Q&A (Stamford Law, now known as Morgan Lewis Stanley)

Dear SIAS Members

SIAS has been helping members with various issues regarding their investments, and over the years we have collated the issues that impact all investors. I am pleased that Stamford Law has come forward, on a pro-bono basis, to help members understand your rights regarding the investments you hold. The issues highlighted give you a better understanding of the rights you hold in the investment. and you in your investment journey.

This is a member privilege and I trust you will find the information useful in protecting you through your investment journey.


David Gerald
President SIAS


There are a number of scenarios that may result in the delisting of a company from the official list of the Singapore Exchange Securities Trading Limited (SGX-ST). The typical delisting scenarios are: (i) delisting following a takeover (mandatory or voluntary) or privatisation by a scheme of arrangement with the company not being able or willing to reinstate the public float of 10% within the time frame permitted by the SGX-ST; (ii) voluntary delisting (coupled with an exit offer) propositioned by a company; and (iii) failure of the company to meet or continue to meet certain listing requirements resulting in an SGX-ST directed delisting.

When a company is delisted, its shares are no longer eligible for trading on the stock exchange. As a shareholder and if you continue to hold on to the shares post-delisting, you will continue to have legal and beneficial ownership and rights over the shares that you hold in the company. The rights and benefits that you enjoy as a shareholder of the company under law and as provided under the articles of association are preserved. Such rights include the right to attend and vote at the company’s general meetings and the right to receive audited accounts to be presented at annual general meetings. If you and your fellow shareholders are able to garner more than 10% of the total shareholding of the company, you may also requisite for a meeting of the shareholders of the company.

Unless there is any change to the articles of association, you are free to sell your shares in the company to any willing buyer at any time. Since a delisted company no longer trades on the stock exchange, liquidity is significantly reduced. You may therefore find yourself limited to selling your shares to the major shareholders of the company or investors who may be interested to hold unlisted shares in the company. You should determine if there is still room for you to require the company or, in the case of a takeover situation, the offeror, to buy your shares(1). The SGX-ST, unlike the New York Stock Exchange, does not provide over-the-counter (OTC) facilities to shareholders of delisted companies to sell their shares. Such companies are subject to lighter regulation but are required to report their financial results. Unlike the New York Stock Exchange, the SGX-ST also does not provide for the disposal of shares of a delisted company by way of a “Pink Sheet”(2).

Notes:

(1) For example, under Section 215(3) of the Companies Act, you have a right as shareholder to require the company to acquire your shares within a period of 3 months from the date of receipt of notification that 90% or more of the shares in issue have been acquired by a company or corporation pursuant to a takeover, scheme of arrangement or other contractual arrangements.

(2) A “Pink Sheet” is only a quotation system and subject to even less regulation than OTC facilities. Companies do not have to register with the stock exchange or report their financial results.

A minority shareholder in a private company incorporated in Singapore generally has to accept the decisions of the directors and the majority shareholders. He does, however, have rights to information and protection from certain conduct. These are set out in the Companies Act. The articles of association of a company also confer further rights to a minority shareholder and it is usual for an investor taking a significant minority stake in a company to negotiate for specific rights (for instance, veto rights on any new issuance of shares) to be included in the articles.

The most important right under the Companies Act is the right to attend and vote at general meetings. A company is required to hold a general meeting annually and the directors are required to lay the company’s financial statements before the shareholders. The financial statements comprise a profit and loss account accompanied by a balance sheet. As they provide critical information about a company’s profits or losses, liquidity and debt leverage, a shareholder should try to understand them. It is commonly accepted that the inability of a company to lay its accounts before its shareholders within the prescribed timeframe without providing any explanation is a “red flag” that warrants shareholders to pay close attention to the company.

A further right of shareholders is to vote on resolutions to pay a dividend and to elect (as well as remove) the company’s directors. The manner in which directors are to be appointed (or removed) is generally stipulated in the company’s articles of association.

Shareholders’ approval also needs to be sought for the payment of directors’ fees in respect of their office. Directors’ fees paid to a director as a director are different from a salary paid to a director as an employee. The company needs to obtain shareholders’ approval for payment of the former, but the directors can approve the latter as that is a management decision that is usually made by the board of directors.

