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David versus Goliath: Minority oppression, intimidation, defamation suits, what next?
31-07-2018, 09:11 PM.
Post: #1
David versus Goliath: Minority oppression, intimidation, defamation suits, what next?
By Mak Yuen Teen
Published July 28, 2018

Minority shareholders have long faced a problem in Singapore, more so than in many other markets, including even some emerging markets. This probably has to do with us wanting to be a “business friendly” place. We definitely do not pay enough attention to minority shareholder protection and this will ultimately harm valuations and liquidity on our market, making us an unattractive listing destination.

First, there are many companies with controlling shareholders but few effective safeguards to protect minority shareholders against abuses.  Independent directors are in effect appointed by controlling shareholders. Some countries have introduced cumulative voting, two-tier voting, or even minority shareholders only voting (for at least one independent director) to increase the ability of minority shareholders to appoint at least someone on the board who is not beholden to controlling shareholders.

Whenever such proposals are put forward here, it is quickly pushed back by those who argue that all directors have the same duty to act in the best interests of the company, that this may cause a director to only look after the interests of minority shareholders which may be to the detriment of the company, or that this will cause the board to be dysfunctional. These conveniently avoid the fact that in many companies, independent directors are beholden to controlling shareholders and management; director duties are rarely enforced; and many existing boards put in place by controlling shareholders are hardly functional.

Other countries, like US and Israel, impose fiduciary duties on controlling shareholders to act in the best interest of the company and all shareholders. An excellent recent paper by two renowned law professors from Harvard Law School and Hebrew University called for the appointment of some “enhanced-independence directors” who  require support from both controlling shareholders and minority shareholders for their initial election but leaves controlling shareholders with no say over their reelection and termination. Israeli corporate law already requires two-tier voting for “external directors” and Israeli companies listed here practise this.

In Singapore, controlling shareholders do not owe fiduciary duties to the company and other shareholders. Minority oppression suits, even if used, are difficult to win in the case of listed companies, purportedly based on the argument that in listed companies, “oppressed” minority shareholders can sell their shares. Shares of companies with oppressive controlling shareholders that refuse to pay dividends but obtain their “returns” from excessive remuneration, related party transactions and other forms of expropriation would undoubtedly be trading at a significant discount, so the exit price is closer to a fire sale price. Potential investors who are more informed are unlikely to want to buy the shares anyway, so liquidity is likely to be poor.

Since contingency fee-based class action is not available, minority shareholders will generally find it too costly to sue. In some of my recent articles, I have expressed dissatisfaction with our regulatory regime so there is no need to repeat it too much. Basically, regulatory enforcement has significant room for improvement and regulatory actions must extend to more than just executive directors and officers, but to include more independent directors who are often at least culpable for closing one or both eyes.

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