COMPANY LEGISLATION

AND REGULATORY FRAMEWORK COMMITTEE REPORT

CHAPTER THREE – CORPORATE GOVERNANCE

1. INTRODUCTION

1.1 The Corporate Governance Committee has recommended a Code of Corporate Governance, which has been accepted by the government. The SGX has announced that its Listing Manual will require all listed companies to disclose and explain deviations from the Code of Corporate Governance in their annual reports for annual general meetings held from 1 January 2003 onwards.

1.2 The Code of Corporate Governance encapsulates best practice and is not mandatory. We expect corporate governance standards in Singapore to evolve and improve over time. The CCDG will be responsible for the further evolution of the Code of Corporate Governance, and will regularly update it to ensure its continued relevance and usefulness. In reviewing the Code of Corporate Governance, best practices from leading jurisdictions should be adopted. The CCDG would also be actively engaged in raising standards of corporate governance in Singapore.

1.3 In this Chapter, we have reviewed the core provisions of Part V, CA with a view to identifying areas which would benefit from reform and refinement. We have reviewed efforts in the UK Steering Committee Final Report 20011, the New Zealand Law Commission Company Law Reform and Restatement2 and the Australian Corporations Act 2001, which have attempted to provide a succinct restatement of directors’ duties. We have also taken into account the recommendations of the Corporate Governance Committee, particularly with regard to raising standards of performance of boards of directors. Finally, we have reviewed the adequacy and modernisation of shareholder decision-making and shareholder remedies.

1.4 Unless otherwise stated, our recommendations in this chapter apply to all forms of companies.

2. DIRECTORS

2.1 Definition of “Director”

2.1.1 Our review of s. 4(1), CA and s. 4(2), CA which define “director” for the purposes of the Companies Act, suggests no need for refinement or extension as they continue to effectively encompass nominee and shadow directors.

2.1.2 We note a drafting anomaly in s. 149(8), CA and s. 149A, CA, which attempt separate definitions of “director” and “shadow director” only for these provisions. The particular definitions of director and shadow director have the effect of repeating the substantive 1 Modern Company Law for a Competitive Economy Final Report, Volume 1 & 2, The Company Law Review Steering Group, June 20012 Report No. 9 of the New Zealand Law Commission, Company Law: Reform and Restatement (1989)

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definitions in s. 4(1), CA and s. 4(2), CA and are accordingly superfluous and warrant repeal. We note also the reference to shadow directors in Rule 2 of the Companies (Application of Bankruptcy Act Provisions) Regulations3.

RECOMMENDATION 3.1

The CLRFC recommends the repeal of the separate definitions of “director” and “shadow director” in Sections 149(8) and 149A of the Companies Act.

2.2 Non-Executive Directors

2.2.1 We note that s. 201B(10), CA provides a definition of “non-executive director” for the purpose of determining the composition of the audit committee, which is prescribed for listed companies. As s. 201B, CA applies only to listed companies, we recommend that this section be migrated to the SFA. This is consonant with the approach of the UK Coordinating Group on Audit and Accounting Issues July 2002 report which similarly proposes prescriptive legislation for listed companies to form audit committees.

RECOMMENDATION 3.2

The CLRFC recommends that Section 201B of the Companies Act relating to audit committees of listed companies be migrated to the Securities and Futures Act.

2.3 Qualification of Directors

Training of Directors

2.3.1 In reflection of the core principle that shareholders are entitled to appoint such directors as they think appropriate to the company’s business and their interests, the CA does not prescribe any academic or professional qualifications for directors. The stock exchange requirements, transparency and market demands influence the experience and expertise of directors who are nominated and elected by listed companies. It would be in the public interest to enlarge the pool of eligible directors (especially for listed companies) through training and certification programmes, and to develop best practice codes and checklists for directors. These could be undertaken by the Singapore Institute of Directors in consultation with the SGX.

2.3.2 The Corporate Governance Committee, through the Code of Corporate Governance, recommended that the Nominating Committees of listed companies disclose the qualifications and experience of directors. We agree that such disclosure and other best practices should continue to evolve through non-statutory codes and best practices.

RECOMMENDATION 3.3

The CLRFC recommends that the Singapore Institute of Directors, in consultation with the Singapore Exchange, conduct more extensive and systematic training and accreditation for directors in Singapore.Retirement Age of Directors

3 Rule 2, Companies (Application of Bankruptcy Act Provisions) Regulations S293/95

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2.3.3 S. 153, CA states that directors of public companies and subsidiaries of public companies must seek annual reappointment if they are of or above the age of 70 years.