The Accounting and Corporate Regulatory Authority (usually referred to as ACRA) is the regulatory agency entrusted with the administration of the Companies Act. It takes the non-compliance by a company with the provisions of the Companies Act seriously and is known to actively prosecute directors for, among other infringements, the failure to observe the obligations relating to calling of annual general meetings.

A shareholder also has a right to inspect the minutes of a company’s general meetings (but not board minutes). This will, at a minimum, inform him of the resolutions passed by the shareholders. While most resolutions to be passed by the shareholders will require a simple majority vote (that is, more than 50%) of those present and voting, certain resolutions such as those relating to the amendments to the memorandum of association and the winding-up of a company will need a 75% majority vote.

The Companies Act also confers a right on any two or more shareholders with a combined stake of at least 10% of the share capital to requisition a general meeting.

A minority shareholder is entitled to be treated fairly and equitably. This means that an aggrieved shareholder may seek redress from the High Court of Singapore if: –

  • the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the shareholders including himself, or in disregard of his or their interests as shareholders; or
  • some act of the company has been done or is threatened or that some resolution has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the shareholders (including himself).

A minority shareholder is further entitled to have the provisions of the memorandum and articles of association observed. He may therefore apply to court to restrain an impending breach of any such provision or an act which would amount to such a breach.The Court has the discretion to order a wide range of remedies including ordering a “buy-out” of the aggrieved minority shareholder’s stake or order a winding-up of the company.

Additionally, if a minority shareholder feels that a wrong has been done to the company and this has not been redressed, he can apply to the High Court for leave to bring an action in the name and on behalf of the company, or intervene in an action to which the company is a party for the purpose of prosecuting, defending or discontinuing the action on behalf of the company.

In cases where there are suspected commercial or financial crimes, the Commercial Affairs Department, being the principal white-collar crime investigation agency in Singapore, may be involved.

In last week’s edition of Ask Stamford Law, we have looked at the rights of the minority shareholders in an unlisted company. In a situation involving a listed target company (the “Target”), the minority shareholders can avail themselves to a more comprehensive protection through a host of regulatory tools such as the Singapore Code on Take-overs and Mergers (the “Takeover Code”), the Listing Manual of the Singapore Exchange Trading Limited (the “Listing Manual”), and the Code of Corporate Governance (the “Corporate Governance Code”).

In a takeover or a potential takeover of the Target, the board of the Target (the “Target Board”), or the offeror or the potential offeror (the “Offeror”), may often discuss or carry on negotiations with the major shareholders of the Target without involving the minority shareholders. Generally, unless otherwise provided by way of shareholders’ agreements or the constitutive documents of the Target, none of the Target Board, the Offeror or the major shareholders of the Target, has a legal obligation to involve the minority shareholders in the negotiations or discussions, provided that they otherwise act in a manner which is consistent with the law, regulations, rules and guidelines (in particular, the rules set out in the Listing Manual).

Protection of the interests of the minority shareholders This does not mean that the minority shareholders are left wholly without protection. In particular, the primary objective of the Takeover Code is to ensure fair and equal treatment of all shareholders in a takeover and merger situation. Some key measures of protection are discussed below:

