Commentary: Enhancing protection for minorities during times of corporate distress

Date: October 21, 2019

First published in Business Times on 21 October 2019

SECTION 211B of the Singapore Companies Act was amended in 2017 as part of a major overhaul of Singapore’s corporate restructuring and insolvency laws in order to make it easier for companies, especially those with creditors from around the world, to be rescued and rehabilitated. The move was part of a concerted effort by local authorities to boost Singapore’s bid to position itself as a global debt restructuring hub.

The Securities Investors Association Singapore (Sias) would like to propose two initiatives that would complement this bid.

First, since Sias has been actively involved in the debt restructuring efforts of several financially troubled companies over the past few years and has amassed considerable experience in this area, a mechanism should be installed whereby companies have to approach Sias when they find themselves in need of restructuring and at the same time, Sias is granted official standing to act on behalf of stakeholders in court.

Second, consideration should be given to setting up a fund or insurance policy that would provide money for legal and financial advice for investors, who typically are left to fend for themselves when companies they have invested in find themselves in financial distress.

The reason for these two proposals is that our experience tells us more needs to be done to protect the interests of retail investors when trouble strikes.

In such situations, retail investors always find themselves disadvantaged relative to their institutional counterparts who would have taken as many measures as possible to ensure that their interests are protected in the relevant legal documents. Furthermore, large investors have the funds to pursue legal action and obtain the best legal advice. Investors on the other hand do not.

Equitable treatment

Also, when companies announce that they are financially strapped and might be faced with winding-up actions, the lines of communication between companies and their larger stakeholders are typically much more open than between companies and their retail investors.

What then happens is that investors are left to grope in the dark for answers and information. Often, the troubled company adds to the problem by withdrawing from the public eye while stating that negotiations are confidential and delicate.

The absence of communication and useful information leads to increasing uncertainty and this in turn causes speculation and anxiety levels to rise. This is hardly fair, nor is it ideal.

However, we are encouraged to note that slowly, more companies are coming around to the realisation that allowing such a situation to persist is not in the best interest of anyone and if they are in need of rescue and/or debt restructuring, their first port of call should be Sias.

This is because the market has come to know that throughout our involvement in helping companies that approached Sias, such as China Aviation Oil, Marco Polo Marine, AusGroup, Ezra, Ezion, Nam Cheong and Hyflux in their debt restructuring, Sias’s overriding goal has been to preserve value for investors and to try as far as possible to save the companies and to ensure that they remain a going concern.

We do this by first setting up steering committees for the various stakeholders that comprise individuals who actually own the affected securities. Sias then organises regular townhall meetings between the company management, steering committees and investors to discuss action being taken by the company and to try and provide as much information as possible to minority investors.

We also provide on a pro bono basis independent legal and financial advisers so that investors who attend can get the best possible objective advice. In this way, they receive updates on what is being done to preserve their interests.

The problem is that currently, it is up to companies to decide whether to approach Sias or not. This means there could be many instances where shareholders are not properly engaged and are therefore exposed to the likelihood of not knowing where they stand.

The authorities might want to consider implementing a formal requirement whereby all companies which face liquidation are to engage Sias. At the same time, the association should also be granted locus standi to appoint legal counsel to act for investors in court, to speak with one united voice and to express the collective concerns of a group of stakeholders that all too often have found themselves holding the short end of the stick.

As the economy grapples with the threat of an escalating trade war and as technology continues to disrupt traditional businesses, we can expect companies to face more difficult times ahead. Debt restructuring will become increasingly important and if Singapore is to become a hub for such activities, it will be essential for all affected parties to enjoy equitable treatment. In this regard, Sias can play an important role in ensuring that the interests of investors are properly represented.

Unfortunately, when companies face such a situation, it would be too late to provide funding to ensure that the interests of their investors are properly represented. It is our suggestion that it is now timely that all players should support setting up a fund or some form of insurance which can be used to help Sias pay for legal and financial advice in such situations to guide investors.

  • The writer is David Gerald, founder, president and CEO of the Securities Investors Association (Singapore)