2.3.4 The UK Steering Committee proposed removing the statutory age limit for directors of public companies and replacing this with a requirement for the age of directors to be disclosed to the shareholders prior to the appointments or confirmation of appointments4.

2.3.5 We see no compelling reason at this time to change the requirement in Singapore to require specific annual shareholder approval to re-appoint directors who are of or above the age of 70 years. Shareholders may re-elect such directors each year. The annual re-election process enables companies to appoint such directors who are able to serve whilst also inducing the boards of public companies and their subsidiaries to plan for succession and renewal. However, we do recommend that the shareholder majority vote prescribed by s. 153(6), CA be amended from its current special resolution to an ordinary resolution.

RECOMMENDATION 3.4

The CLRFC recommends the retention of Section 153 of the Companies Act, which requires directors of public companies and subsidiaries of public companies to seek annual reappointment if they are of or above the age of 70 years. The CLRFC also recommends that the re-election requirements be amended to provide for such appointment by way of an ordinary resolution as opposed to a special resolution.

Undischarged Bankrupts

2.3.6 S. 148(1), CA provides that undischarged bankrupts are prohibited from acting as directors of, or taking part in the management of any corporation, except with the leave of the Court or written permission from the Official Assignee. S. 148(3), CA provides that the Court or Official Assignee, as the case may be, may grant an application under s. 148(1), CA subject to certain conditions.

2.3.7 We recommend that a copy of the court order or written permission, where granted, be filed with RCB. In this way, the conditions of such order or permission would be available for public inspection.

RECOMMENDATION 3.5

The CLRFC recommends that a copy of the Court order or the Official Assignee’s written permission to undischarged bankrupts to serve as directors or be involved in the management of companies under Section 148(3) of the Companies Act be filed with the Registry of Companies and Businesses.

3. RESTATEMENT OF DIRECTORS’ DUTIES

4 Modern Company Law for a Competitive Economy – Final Report, Volume 1, Chapter 6, Page 140, Paragraph 6.18, The Company Law Review Steering Group, June 2001

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3.1 We have reviewed the statutory duties of directors and the range of fiduciary and other common law duties in the light of more recent reforms proposed in the UK and New Zealand.

3.2 The broad canvas of legal issues relating to governance and directors’ duties covers the following:

(a) The standard of care and diligence of directors;(b) The duty of good faith;(c) Conflict of interest rules i.e. corporate opportunity;(d) The power to manage or direct the management of the business of the company

and the proper purpose exercise of powers;(e) The enforcement of directors’ duties which must be underscored by statutory

enforcement by shareholders, statutory derivative action, civil penalties provisions and criminal penalties; and

(f) Disclosure of interests relating to emoluments, directors’ interests in contracts, directors’ interests in shares and regulation of financial transactions between directors and the company and controls over indemnities.

3.3 The UK Steering Committee sets out an approach that is based on two pillars:

(a) Whether it is possible to draft an all inclusive statement of directors’ duties (one which would require directors to promote the success of the company in the interests of its members, but take into account all relevant considerations, including the implications for the company of their decisions over time and also the wider relationships, such as those with employees, suppliers, customers and the community-at-large); and

(b) For improved transparency, principally through the proposed operating and financial review, which will give an account by the directors of the performance and direction of the business, including in all cases, a fair review of achievements, trends and strategic direction, and covering other matters, including wider relationships, risks and opportunities and social and environmental impacts, where these are relevant to an understanding of the performance of the business.5

3.4 In its Final Report 2001, the UK Steering Committee sets out a restatement of the general principles that are applicable to a director in the performance of his functions as director and in relation to his entering into transactions with the company. The general principles would also apply to a director and former director in relation to the use of property, information and opportunities of the company and to benefits from third parties. These are intended to replace the corresponding equitable and common law principles. The restatement is not intended to authorise the contravention of any prohibition or requirement imposed on directors by or under any other enactment or rule of law.

We set out these principles below, with adaptations as illustrative of their intended scope and range for Singapore set out in italics. We would await the final outcomes of the UK legislative draft.

5 Modern Company Law for a Competitive Economy - Completing the Structure, Chapter 3, Page 33, Paragraph 3.2. A consultation document from the Company Law Review Steering Group, November 2000.