  • Right to Mandatory General Offer
    Where an Offeror, together with persons acting in concert with him, (i) acquires shares carrying more than 30% of the voting rights of the Target, or (ii) holds not less than 30% but not more than 50% of the voting rights and the Offeror or his concert parties, acquire in any period of 6 months, additional shares carrying more than 1% of the voting rights, the Offeror is required to extend a mandatory offer to all the other shareholders.
  • Equality of Information
    Under the Takeover Code, the Offeror, the Target or their advisers are prohibited from making available information on a selective basis to some (and not all) shareholders. Information must be made equally available to all shareholders as nearly as possible at the same time and in the same manner. Shareholders must be given sufficient information, time and advice to enable them to reach an informed decision on the offer. More generally, material information which is likely to materially affect the price or the value of the securities is also required to be promptly disclosed under the Listing Manual.
  • Equality of Treatment
    An Offeror is required to treat all shareholders of the same class in the Target equally. Minority shareholders can be assured that they will not be treated in a manner which is less favourable than the major shareholders. The Takeover Code prohibits an Offeror from striking special deals or arrangements concerning the acceptance of an offer with favourable conditions which are not being extended to all shareholders, save in the strictest circumstances and with the approval of the Securities Industry Council.An action by either the directors or some shareholders of the Target, which is oppressive or found to be unfairly discriminatory or prejudicial against other shareholders may also be reviewed and remedied by the court under the Companies Act.
  • Independent Directors and Duty of Directors
    All listed companies should have a strong and independent element on their board, with independent directors making up at least one-third of the board. This ensures that the Target Board is able to exercise judgment on its corporate affairs independently, in particular, from the management and 10% shareholders. In the context of a public takeover, minority shareholders are protected to the extent that the Target Board is duty-bound to obtain competent independent advice on an offer, and, unless otherwise conflicted out, to provide a recommendation to the shareholders on the acceptance or rejection of the offer made by the Offeror. The directors, in addition to their general fiduciary duty to act in the best interest of the Target, are also specifically required, under the Takeover Code, to have regard to the interests of the shareholders as a whole in advising the shareholders in a takeover situation.
  • Independent Directors and Duty of Directors
    The Takeover Code additionally requires the Target Board to obtain independent advice from an independent financial adviser (the “IFA”) which will opine on the fairness and reasonableness of an offer. The directors’ recommendations will almost always make reference to the opinion of the IFA. Despite the fact that IFAs typically provide that their advice is made to the independent directors, the Takeover Code requires that the substance of the advice by the IFA to the independent directors must be made known to the shareholders. As such, it is clearly intended that such advice and the basis for the advice be accessible to all shareholders. Therefore, the possibility that the shareholders may nonetheless have a right of action against the IFA under common law for a breach by the IFA of its duty of care towards the shareholders cannot be wholly dismissed.

Given the large number of shareholders in a listed company, individual participation and consultation in negotiations can potentially result in procedural inefficiency. While the regulatory framework may seem to only offer protective rights, which when examined individually, are passive in nature, in a public takeover situation, these rights often collectively result in a multi-faceted and robust web of protection for the minority shareholders to ensure that the decision-making process undertaken by the Target Board, the Offeror and the major shareholders is fair and without prejudice to the rights of the minority shareholders.

A company is a separate legal entity from its shareholders and owns property in its own right. This means that the property of a company is its own and is not held on trust for its shareholders. Hence, when a listed company sells a subsidiary, the sale proceeds it receives form part of the listed company’s assets. The shareholders of the listed company are not entitled to demand for any form of direct compensation or benefit. The listed company will often have good reasons to apply the sale proceeds for purposes other than distribution to its shareholders and whether distributions should be made to the shareholders out of any such sale proceeds are within the purview of the board of directors.

While it is not compulsory for a listed company to make any form of compensation or distribute any benefit to its shareholders when it sells its subsidiary, the sale of the subsidiary may require the approval of the shareholders. Such approval may be conditional upon or tied to a commitment to make a distribution of the sale proceeds and, if so linked, the company will be required to honour that commitment after the sale proceeds are received.

There are a number of options available to a listed company should it decide to distribute the sale proceeds to its shareholders. These are discussed below. For ease of further discussion, we will assume (as is commonly the case) that the consideration for the sale of its subsidiary is cash.

Distributions out of profits

  • Dividends
    Dividends may only be paid out of profits of a company. Such profits need only be available at the time that the dividends are declared and it is not necessary for profits to be available when the dividend is actually paid. However, a shareholder does not have an unconditional right to receive dividends. Assuming that profits are available, the decision as to whether to declare a dividend and the quantum of such dividend is a matter for the board of directors to determine. A shareholder cannot compel a company to declare dividends. How and when dividends are to be declared is a matter left to the articles of association of a company. Typically, the directors will recommend a particular rate of dividend and the company in general meeting will declare the dividend subject to the maximum recommended by the directors. The articles also may vest the power to declare dividends with the directors or provide that dividends will be payable without the necessity of a declaration.
  • Bonus Shares
    Dividends may be paid otherwise than in cash and can be in the form of shares. A company that wishes to distribute sale proceeds may thus do so by issuing shares that are fully paid up to the members. A disadvantage of dividends in the form of shares is that shareholders may end up with odd lots, which may be difficult to sell.

Capital Reduction

If a company does not have any accounting profits, any distribution of cash or assets will have to be made pursuant to a capital reduction procedure.

