Commentary: Shareholder-Board dispute resolution should be in the Boardroom, not the Courtroom

Date: February 6, 2023

Over the past few years, there have been several disputes between minority shareholders of mainly smaller companies and the Board of Directors of those companies.

Most of these revolved around dissatisfaction with the direction being taken by the incumbent directors in guiding the companies concerned, leading to attempts by the unhappy shareholders to have the Board replaced, sometimes through the Courts. As many have found, this can be an expensive exercise in futility.

Based on SIAS’s experience, such “battles for the Board’’ indicate very clearly one common underlying problem, namely that there has been a serious breakdown in communication between the Board and their shareholders.

The solution in SIAS’s view lies not in legal battles or having to resort to the Courts but for Boards to take a hard look at their communication practices and to implement adequate preventive measures. Put differently, the solution to shareholder-Board disputes lies in the Boardroom, not the Courtroom.

The fact that almost all of the instances where SIAS has intervened were eventually settled without having to be dragged into court points to the effectiveness of such an approach.

The approach of solving problems “in the Boardroom, not the Courtroom’’ is one that has been successfully championed by SIAS since the association was formed some 22 years ago.

It is a non-confrontational, non-antagonistic way of solving corporate problems that seeks to bring all parties together to communicate with one another in an open, honest and transparent manner in the hope of avoiding expensive litigation which can only be detrimental to a company’s interests.

In SIAS’s experience, it has meant that in times of shareholder discontent, the road to an amicable settlement lay in arranging timely meetings between shareholder representatives and the Board to thrash out contentious issues with SIAS acting as the mediator.

Shareholders need to be appraised on the company’s position clearly. Often it is forgotten that shareholders are after all owners of the company and need to be in the know not just at annual meetings but also as and when they raise legitimate concerns.

SIAS notes that the vast majority of shareholder-Board disputes seen over the past few years involved mainly companies with market capitalisations of below S$100m, ie smaller firms which may not necessarily have a proper or effective investor relations (IR) function.

This is a shame because a properly functioning IR department can help keep shareholders informed on strategies and plans, whilst also providing feedback to management on investor concerns. What is disturbing is that in most of these companies, there is no internal IR department. Perhaps a good starting point would be for smaller companies to examine the effectiveness of their IR practices and to take the necessary corrective action if these practices are found wanting.

Another observation worth making is that most of the firms who have found themselves embroiled in disputes with their shareholders do not practice regular updates to their shareholders on the company’s plans and strategies. In fact, in many cases, our experience is that Boards have adopted a “take it or leave it” attitude when it comes to disclosure.

In this connection, SIAS would encourage firms to adhere to recommendations made by the Singapore Exchange in its 16 Dec 2021 Regulator’s Column that companies should organise and host virtual information sessions for certain major corporate actions such as a proposed diversification into a new business, an interested party transaction or a substantial acquisition. The Corporate Governance Code also recommends that companies hold Investor Day for shareholders to meet with board and management to be updated on company matters.

If companies follow the advice from Singapore Exchange and MAS, there would be opportunities to avoid unhappiness and friction. The idea here is that by having such sessions and by keeping shareholders informed, uncertainty is reduced and disputes can be minimised. Companies will also save costs which will have to be spent on engaging professionals to manage the issues.

The key is to keep communication flowing between Boards and stakeholders and to avoid breakdowns. Once breakdowns occur, it means that everyone suffers, from the employees of the firm to the top management to all stakeholders. Senior management time, which is valuable resource that could be better spent running the firm, is then wasted fighting to retain control.

Worse, the uncertainty over the company’s direction means the share price is punished as investor confidence is undermined. Note that the more of such battles witnessed in the market, the greater the loss of overall confidence, which cannot be good for the market’s reputation.

There will of course, be resistance to the idea of greater Board transparency. In many cases, mindsets and habits among directors have become entrenched over the years, especially in family-owned businesses.

However, Boards should not see having to improve their communication as a challenge but as an opportunity, not just to manage shareholder expectations but also to reduce the likelihood of future activism.

In other words, the sooner all companies recognise that the solution to their problems lie in the Boardroom and not the Courtroom, the better.


David Gerald
Founder, President & CEO