory enforcement action, it may be time to take a fresh look at Singapore’s enforcement architecture that addresses corporate misfeasance.

Singapore’s company law is based on the English common law approach, relying on the ultimate authority of the courts to determine where the boundary of the law lies. This is unlike the civil law approach, which typically sees the legislature prescribing a straitjacket of rules, regulations and directives. Our system does not hinder innovation and develops safeguards in an organic fashion.

Closer oversight of, and more frequent reporting by, companies would be a step towards a civil law philosophy – and a misplaced one. A thicker rule book will lead to a “check the box” mentality that suppresses creativity. Over-regulation also encourages the wrong sort of creativity, the exploiting of loopholes that will surely exist. Following the many rules will become a substitute for genuinely good governance. Already-high compliance costs would skyrocket, ultimately diminishing Singapore’s allure as the place to do business in Asia (as the annual World Bank Doing Business Reports would attest) – an unacceptable outcome.

So when it comes to corporate misconduct, if more regulation isn’t the answer, what is? I offer a modest but somewhat unconventional solution: Power to the people.

Right now, Company Law does not give individual shareholders the right to bring legal actions towards most forms of corporate misconduct. Instead, the board of directors decides whether to sue because the company is the “proper party”. That is the Proper Plaintiff principle. Unfortunately, where the directors themselves are the perpetrators of the misconduct, then “ownself check ownself” doesn’t work.

Shareholders could start what is known as a “derivative action” and sue the director directly but this requires court sanction, is available only under strict circumstances and is often prohibitively expensive. And as the loss caused is spread among all shareholders, no one shareholder is likely to feel incentivised to start the action. The cost-benefit consideration becomes the “moat” protecting the wrongdoer.

The Proper Plaintiff principle protects companies from being held hostage by frivolous actions but disadvantages the small investor, which is unacceptable in a global economy that aspires to distribute wealth and rights more widely.

So what can be done to democratise the corporate landscape? For starters, the law should be changed to allow shareholders to sue for loss of value of their shares in their own right, rather than through the company. That is a legitimate interest that shareholders would have in a case of corporate misconduct. But we need to go further. Let me offer three mildly heretical proposals:

Allow class action lawsuits

The class action is a flexible procedural device. It allows one plaintiff to sue the relevant wrongdoer in a representative action. This means that multiple plaintiffs with the same broad interest may pool their resources to fund one combined action that is brought by one representative on their behalf. Or it may mean that other persons with a similar interest can join in the lawsuit after it has started, and that the one Plaintiff can claim damages on behalf of the entire class of aggrieved persons. If that plaintiff wins, they all win. If allowed (obviously with safeguards), it recalibrates the balance of power between minority shareholders and those controlling a company.

Permit third-party funding for court cases

Currently, litigants can get funding from third parties for international arbitration cases, but not for lawsuits in court. Most company-related disputes would fall into the latter category. Where a third-party funder agrees to take on the legal costs incurred (and a share of the ultimate award), the cost and risk involved with bringing a claim is significantly reduced for any one individual or group of individuals. Third-party funding in tandem with class action lawsuits could enhance access to justice where the costs and risks of litigation would be simply too onerous for any one individual to bear.

Pave the way for contingency fee structures

Critics fear that permitting legal fees to be pegged to a percentage of the damages awarded in a successful judgement would encourage rampant litigation – court case as casino, so to speak, due to a potential windfall to be earned. However, contingency fees do not have to only be a percentage of the recovery; they can be pegged to the outcome flexibly. This can be done by an agreed uplift in fees, or a base fee plus a percentage-based payment. The central issue is to reduce the legal costs payable by the Plaintiff if they do not win; they only pay the full or uplifted fee if the case is won.

The argument that these measures would open the floodgates of litigation has not been borne out in the experience in most common law jurisdictions. The US experience does not apply to us, because America has jury systems and allows sky high punitive damages, which Singapore does not.

The commercial reality is that rational lawyers and third-party funders will decline a case with insufficient merits. We need to trust the invisible hand. Litigation, or the threat thereof, can operate as part of an ecosystem of distributed checks and balances.

I call these a mild heresy because these structures are already accepted in other parts of the common law world. They of course require deeper thought and wider conversation. But if introduced with proper controls so that only legitimate cases make it to the court, then the only question that remains is “why not?”.

Disruption is the word of the moment. This requires us to challenge and rethink the status quo and conventional wisdom on a regular basis. A little less “nanny state”, a little more individual autonomy. Power to the people.


TSMP law corporation