The Companies Act governs the capital reduction procedures and provides for two methods of capital reduction: court sanctioned or non-court sanctioned capital reduction. A court sanctioned capital reduction requires (i) the passing of a special resolution for the reduction and (ii) a confirmation of the reduction by the court. The requirement of court confirmation provides protection to creditors of the company.

A non-court sanctioned capital reduction requires (i) shareholders’ special resolution and (ii) a declaration of solvency by all the directors. A creditor may at any time within 6 weeks of the resolution apply to court to have the resolution cancelled. Hence, companies may prefer the court sanctioned capital reduction procedure on the assumption that such a reduction is less likely to be susceptible to legal challenge by creditors.

A capital reduction need not be expressly authorised by a company’s articles of association. It is sufficient if the company’s memorandum and articles of association do not exclude or restrict its power to reduce its share capital in this way.

A conditional offer refers to a takeover offer which is expressed to be subject to certain conditions being fulfilled. This means that the offeror will only become obligated to purchase the shares in the target company which have been validly tendered in acceptance of the offer after the conditions have been fulfilled. If the conditions to the offer are not fulfilled on or before the closing date of the offer, the offer will lapse and shareholders who have tendered their shares in acceptance of the offer will have their shares returned to them. A conditional offer is said to “unconditional” once all the conditions to the offer have been met.

The conditions that may be attached to an offer would depend on whether the offer is a mandatory or voluntary offer.

Under the Singapore Code on Take-Overs and Mergers (the “Code”), a person is required to make a takeover offer (a “Mandatory Offer”) for a company if:

  • he acquires shares which (taken together with shares held or acquired by persons acting in concert with him (“concert parties”)), carry 30% or more of the voting rights of the company; or
  • he, together with his concert parties, holds between 30% and 50% of the voting rights of the company and he, or any of his concert parties, acquires in any 6-month period additional shares carrying more than 1% of the voting rights of the company.

A Mandatory Offer can only be subject to the following conditions:All other takeover offers made under circumstances other than one triggered for a Mandatory Offer, are considered as voluntary offers (each a “Voluntary Offer”).

  • the condition that the offeror receives sufficient acceptances to the offer which, when taken together with any shares which the offeror may hold or acquire after the announcement of the offer until its closing date, would allow the offeror and his concert parties to control more than 50% of the voting rights issued shares of the target company (the “Minimum Acceptance Condition”); and
  • the condition that the offer shall lapse in the event the Competition Commission of Singapore makes a decision to undertake a Phase 2 review of the transaction, or issues a direction that prohibits the offeror from acquiring shares in the target company.

If the offeror (and his concert parties) hold more than 50% of the voting rights of the target company as at the date of the offer, the Voluntary Offer is not required to contain the Minimum Acceptance Condition, although the offeror may nonetheless attach it if it intends to acquire not less than 90% of the target company’s voting rights.In the case of a Voluntary Offer, if an offeror (and his concert parties) hold less than 50% of the issued share capital of the target company at the time of making the offer, then the Voluntary Offer must contain the Minimum Acceptance Condition. However, the offeror may apply to the Securities Industry Council (“SIC”) for its consent to increase the acceptance threshold under the Minimum Acceptance Condition from 50% to 90%.

Other conditions (such as the requirement for approval by the offeror’s shareholders, or conditions relating to the target company’s financial performance) may be attached to a Voluntary Offer, with the consent of the SIC. These conditions must be approved by the SIC, which does not allow conditions that require subjective judgments by the offeror or lie in the bidder’s hands, as this can create uncertainty. Moreover, the Code further prescribes that offerors should not invoke any condition (other than the Minimum Acceptance Condition) so as to cause the offer to lapse unless the circumstances which give rise to the right to invoke the condition are of material significance to the offeror in the context of the offer, and information about the condition is neither publicly available nor known to the offeror before the offer announcement.

A shareholder whose shares are held through a nominee company or custodian bank (i.e. indirect investors or beneficial shareholders) will not have any rights to vote directly in a general meeting of the company. This is because only registered “members” are entitled to attend and vote. Shares held through a nominee company or custodian bank will be registered in such nominee or custodian bank’s name. While these registered “members” are effectively bare trustees, holding shares for the collective benefit of the beneficial shareholders, a company will only recognise the rights of the persons registered as holders of the shares to attend and to vote at a general meeting. Statutory exception is made for shareholders who deposit their shares with The Central Depository (Private) Limited (“CDP”).