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General Principles By Which Directors Are Bound

Obeying the Constitution and other lawful decisions

1. A director of a company must act in accordance with-(a) the company’s constitution, and(b) decisions taken under the constitution ( or by the company, or any class of

members, under any enactment or rule of law as to means of taking company or class decisions),

and must exercise his powers for their proper purpose.

The matters to which the director are to have regard to in exercising their powers shall include

(a) the interests of the company’s employees generally; and(b) the rulings of the Securities Industry Council on the interpretation of the

principles and rules of and the practice to be followed under the Singapore Code on Take-overs and Mergers.

Promotion of company’s objectives

2. A director of a company must in any given case -(a) act in the way he decides, in good faith, would be most likely to promote

the success of the company for the benefit of its members as a whole (excluding anything which would breach his duty under paragraph 1 or 5); and

(b) in deciding what would be most likely to promote that success, take account in good faith of all the material factors6 that it is practicable in the circumstances for him to identify.

Delegation and independence of judgment

3. A director of a company must not, except where authorised to do so by the company’s constitution or any decisions as mentioned in paragraph 1-

6 Notes(1) In this paragraph, “the material factors” means-

(a) the likely consequences (short and long term) of the actions open to the director, so far as a person of care and skill would consider them relevant; and

(b) all such other factors as a person of care and skill would consider relevant, including such of the matters in Note (2) as he would consider so.

(2) Those matters are-(a) the company’s need to foster its business relationships, including those with its employees and

suppliers and the customers for its products or services;(b) its need to maintain a reputation for high standards of business conduct; and(c) its need to achieve outcomes that are fair as between its members.

[We have not adopted paragraph (b) of the UK formulation which is influenced by EU developments relating to community and environmental impact.](3) In Note (1) a “ person of care and skill” means a person exercising the care, skill and diligence required by paragraph 4.(4) A director’s decision as to what constitutes the success of the company for the benefit of its members as a whole must accord with the constitution and any decisions as mentioned in paragraph 1.

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(a) delegate any of his powers; or(b) fail to exercise his independent judgment in relation to any exercise of his

powers7.

Care, skill and diligence

4. A director of a company must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both -

(a) the knowledge, skill and experience which may reasonably be expected of a director in his position; and

(b) any additional knowledge, skill and experience which he has.

Transactions involving conflict of interest

5. A director of a company must not -(a) in the performance of his functions as director, authorise, procure or permit

the company to enter into a transaction, or(b) enter into a transaction with the company,

if he has an interest in the transaction which he is required by this Act to disclose to any persons and has not disclosed the interest to them to the extent so required.

Personal use of the company’s property, information or opportunity

6. A director or former director of a company must not use for his own or anyone else’s benefit any property or information of the company, or any opportunity of the company which he became aware of in the performance of his functions as director, unless-

(a) the use has been proposed to the company and the company has consented to it by ordinary resolution; or

(b) the company is a private company, the use has been proposed to and authorised by the board, and nothing in the constitution invalidates that authorisation; or

(c) the company is a public company, its constitution includes provision enabling the board to authorise such use if proposed, and the use has been proposed to and authorised by the board in accordance with the constitution.8

Benefits from third parties

7 Where a director has, in accordance with this Schedule, entered into an agreement which restricts his power to exercise independent judgment later, this paragraph does not prevent him from acting as the agreement requires where (in his independent judgement, and according to the other provisions of this Schedule) he should do so.

8 Notes (1) In this paragraph “the board” means the board of directors acting without the participation of any interested director.(2) This paragraph does not apply to a use to which the director has a right under a contract or other transaction that he has entered into with the company, or that he has in the performance of his functions authorised, procured or permitted the company to enter into.

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7. A director or former director of a company must not accept any benefit which is conferred because of the powers he has as director or by way of reward for any exercise of his powers as such, unless the benefit is conferred by the company or -

(a) acceptance of the benefit has been proposed to the company and the company has consented to it by ordinary resolution; or

(b) the benefit is necessarily incidental to the proper performance of any of his functions as director.

