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Sharanya Pillai
Sharanya Pillai10/8/2018 08:00 AM GMT+08  • 11 min read
Minority rights
SINGAPORE (Oct 8): Teo Hee Huat, an investor who has tracked many mid- and small-cap stocks over the last three decades, has endured his fair share of setbacks in the market. But he had a surprisingly positive experience with Blumont Corp.
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SINGAPORE (Oct 8): Teo Hee Huat, an investor who has tracked many mid- and small-cap stocks over the last three decades, has endured his fair share of setbacks in the market. But he had a surprisingly positive experience with Blumont Corp.

See: Outspoken investors beware

Teo says he spent some $15,000 buying the stock at about 20 cents apiece close to two decades ago, when the company was known as Adroit Innovations and cast itself as a provider of internet solutions. He did not monitor the company closely in the years that followed, even as it changed its name in 2011. But Teo began to pay attention when Blumont’s shares went into a steep climb in 2013.

As the stock approached the $2 threshold, Teo began to feel uneasy and sold his entire holding. It was September 2013, just a month shy of the big crash that Blumont suffered, along with LionGold Corp and Asiasons Capital (now known as Attilan Group), which eventually exposed Singapore’s biggest-ever stock manipulation scandal. “It was really just luck; this kind of investing requires zero skill,” Teo tells The Edge Singapore.

Despite his windfall, Teo says he does not really have the stomach for speculative counters. In fact, his experience with Blumont has only reinforced his belief in focusing on companies with solid fundamentals, monitoring them closely and, most importantly, asking probing questions at annual general meetings (AGMs). But Teo has found that this seemingly conservative investing strategy has risks too.

In July, Asiatic Group (Holdings) sent a cease-and-desist letter to one of its shareholders for alleged defamatory statements about the company. The shareholder was Jerry Low, an experienced hand in the local market, who once led a retail investor revolt against the management of Sabana Shari’ah Compliant Industrial Real Estate Investment Trust. Asiatic dropped the matter after Low removed statements he had posted online.

Then, on Sept 9, Stamford Land Corp announced a lawsuit against one of its shareholders for allegedly making defamatory statements during the company’s AGMs in 2016 and 2018, on social media and in a letter to the press. The shareholder is Mano Sabnani, who was once editor-in-chief of The Business Times and Today. “If someone as well-known as Mano can be sued, what about the rest of us?” Teo questions.

See: Stamford Land and investor Mano Sabnani arrive at amicable settlement

For many market watchers, this is an ill wind that could deter retail investor engagement in the local market. “There is likely to be an asymmetry of information and financial power where the company and the shareholder are concerned, which puts the shareholder at a distinct disadvantage. The mere threat of a lawsuit is sometimes enough to put retail investors off taking on the boards,” says Eugene Tan, associate professor of law at the Singapore Management University (SMU).

There is also a sense of injustice about companies taking legal action over comments made by minority investors. After all, many of these shareholders do not have the financial resources to sue companies that cause them to lose money through mismanagement and fraud. “Shareholders have little access to justice. It’s too costly for them to sue [errant companies], and regulators here do not sue on their behalf to recover losses for investors,” says corporate governance expert Mak Yuen Teen, an associate professor of accounting at the National University of Singapore (NUS).

‘I don’t want to be sued’

At a Sept 28 investors’ forum organised by the Securities Investors Association (Singapore) (SIAS), the risk of being sued for defamation was evidently on the minds of many people. While investors who attended the event were not coy in voicing their concerns about the state of the local market, some were careful when making comments about specific companies.

For instance, one investor declined to even name the company he was griping about, citing the fear of a lawsuit. Another stopped short of faulting the company’s auditor for failing to spot fraudulent activity, quickly saying, “I don’t want to be sued.” One irate investor threw caution to the wind, claiming that he had little to his name that a company could sue him for anyway.

Retail investors also voiced concern about the threat of defamation suits at the Singapore Exchange’s AGM on Sept 20. In response, Tan Boon Gin, CEO of SGX Regulation Co, said: “As a market regulator and from a market perspective, I must say that we do encourage parties not to take an overly legalistic approach because if they do, I fear it will have a chilling effect on robust conversations.”

Since then, SGX RegCo has announced that it is working with SIAS and the Singapore Institute of Directors to come up with a best practices guide for companies and investors during shareholder meetings.

Mak says investors’ fear of litigation is a “real worry” and could have implications for corporate governance. “We need to look into this and make clear that shareholders have qualified privilege and they should not be sued for questioning management and the board. The last thing we want is companies suing investors for criticising their corporate governance,” he says.

Tan of SMU also says it would be a “retrograde step in corporate governance” if more listed companies took a litigious approach in managing relationships with investors. “Companies and their boards have the right not to be defamed without basis. We don’t want a culture of irresponsible speech in our corporate sector,” he says. “But this is a right that has to be wielded responsibly and used sparingly. In the same vein, board members should have thicker skins when shareholders engage them robustly such as at an AGM. It comes with the turf.”

What can be done to prevent shareholders being silenced by the threat of legal action? Remy Choo, director of Peter Low and Choo, suggests strengthening the concept of “qualified privilege” as a defence against defamation. “In respect of defamation, Principle 12 of the 2018 Code of Corporate Governance requires companies to comply with the principle that they should facilitate the participation of shareholders during general meetings to allow shareholders to communicate their views on matters affecting the company,” he says.