Fund managers and institutional investors are some common examples of beneficial shareholders whose shares are commonly kept in nominee accounts. Presently, they can only exercise their limited voting rights if they fall within the specified categories stated below:

 

  • Appointment of beneficial shareholder as proxy

    Singapore law currently provides that a nominee company as the registered “member” of a company can only appoint a maximum of 2 proxies to attend and vote at a general meeting (unless the articles of association provide otherwise). This means that unless a beneficial shareholder is appointed as 1 of these 2 proxies, he is effectively prevented from attending and voting at shareholders’ meetings due to the limit in the number of proxies.

    Even if a company’s articles allow for the appointment of multiple proxies, most of these proxies cannot vote on a show of hands because each registered shareholder is only entitled to one vote on a show of hands. Accordingly, such nominee companies will face the difficulty of deciding which proxy, out of the multiple proxies appointed, will be entitled to exercise their voting rights on a show of hands.

    The Code of Corporate Governance 2012 encourages listed companies to amend their articles to remove the limit on the number of proxies that may be appointed by nominee companies. Listed companies will have to comply or explain departures from this principle of the Code. At present, however, few companies have moved to amend their articles to implement a multiple proxies regime.

  • Beneficial shareholders notifying nominee companies how they wish to vote

    Some nominee companies have introduced a mechanism where a beneficial shareholder can notify them how he wishes to vote. Where the nominee company receives conflicting instructions from its various clients, the nominee company will vote so many shares “for” a resolution and so many shares “against”, by submitting proxy forms appointing the chairperson of the meeting as proxy to vote accordingly.

    However, some resolutions require not simply a majority of votes but also a majority in number of the shareholders present and voting (e.g. in a resolution to approve a scheme of arrangement). The above mechanism does not increase the voting rights of beneficial shareholders as the nominee company will still only count as one for the purposes of the number of shareholders.

    Where voting is by a show of hands, and not a poll, the same qualification above that the nominee company will be limited to one vote will apply.

It is noteworthy that reforms have been set in place and endorsed by the Ministry of Finance. In particular, one of the accepted recommendations for the reform of our Companies Act is to allow, unless otherwise prohibited by a company’s articles, registered “members” falling within the following two categories to appoint more than 2 proxies to vote at general meetings (provided that each proxy is appointed to exercise the rights attached to a different share or shares and the number of shares and class of shares shall be specified):


Reforms

  • any banking corporation licensed under the Banking Act or wholly-owned subsidiary of such a banking corporation, whose business includes the provision of nominee services and who holds shares in that capacity; and
  • any person holding a capital markets services licence to provide custodial services for securities under the Securities and Futures Act.

The Ministry of Finance intends to table the Bill in Parliament to implement these amendments by the end of 2013. Accordingly, once the changes are set in place, investors whose shares are held in the aforementioned broker nominee accounts will then be given the ability to vote in general meetings, whether by poll or on a show of hands.In addition, our Companies Act will be amended to allow the proposed multiple proxies to each be given the right to vote on a show of hands in a shareholders’ meeting.

There are two different forms of directors’ remuneration. First, directors’ fees paid to a director in his capacity as a director, and second, salary or fees paid to a director who is also an employee of the company. The former form of remuneration is one which is paid to the director “in respect of his office” and is required to be approved by the company under Section 169(1) of the Companies Act (Cap. 50) Singapore (the “Act”). That is, it must be subject to the affirmative vote of shareholders of the company at a general meeting. In such instances, exorbitant remuneration in this form will need to be approved by a majority of the shareholders. We will refer to this form of remuneration as “Office Holder Fees”.

In contrast, it is the board of directors that decides what salary or fees are due to an employee, whether or not the employee is also a director or senior manager. The board of directors normally does not need specific approval from shareholders. We will refer to these payments as “Employment Benefits”.