Special Duty where company more likely than not to be unable to meet debts

8. At a time when a director of a company knows, or would know but for a failure of his to exercise due care and skill, that it is more likely than not that the company will at some point be unable to pay its debts as they fall due -

(a) the duty under paragraph 2 does not apply to him; and(b) he must, in the exercise of his powers, take such steps (excluding anything

which would breach his duty, under paragraph 1 or 5) as he believes will achieve a reasonable balance between-

(i) reducing the risk that the company will be unable to pay its debts as they fall due; and

(ii) promoting the success of the company for the benefit of its members as a whole.9

Special duty where no reasonable prospect of avoiding insolvent liquidation

9. At a time when a director of a company knows, or would know but for a failure of his to exercise due care and skill, that there is no reasonable prospect of the company’s avoiding going into insolvent liquidation-

(a) neither paragraph 2 nor paragraph 8 applies to him; and(b) he must, in the exercise of his powers, take every step with a view to

minimising the potential loss to the company’s creditors that a person exercising due care and skill would take (excluding anything which would breach his duty under paragraph 1 or 5);

and “due care and skill” here means the care, skill and diligence required by paragraph 4.

3.5 In the UK White Paper on Modernising Company Law, the UK government agreed that directors’ general duties should be codified in statute10. The UK government is currently considering how the text of the draft duties may be improved before they are crafted into the law. The CLRFC recommends that the UK statutory restatement, when released, be adopted in Singapore, subject to adaptation. The enactment of these general principles, bolstered by statutory remedies to enforce directors’ duties, will form the bedrock of directors’ duties,

9 (1) What is a reasonable balance between those things at any time must be decided in good faith by the director, but he must give more or less weight to the need to reduce the risk according as the risk is more or less severe.(2) In deciding in any case what would be most likely to promote the success of the company for the benefit of its members as a whole, the director must take account in good faith of all the material factors that it is practicable in the circumstances for him to identify. (3) The Notes to paragraph 2 apply also for the purposes of this paragraph.(4) In this paragraph, “due care and skill” means the care, skill and diligence required by paragraph 4.

10 UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 3.5

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which would continue to be amenable to evolution through case law. While this will mean the repeal of s. 157, CA which provides that “A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office”, the general principles will operate together with the specific statutory provisions which we have reviewed and propose to refine as set out in this chapter.

RECOMMENDATION 3.6

The CLRFC recommends the adoption of UK’s statutory restatement of the general principles for directors, subject to adaptation to suit Singapore’s context.

3.6 Use of Information and Advice

3.6.1 We recognise that directors may rely on information prepared by and received from professionals and experts, and recommend that they be accorded protection for reasonable reliance of such advice. S. 107 of the New Zealand draft legislation11 would be a model worth adopting.

RECOMMENDATION 3.7

The CLRFC recommends that directors be accorded protection for reasonable reliance on advice and information from professionals and experts along the lines of the Section 107 of the New Zealand draft legislation.

3.7 Directors’ Duties and Liabilities on the Consent

3.7.1 The UK Steering Committee, in its Final Report, recommended that the form which directors sign to acknowledge their duties on appointment, be revised to focus the minds of directors on their duties and liabilities12. In the UK White Paper on Modernising Company Law, the UK government proposed that all new directors should receive plain language guidance summarising the main legal requirements placed on directors13.

3.7.2 In Chapter One, we recommended retaining the requirement for directors to give their consent to act when the company is incorporated. The CLRFC is of the view that it would be useful to remind a director of his duties and liabilities at the point of giving his consent. We recommend that a summary account of directors’ duties and liabilities be inscribed on the director’s consent to act.

RECOMMENDATION 3.8

The CLRFC recommends that a summary account of directors’ duties and liabilities be inscribed on the director’s consent to act.

4. RETENTION AND REFINEMENT OF EXISTING STATUTORY DUTIES

11 Report No. 9 of the New Zealand Law Commission, Company Law: Reform and Restatement (1989)12 Modern Company Law for a Competitive Economy - Final Report, Volume 1, Annex C (Statement of Directors’ Duties – Draft Clause and Schedule and Explanatory Notes), Page 349, Explanatory note 4, The Company Law Review Steering Group, June 2001.13 UK White Paper on Modernising Company Law, Volume I, Part II, paragraphs 3.16 and 3.17

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4.1 General Duty to Disclose Interests in Contracts

4.1.1 We recommend retaining s. 156, CA which prescribes a disclosure regime for “Disclosure of interests in contracts, property, offices, etc”, but extending it beyond contracts to include “transactions”.

4.1.2 S. 156(8), CA extends the disclosure obligation of directors to require disclosure where members of the director’s family have interests in contracts with the company. However, s. 156, CA does not provide a definition of “family” for the purposes of such disclosure. We would recommend clarifying the position by providing a new definition in s. 156, CA which corresponds to the definition provided in s. 163(5), CA. On the ground that the other directors in the company are already aware of the interest, we see no reason to adopt in Singapore the further recommendations in the UK, regarding the concept of a register of directors’ interests and the need to provide a defence for non-disclosure.