Shareholders would ordinarily be thought to enjoy “qualified privilege” in these meetings. But they can get into trouble when they choose to make comments in public, or through social media channels. “Of course, some companies take the view that communicating these views on platforms to the world at large goes beyond the bounds of the defence of qualified privilege,” Choo says.

The way he sees it, there could be room for the defence of qualified privilege to be extended. “SGX can afford to set out, through subsequent guidance notes, their view that there is a broader public interest in shareholders expressing their views on company affairs. Such statements by the regulator will make it easier for shareholders to avail themselves of defences in defamation, such as qualified privilege and fair comment.”

For now, Stamford Land does not appear to be backing down. In an Oct 2 filing, the company said it had sought clarification about statements made by SGX RegCo at the AGM. “SGX RegCo has stated that they had made it clear at the AGM that their comments were aimed at the market in general and not directed at Stamford Land and the ongoing legal proceedings,” the filing says.

Sue errant companies?

Retail investor S Nallakaruppan has been worrying about his investment in scandal-ridden rail parts maker Midas Holdings. The counter was suspended in February after auditor Mazars uncovered previously undisclosed litigation and unauthorised loans. CEO Patrick Chew had resigned, citing health reasons in March.

In May, Midas’ remaining board members held a shareholder dialogue at which they revealed that the company could be pushed towards insolvency. The parent company had essentially lost oversight of its Chinese subsidiaries and had just $700,000 in cash. Singapore’s Commercial Affairs Department launched an investigation into the company in April, but there have not been substantial updates yet. Mazars has disavowed its financial reports on Midas for 2012 to 2016.

Over time, Nallakaruppan has grown frustrated with the slow drip of announcements filled with legal jargon on SGXNet regarding the company’s subsidiaries. He raised this grievance at the Sept 28 SIAS forum: “What recourse do shareholders have now, instead of waiting for all the investigations to be done?”

In the US, a class-action lawsuit and contingency fee arrangement are often cited as potential remedies for aggrieved shareholders. The former involves lawyers taking on cases for a large “class” of unnamed plaintiffs with a similar interest. The latter involves lawyers being paid only if they win the case.

Both class-action lawsuits and contingency fees are not recognised in Singapore, Ushan Premaratne, a partner at Withers KhattarWong, tells The Edge Singapore. To be fair, Singapore’s rules of court do allow for “representative actions”, where individuals sue collectively — such as when about 5,000 members sued Raffles Town Club in 2000. But there have been a “paucity of cases” over the past two decades, Ushan adds.

In the absence of a class-action framework, the process of shareholders taking legal action when they lose money is something of a challenge, according to Thio Shen Yi, joint managing partner of TSMP Law Corp. In addition, it is difficult for minority shareholders to sue the directors or majority shareholders of a company. “It’s a very convoluted process. You need to go to court to ask permission to start a case,” Thio says.

This is due to the “proper plaintiff” rule, he explains. “The only party who can sue a director or the board for a breach of fiduciary duties is the company, not the shareholders. The company’s board can just say ‘no, we’re not going to agree to sue ourselves’. The shareholder can apply to the court for permission to compel the company to start a lawsuit against the director or the board. They have to do this because, as minority shareholders, they don’t control the company. However, even if the court allows the minority to go after the board, there is still the issue of who finances the litigation.”

Tan of SMU warns that there is a downside to encouraging class-action lawsuits. “We don’t want listed companies to be on the defensive mode and spend their time fighting lawsuits instead of creating value for shareholders. Context is important: In the US, there are more institutional investors. They have the wherewithal and clout to push for change. In comparison, Singapore’s market comprises a relatively higher level of retail participation,” he says. “Therefore, in Singapore’s context, shareholder activism and education is the way to go.”

Choo points out that introducing class-action lawsuits in Singapore may require a review of the broader rules on litigation across the board. “There is no principled rationale for reforming the approach to class-action suits solely in respect of shareholder action. There are also differences between litigation rules and culture in these jurisdictions and those in Singapore that will require further thought and consideration before any such system is adopted,” he says.

Beyond legal remedies, Mak of NUS suggests coming up with an arbitration framework or investor compensation mechanism. “Of course, funding is an issue and we don’t want listed companies to be funding bodies that are supposed to be protecting minority shareholders. If the authorities are open to funding such initiatives… I think there are people who would be interested in taking these forward. But I just do not get any sense that investor protection is a priority in our market,” he says.

Indeed, Mak thinks investors may be better off simply avoiding riskier stocks, especially those with operations overseas. “Sadly, there is not much that can be done when it comes to certain listed companies with foreign operations. Perhaps investors should just avoid them, given that when things go wrong, there is little recourse and the regulators generally can’t do much anyway,” he says.

For his part, Teo, the investor who made money from Blumont, says he carefully sizes up the top management of companies to get a sense of their integrity. He also considers their attitude towards shareholders. And, if he doesn’t like what he sees, he simply walks away. “After all, an AGM is supposed to be like a family gathering; as shareholders we are also co-owners of the company. If I don’t feel welcome, then why invest?”

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