Insofar as the company paying exorbitant Employment Benefits to directors and senior managers, the company’s directors should bear in mind their fiduciary duty to act in the best interests of the company. This includes a duty to act honestly and fairly and also not to place themselves in a conflict of interest. Where a company is in a dire financial position, the directors need to consider if they are contractually bound to pay the Employment Benefits or if they have a discretion as to the level of the benefits, or part of the benefits. In the event that control of the company subsequently falls out of the hands of the directors, a liquidator or judicial manager is likely to look closely at the payment of Employment Benefits during the period of financial difficulties.

Shareholders of a private company may consider seeking leave from the High Court to bring an action in the name and on behalf of the company against the directors to restrain or recover the payment of unjustifiable Employment Benefits. This is rare as the cost of such applications for leave have, in different contexts of breaches of fiduciary duties, proven to be high and unaffordable for the average shareholder.

Turning to Office Holder Fees, where the directors form the majority of the shareholders or where the majority of the shareholders have appointed the directors, the minority shareholders may feel aggrieved by the passing of a resolution approving the payment of the fees. The minority shareholders have the option of seeking relief for minority oppression but this is not without challenges. The payment needs to be shown to be oppressive to the shareholders or in disregard of their interests as shareholders and this is challenging where the payment impacts all shareholders equally. There are also practical challenges for a small shareholder as the expense of such proceedings against the majority shareholders can be prohibitive.

As noted in one of our previous columns, a shareholder generally does not have an unconditional right to receive dividends, even when profits are available for that purpose.

How and when a dividend is to be declared is governed by the articles of association of a company. Usually, the directors will recommend a particular rate of dividend, and the company in general meeting will declare the dividend subject to the maximum recommended by the directors.

Given that a shareholder is unable to compel a company to declare dividends in the absence of a specific right granted in the articles of association, the following are some of the ways in which a shareholder may wish to consider adopting to influence a company to declare dividends:

(a) Calling a meeting of the company

2 or more members holding not less than 10% of the total number of issued shares of a company (excluding treasury shares) may call a meeting of the company, at which the issue of lack of declaration of dividend can be raised and addressed. Quite often, shareholders will make use of the annual general meeting as a platform to require the directors to give an account accordingly.

Such a meeting can provide shareholders with the platform to either persuade or add soft pressure on the directors to consider a declaration of dividends or hold the directors accountable for their decision not to recommend the declaration of dividends. For example, a healthy rate of dividend declared which may result in an increased demand for the company’s shares from the investor community, and the possible correlation with the company’s share price are some the reasons that had, in some instances, been put forth in favour of a declaration of dividends. In addition, questions can also be raised as to whether the directors have properly discharged their duty to act in the best interest of the company and the shareholders as a whole if they have not properly applied their minds to consider a declaration of dividends would be appropriate.

There is also Singapore case law to support the position that should majority shareholders consistently refuse to declare dividends when profits are available (particularly if the majority could be shown to have remunerated themselves only in another way), this may amount to oppression of the minority shareholders for which the minority shareholders may choose to seek redress under our Companies Act. For instance, such redress may be available where a majority shareholder, who is also a director, sanctions the payment to himself of substantial director’s fee, which deprives minority shareholders from receiving returns on their shareholding in the form of dividends. Note that insofar as we aware, such an argument has yet to be successfully tested in the context of publicly listed companies.

Where a meeting of the company is validly convened, the passing of the resolution to approve the declaration of dividends will still be predicated on a requisite majority of shareholders voting in favour of the said resolution.

(b) Altering the composition of the board of directors

Shareholders who are not adverse to a more aggressive approach may also wish to consider replacing the board with directors who are more amenable to a declaration of dividends if there is a sufficient majority of shareholders in favour of this. However, especially in the case of a public listed company, shareholders should carefully consider if such a move will unnecessarily shake the confidence of the market (viz., the company) and, where the board has generally been effective in the control and management of the company, if the major revamp of the board may affect the performance of the company (be it in the short term or the longer term).

In this regard, do note that it is not uncommon for articles of association of companies to include a provision that shareholders may by ordinary resolution remove a director before his term of office expires. In addition, our Companies Act stipulates that shareholders of a public company may by ordinary resolution remove and replace directors, even if the memorandum or articles of association provide otherwise.