RECOMMENDATION 3.9

The CLRFC recommends extending the scope of Section 156 of the Companies Act beyond “contracts” to include “transactions”. The definition of “family” in Section 156(8) of the Companies Act should be aligned to the definition provided in Section 163(5) of the Companies Act.

4.2 Payments to Directors

4.2.1 We note the recommendation in the UK that covenanted payments to directors, i.e. all predetermined sums other than pensions in respect of past services should not require shareholder approval. In Singapore, this has effectively been the same result arrived by the Court of Appeal in Grinsted v Brittania Brands [1993] 3 S.L.R. 157. We accordingly do not recommend any further revisions to s. 168, CA.

4.2.2 We confirm the value of s. 169, CA in requiring single item disclosure for shareholder approval of emoluments to directors as a measure of continuing accountability and transparency.

4.2.3 We note that the Corporate Governance Committee has recommended the disclosure of directors’ emoluments in listed companies, through the disclosure of a series of tiered levels of payment in lieu of exact amounts for each director. This is intended to provide some degree of confidentiality. S. 164A, CA provides another means of disclosure relating to directors’ emoluments and other benefits upon the requisition of members representing either 10% in number or 5% in shareholdings.

RECOMMENDATION 3.10

The CLRFC recommends no change to Section 168 of the Companies Act and affirms the requirement for single item disclosure for shareholder approval of the provision or improvement of emoluments to directors under Section 169 of the Companies Act.

4.3 Loans to Directors

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4.3.1 We would recommend clarification of s. 162(1)(b), CA to provide that the housing loan permitted thereunder be confined to the home occupied or to be occupied by the director, and should not be extended to housing loans for multiple homes or for investment. In the context of Singapore’s open economy and the need to provide housing for expatriate or new entrants, it is desirable to enable such loans to be made within the controls of s. 162, CA.

RECOMMENDATION 3.11

The CLRFC recommends that Section 162(1)(b) of the Companies Act be amended to clarify that the housing loan permitted thereunder be confined to the home occupied or to be occupied by the director, and should not be extended to housing loans for multiple homes or for investment.

4.4 Disclosure by Nominee Directors

4.4.1 It was suggested that a provision be introduced in the CA to recognise the reality underlying the appointment of nominee directors and, in particular, the issue of nominee directors making available corporate information to their nominators. The UK Steering Committee has preferred to leave this area to be developed by the courts.

4.4.2 We are inclined to clarify and give statutory effect to the position of nominee directors in Singapore by adapting the New Zealand model. S. 145, New Zealand Companies Act 199314 expressly permits such disclosure, subject to the fulfillment of several prescribed conditions. In essence, the New Zealand provision allows for disclosure of information by the nominated director to his nominating shareholder in accordance with whose directions or instructions the director is accustomed to act, provided, inter alia, that the disclosure is entered into an interests register and that it does not put the interests of the company in jeopardy. We recommend that, in lieu of a disclosure in the director’s interests register, such disclosure should be minuted in the relevant board minutes.RECOMMENDATION 3.12

14 S. 145 of the New Zealand Companies Act 1993 provides:“Use of Company Information(1) A director of a company who has information in his or her capacity as a director or

employee of the company, being information that would not otherwise be available to him or her, must not disclose that information to any person, or make use of or act on the information, except:(a) For the purposes of the company; or (b) As required by law; or (c) In accordance with subsection (2) or subsection (3) of this section; or (d) In complying with section 140 of this Act.

(2) A director of a company may, unless prohibited by the board, disclose information to:(a) A person whose interests the director represents; or (b) A person in accordance with whose directions or instructions the director may be

required or is accustomed to act in relation to the director's powers and duties and, if the director discloses the information, the name of the person to whom it is disclosed must be entered in the interests register.

(3) A director of a company may disclose, make use of, or act on the information if:(a) Particulars of the disclosure, use, or the act in question are entered in the interests

register; and (b) The director is first authorised to do so by the board; and (c) The disclosure, use, or act in question will not, or will not be likely to, prejudice the

company.”

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The CLRFC recommends recognising the position of nominee directors by permitting them to disclose information to their nominating shareholder, provided it does not put the interests of the company in jeopardy and that such disclosure is minuted in the relevant board minutes.

4.5 Indemnity for Directors

4.5.1 We propose to update s. 172, CA and adopt the extended coverage of s. 310 of the UK Companies Act 1985. We also propose replacing s. 391, CA with s. 727 of the UK Companies Act 1985, thus reversing the approach of the Singapore Court in Hytech Builders v Tan Eng Leong [1995] 2 SLR 795, which decided that relief under this provision was only available for a claim for damages and not for account of profits against a director. By contrast, in Coleman Taymar v Oakes [2001] 2 BCLC 749, where the company elected to claim an account of profits rather than damages for breach of fiduciary duty, it was held that s. 727 of the UK Companies Act 1985 (which is materially the same as s. 391, CA) allowed the director to seek relief from liability. The Chancery Court refused to follow the decision in Hytech, which was cited to the court, stating that a liability to account was just as much a liability as one to pay damages. We believe that relief should be available even where the claim against the director is for an account of profits and that s. 391, CA be amended to provide that “liability” in the context of s. 391, CA includes a liability to account for profits made.

RECOMMENDATION 3.13

The CLRFC recommends that Section 172 of the Companies Act be updated to incorporate the extended coverage offered in Section 310 of the UK Companies Act 1985. The Committee further recommends replacing Section 391 of the Companies Act with Section 727 of the UK Companies Act 1985 and that the definition of “liability” in the context of Section 391 of the Companies Act be redrafted to include a liability to account for profits made.

4.6 Decriminalisation and Remedies for Breach of Directors’ Duties

4.6.1 We recommend a total review of the CA with the objective of decriminalising those provisions where civil and regulatory sanctions would be sufficient.

4.6.2 While we note the concerns expressed by some public respondents that decriminalization may encourage misconduct, we are of the view that a number of our current criminal sanctions can be eliminated without affecting the integrity of our business environment. We recommend the continuance of criminal penalities for egregrious and fraudulent misconduct. Several current criminal sanctions should be eliminated, as they are traps for the unwary. For example, there does not appear to be a compelling need to prescribe criminal sanctions for directors who fail to acquire their shareholding qualification as may be prescribed by a company’s articles. It is sufficient that such director vacates office for failure to do so. Accordingly we recommend the repeal of s. 147(4), CA.

4.6.3 The UK Steering Committee is seeking to codify the civil remedies available in relation to breach of directors’ duties. In the UK White Paper on Modernising Company Law, the UK government announced its support should a workable scheme be devised, on the

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codification of civil remedies available in relation to breach of directors’ duties15. To deter potential wrongdoers and help improve compliance, the UK government is also considering having a public register of convictions drawn to the attention of the public and shareholders16. When the UK codification is released, we recommend that it be adopted in Singapore subject to adaptation.

RECOMMENDATION 3.14

The CLRFC recommends an overall review of the Companies Act with a view to eliminating criminal sanctions for such areas where civil or regulatory sanctions are sufficient. The CLRFC further recommends that the UK codification of civil remedies, when released, be adopted in Singapore subject to adaptation.

4.7 Relationship between the Board and the General Meeting

4.7.1 We recommend the adoption of the statutory restatement of the distribution of powers between directors and general meeting in the following model used in s. 198A of the Australian Corporations Act 2001: “(1) The business of a company is to be managed by or under the direction of the directors. (2) The directors may exercise all the powers of the company except any powers that this Act or the company’s constitution (if any) requires the company to exercise in general meeting.” This will override article 73 of Table A, Fourth Schedule, CA which provides that management powers are also subject to “such regulations, being not inconsistent with the aforesaid Regulations or provisions, as may be prescribed by the company in general meeting.”

4.7.2 In the Singapore decision of Credit Development v IMO [1993] 2 SLR 370, on a construction of article 73 of Table A, Fourth Schedule, CA, it was held that an ordinary resolution of shareholders in a general meeting may exercise some of the powers given to the directors. The holding in Credit Development takes a different approach from UK and Australian cases (now clearly backed by the slightly different articles they have and also provisions like s. 198A, Australian Corporations Act 2001) which give management more autonomy. While the decision in Credit Development is useful in those exceptional cases where the majority shareholder does not control the board, it may not be necessary with the re-statement of directors’ duties that has been recommended, and in particular, the re-emphasis on the duty of directors to exercise their powers for proper purposes.

RECOMMENDATION 3.15

The CLRFC recommends a statutory restatement of the distribution of powers between directors and general meeting along the lines of Section 198A of the Australian Corporations Act 2001.