Depending on the form of takeover offer used, minority shareholders may do the following when presented with a takeover offer with an offer price of the target company (the “Company”) that is less than its NAVPS:

  • Reject the Offer or Vote against the Proposal. Your Vote Counts.
    Every shareholder has a choice, viz. his own shares. To a certain extent, he can help decide on the outcome of an offer or a corporate action of the Company by either rejecting the offer or, in the case of a corporate action that requires his voting support, vote against the proposal. Hence, if the offer price or other terms of the proposal are not sufficiently appealing to the shareholder, he or she may do the following:

    • If the proposal comes in the form of a general offer in accordance with the provisions of the Singapore Code on Take-overs and Mergers (a “General Offer”), REJECT the General Offer by not submitting the form of acceptance and authorisation / transfer in relation to the General Offer; OR
    • If the proposal comes in the form of a general offer in accordance with the provisions of the Singapore Code on Take-overs and Mergers (a “General Offer”), REJECT the General Offer by not submitting the form of acceptance and authorisation / transfer in relation to the General Offer; OR
    • If the takeover is proposed in the form of a scheme of arrangement (a “Scheme”), vote AGAINST the Scheme resolution by attending in person or submitting a proxy; OR
    • If the takeover is proposed in the form of an exit offer in conjunction with a voluntary delisting, vote AGAINST the voluntary delisting resolution and not submitting the form of acceptance and authorisation / transfer in relation to the exit offer.

    In the case of a privatisation by way of Scheme or a voluntary delisting, a general meeting of the Company will be convened to consider the Scheme or voluntary delisting resolution (as the case may be). A shareholder may attend a general meeting in person to discuss the proposal and make his or her views known at that time. In the case of the Scheme, the attendance of the shareholder (in person or by proxy) is important as a majority of shareholders present and voting (in terms of number as opposed to a mere percentage of voting rights carried) is required.

    Minority shareholders do have the ability to influence the outcome of an offer and this has been evident in recent times. For example, in the scheme of arrangement proposed by ST Electronics to privatise Nera Telecommunications Ltd in 2012, minority shareholders were able to vote down the scheme resolution to privatise the company.

  • If the takeover is proposed as a Scheme, you may also object to the Scheme in Court
    Where a Scheme is approved at the general meeting, it has to be confirmed at a Court hearing. A minority shareholder may attend the Court hearing and present arguments as to why the Scheme should not be confirmed. He has to show that either:

    • The scheme document did not contain sufficient information to allow shareholders to make an informed decision. Carefully prepared Circulars (including Scheme Documents) reduces a shareholder’s chances of success on this ground; OR
    • Process and procedure was not properly followed in conducting the vote, convening the scheme meeting, or in obtaining the votes for the scheme meeting, and the irregularity was prejudicial to minority shareholders or not representative of shareholders’ wishes. Take for example, the proposed Scheme to privatise PCCW Limited in Hong Kong, where the Court of Appeal of Hong Kong SAR refused to sanction the scheme in the face of “clear manipulation” of the votes at the scheme meeting.
  • Object to Compulsory Acquisition
    Where an offeror obtains 90% or more of the shares in the company, the remaining minority shareholders have the right to object to an offeror’s exercise of compulsory acquisition rights by filing an application in Court if the offeror, following the close of a general offer, exercises such rights. The procedures will vary depending on the Company’s jurisdiction of incorporation.However, in order to succeed in the objection, a minority shareholder must prove to the Court that the offeror achieved the threshold for compulsory acquisition rights by unfair means (for example, by using a third party to acquire shares from other shareholders at a price higher than the offer price and then accept the offer), or that procedure was not duly followed.

The Companies Act does not prescribe the manner in which directors are to be appointed to the Board. The appointment of directors is left generally to the company’s articles of association. Typically, directors are elected by the members at the annual general meeting of the company. Accordingly, minority shareholders alone are unable to elect a representative to the Board as they do not possess the requisite voting power to pass a resolution appointing a representative to the Board.

Rationale for not mandating representation of minority shareholders on the Board

A common reason for not requiring representation of minority shareholders on the Board is that it would lead to procedural inefficiency as the Board’s decision making might be hampered by disagreements. Additionally, there is a question as to what percentage stake is enough of a stake in the company to justify having such a significant input in the running of the company. It has also been noted that large shareholders can potentially improve the monitoring of management because of the alignment of their respective interests. On the other hand, Boards that comprise directors who represent significant shareholders are in a position to expropriate from minority shareholders with less committed representation.