5. SHAREHOLDER RIGHTS

15 UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 3.1816 UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 6.24

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5.1 Limitation of Majority Rights

5.1.1 Barring unfairly prejudicial conduct for which minority shareholders may seek court remedies under s. 216, CA, shareholder decisions are properly effected and the minority bound provided they have been taken by the prescribed majority votes of shareholders. The UK Steering Committee has recommended that the case law imposing limits on majority rule in the context of alterations of articles of association or alteration of class rights, be statutorily codified. This would require a restatement of the common law position, which in the UK is represented by cases such as Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656 (CA). The UK White Paper on Modernising Company Law proposed including an “entrenching provision”, stating that certain specified provisions in the constitution may not be altered except by unanimity or by a greater majority than the 75% needed for a special resolution; or unless other special conditions are met. The entrenching provision may be inserted into the company’s constitution on formation, or afterwards if all the members agree. It may also be removed or altered, but only if all the members agree17. We note that in Australia, the courts have added a further restriction to majority shareholder rule by requiring shareholders to exercise their powers to alter the articles of association for a proper purpose18.

5.1.2 The UK Steering Committee has also recommended that in the context of shareholder resolutions to ratify or condone wrongs, such resolutions are effective, provided that the votes of members with an interest or subject to the substantial influence by a person with an interest in the wrong are to be discounted.19 We would endorse such an approach but note the difficulty of defining substantial influence.

RECOMMENDATION 3.16

The CLRFC recommends the adoption of the recommendation in the UK Steering Committee’s Final Report to statutorily impose limits on majority rule in the context of alterations of the articles of association or alteration of class rights. The CLRFC also recommends that shareholder resolutions to ratify or condone wrongs be effective, provided that the votes of members with an interest or subject to the substantial influence by a person with an interest in the wrong have been discounted.

5.2 Passing of Resolutions at General Meetings

5.2.1 The CA provides for physical meetings to be held and for resolutions to be passed at the meetings. Unanimous circular shareholder resolutions may be effected unless the CA specifically prescribes that a meeting be held e.g. s. 184, CA.

5.2.2 We have, in Chapter One, recommended that private companies be permitted to elect to have circular resolutions passed by prescribed majorities in lieu of holding physical meetings. One respondent suggested that we should empower a single member to demand a physical meeting. The CLRFC notes that the UK government has, in the White Paper on Modernising Company Law, indicated that such an approach has “serious disadvantages”20. On balance, we are of the view that the interests of minority shareholders can be protected by 17 UK White Paper on Modernising Company Law, Volume I, Part III, draft clause 2118 Gambotto v WCP Ltd (1995) 182 CLR 432 (High Court of Australia) but see Re Advance Bank of Australia (No.2) (1997) 23 SCSR 513 at 53219 Modern Company Law for a Competitive Economy – Final Report, Volume 1, Chapter 7, Page 170, Para 7.60, The Company Law Review Steering Group, June 2001.20 UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 2.12

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statutorily empowering shareholders (representing at least 5% of the outstanding ordinary shares) the ability to demand a physical meeting.

5.2.3 The question remains whether private companies should in any event be required to convene at least one annual general meeting, whose minimum business is set out in s. 175, s. 201 and article 46 of Table A, Fourth Schedule, CA, at which accounts are to be laid and directors and auditors appointed and dividends declared. The profit and loss account and the balance sheet are laid before an annual general meeting as required by s. 201, CA. Currently, S. 366A and s. 379A of the UK Companies Act 1985 allow private companies to elect by unanimous agreement to dispense with the holding of annual general meetings. This is to enable companies where all shareholders are also directors to dispense with the formality of an annual general meeting, where they so decide. The UK has further relaxed its existing requirement for private companies to hold an annual general meeting. The UK White Paper on Modernising Company Law states that the Companies Bill will remove the requirement for private companies to hold annual general meetings which are, for most companies, “an unnecessary formality that carries out no business of substance”21. As a starting position, we recommend the adoption of s. 366A and s. 379A of the UK Companies Act 1985 for private companies in Singapore.

5.2.4 We reviewed s. 186, CA, which requires companies to lodge resolutions (both special and ordinary) and agreements binding any class of shareholders with the RCB. Whilst there continues to be a public interest in the filing of special resolutions, some questions have been raised as to whether the public interest to require the filing of “resolutions or agreements” relating to classes of shareholders would require the filing of all shareholder agreements, which inherently apportion shareholder rights amongst the parties. For avoidance of doubt, we recommend the deletion of the expression “or agreements” in s. 186(1)(b), CA.

RECOMMENDATION 3.17

The CLRFC recommends adopting Sections 366A and 379A of the UK Companies Act 1985, which allow private companies to elect by unanimous agreement to dispense with the holding of annual general meetings. For purposes of clarification, the CLRFC further recommends the deletion of the expression “or agreements” in Section 186(1)(b) of the Companies Act.

5.3 Voting at General Meetings

5.3.1 We have considered the proposals to permit companies to elect to have electronic voting procedures. There are no impediments under the CA to electronic voting should any company wish to adopt and prescribe such voting procedures in its articles of association.

5.3.2 The Corporate Governance Committee has observed that the default requirement in the CA prescribes voting by physical attendance (whether of the registered shareholder or his nominated proxy) and that telephonic, electronic or other modes of absentia voting would be possible where specifically provided in a company’s articles of association.

5.3.3 The Disclosure and Accounting Standards Committee has also observed that the CA should be medium neutral in approach as to how companies, especially listed companies, release their financial results and annual reports to shareholders. This would allow companies

21 UK White Paper on Modernising Company Law, Volume I, Part II, paragraph 2.11

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to release financial and corporate information via the Internet. We endorse this observation with respect to the announcement and release of financial and other information as may be prescribed by the SGX. The SGX should be the agency to prescribe rules and procedures governing the use of web-casts and dial-ins for the disclosure of information.

5.3.4 With respect to statutory reports, we would recommend that electronic distribution be permitted, together with printed hardcopies to be made available to members as they may require. The analogous concept is s. 203A, CA which permits the distribution of summary financial statements but reserves the entitlement of members to receive full financial statements upon request. This elective approach which enables shareholders who wish to continue to receive printed hard copies is consistent with the approach in other jurisdictions. The UK takes this approach for the distribution of accounts and annual reports, summary financial statements and notices of meetings22.

RECOMMENDATION 3.18

The CLRFC recommends that the Singapore Exchange should be the agency to prescribe rules and procedures governing the use of web-casts and dial-ins for the disclosure of information. The CLRFC further recommends that the Companies Act be amended to provide for the electronic distribution of statutory reports to shareholders and for hardcopies to be available to shareholders who require them.

6. ACTION BY MINORITY SHAREHOLDERS

6.1 The Company’s Constitution and Personal Rights

6.1.1 The UK Steering Committee Final Report affirmed the preference for the retention of the contractual character of the constitution instead of a statutory replacement, which is the existing position in s. 39, CA23. It modified its final recommendations relating to enforcement by proposing a different approach, namely that all obligations imposed by the constitution should be enforceable by individual members both against the company and other members, unless the contrary was provided in the constitution or unless the breach in question was trivial or the remedy fruitless.24 The latter would empower the courts to exclude vexatious claims. We would endorse the final recommendations of the UK Steering Committee for adoption.

RECOMMENDATION 3.19

The CLRFC recommends adopting the recommendation of the UK Steering Committee that the contractual character of the constitution be retained – i.e. all obligations 22 “Electronic Communications for Companies: An Order under the Electronic Communications Bill”, a consultative document from the UK Department of Trade and Industry, February 2000.23S. 39(1), CA provides as follows:“Subject to this Act, the memorandum and articles shall when registered bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles.”24 Para 5.71, “Modern Company Law for a Competitive Economy – Completing the Structure”, a consultation document from The Company Law Review Steering Group, November 2000, proposes that these rights should include: “(the rights) to be entered in the register of members, to transfer shares; to vote and participate in meetings, to receive dividends properly declared and determined distributions and to pre-emption should be defined as personal, together with any other right breach of which gave rise to direct harm to the member rather than not indirect, or collective, harm to the company as a whole.”

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imposed by the constitution should be enforceable by individual members both against the company and other members, unless the contrary was provided in the constitution or unless the breach in question was trivial or the remedy fruitless.

6.2 Remedies for enforcement of Breaches of Directors’ Duties and Derivative Actions

6.2.1 We await the follow up recommendations and draft legislation in the UK on the remedies for enforcement of breaches of directors’ duties, as well as proposed improvements to the derivative actions in the UK. Accordingly, we make no recommendations now, until the UK provisions are available for review and consideration in Singapore.

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