Proportional representation on the Board

A cumulative voting system will provide for a more proportional representation on the Board. Under that system, the number of shares held by a member is multiplied by the number of vacancies, and the member may cast for a single candidate the total number of votes calculated this way, or may distribute the votes among several candidates as desired. However, it should be noted that cumulative voting for the election of directors was not recommended during the recent review of the Companies Act because of reservations on the effectiveness of the cumulative voting system.

The role of independent directors

The Code of Corporate Governance (the “Code”) which applies to publicly listed companies defines an “independent” director as one who has no relationship with the company, its related corporations, its 10% shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business judgement with a view to the best interests of the company. Independent directors are essential in protecting the overall interests of the company. They provide guidance, supervision, as well as checks and balances for effective corporate governance.

There has, since the late 1980s, been a growing awareness of the role of independent directors in protecting minority shareholders’ interests. They were first introduced when audit committees became part of the corporate landscape. During the 2005 review of the Code, it was proposed that the definition of independent director exclude directors who are, or directly associated with, substantial shareholders. However, this was not adopted as the Government concluded that substantial shareholders do not pose the kind of principal-agent problems that executive directors can potentially pose. Arguably, substantial shareholders of a company will, more often than not, have their interests aligned with those of other shareholders as they have a greater stake in the success of the company.

During the 2011 review of the Code, this changed and it was acknowledged that to enable independent directors to act effectively in companies, independent directors should not possess any relationship with substantial shareholders. This was because relationships with substantial shareholders may influence an independent director’s exercise of objective judgement.

The Code additionally emphasizes that no individual or small group of individuals should be allowed to dominate the Board’s decision making. There should be a strong and independent element on the Board, with independent directors making up:

i. at least one-third of the Board; or
ii. at least half of the Board where (i) the chairman of the Board and the CEO is the same person; (ii) the Chairman and the CEO are immediate family members; (iii) the Chairman is part of the management team; or (iv) the Chairman is not an independent director.

Other options available to minority shareholders

a. Voicing concerns
A lack of board representation does not mean that minority shareholders are relegated to passively following what the Board recommends. The Code recommends that the Board should establish and maintain regular dialogue with shareholders, to gather views or inputs, and address shareholders’ concerns. Minority shareholders may also attend general meetings of the company to voice their concerns. In this regard, the Code recommends that companies should encourage greater shareholder participation at general meetings, and allow shareholders the opportunity to communicate their views on various matters affecting the company.
b. Calling or requisitioning a meeting
Under the Companies Act, two or more members holding not less than 10% of the total number of issued shares of the company may call a meeting of the company. Notwithstanding a company’s articles of association, minority shareholders holding not less than 10% of the paid-up capital of the company may also requisition the directors to convene a meeting. The requisitioning of a meeting is usually preferred as most individual members seldom possess the means to call a meeting of large companies. Unfortunately, the calling or requisitioning of a meeting is of limited effectiveness as minority shareholders will probably lack the necessary votes required to pass any resolutions tabled.
c. Nominee directors
Minority shareholders may also propose nominee directors to the Board. However, a nominee director is not entitled to prefer the interests of his principal at the expense of the interests of the company. As noted above, minority shareholders may find it difficult to appoint nominee directors as they lack the requisite voting power.

Comparison with other jurisdictions

a. Two-tier Boards
Under the two-tier Board structure, there exist two Boards: a management Board and a supervisory Board. This structure can be seen in German companies, where the supervisory Board members are either shareholder representatives or labour representatives. In Singapore, only one single Board exists. All Board members are normally elected by the shareholders. A two-tier Board, in principle, achieves a stricter separation of control from management though the flow of information and the decision-making process is swifter in a one-tier Board.
b. Minority representation on Boards
The mandatory representation of minority shareholders on the Board is provided for in some jurisdictions. For example, in Italy, it is mandatory for listed corporations to reserve one Board seat for minority shareholders.

The information and response above are only intended to provide general information, and are not intended and should not be treated as a substitute for specific legal advice relating to particular situations. Although we endeavour to ensure the accuracy of the information contained herein, we do not accept any liability for any loss or damage arising from any reliance thereon. For further information, or if you would like to discuss the implications with respect to your specific circumstances, Stamford Law will be pleased to attend to you on a mandated engagement.