Citation(2011) 23 SAcLJ 890
Date01 December 2011
Published date01 December 2011

Legal Strategies for Constraining Self-dealing in Concentrated Ownership Structures

Ownership in Singapore's family-owned companies is highly concentrated, giving rise to the agency problem of expropriation of minority shareholders by the controlling shareholders. The problem can be significant as self-dealing transactions in these family-owned companies reached approximately S$1.8bn in 2009/2010. This article analyses specific local cases of expropriation of minority shareholders to expose the doctrinal problem arising therein and also undertakes an evaluation of the governance strategies used by the Singapore Exchange's Listing Rules to police self-dealing transactions. An economic analysis of the relevant legal rules in terms of “property rules” and “liability rules” highlights the problem areas which are in need of reform.

I. Family-owned businesses in Singapore

1 Generally speaking, firms in Singapore are of two main types: either they are owned by the State, ie, government-linked companies, or they are owned by families or groups of families in partnership with varying amounts of involvement by private equity, hedge funds and venture capitalists. Amongst the 100 largest firms, 69 are family-owned firms. Assuming that the control block is held by a family or groups of families, the mean percentage of shares held by a control block and a blockholder (ie, a family member) are 69.52% and 16.22% respectively. The median for a control block and a blockholder is 51.14% and 6.18% respectively.

2 There is no singular definition of a family business, although experts in the field have used many different criteria to distinguish such

businesses, such as percentage of ownership, strategic control, involvement of many generations and the intention for the business to remain within the family. Astrachan and Shanker have created a pictorial representation of the family business as follows:

Source: Handbook of Research on Family Business 1

3 A family business thus could be any of these definitions. At the broadest, the outer-circle of the “bull's eye”, a family business exists where there is some family participation in the business in terms of setting strategic direction. At the middle layer, the business owner intends the business to remain in the family and the founder or his descendant plays a key role in running the business. At the centre ring, which is the narrowest definition, multi-generations are running the business with the parent/founder as chairman, two or three siblings at top management, one sibling with ownership but no day-to-day responsibility and younger cousins at entry-level positions.2

4 Essentially, family businesses can be categorised into different classes depending on the extent of direct involvement in the business by family members. In order not to adopt too inclusive a definition or be

unnecessarily exclusive, it is proposed to classify family businesses into three categories as follows:3

Types of Family Control


Strong family control

(a) Family owns majority stake and holds key executive positions such as CEO or CFO (b) Family owns majority stake and holds executive positions

Moderate family control

(a) Family owns majority stake and holds non-executive positions or no board seats (b) Family owns a minority stake of between 30% and 50% and holds board seats (c) Family owns a minority stake of between 10% to 29% but holds key executive positions such as CEO or CFO

Weak family control

(a) Family owns a minority stake of between 10% and 29% and holds non-executive positions (b) Family owns a minority stake of between 10% and 29% with no board seats

5 Out of 74 non-government linked companies, 69 are family-owned. The sample of 69 companies is categorised according to the criteria set out in the above table. The data is obtained from the annual reports of these companies in the year 2007/8. It is found that out of 69 family-owned firms, 32 are under strong family control, 32 under moderate family control and five under weak family control. Hence, 93% of family-owned firms in Singapore are under moderate to strong family control. The concentration of shares in these firms is high at an average of 69.52%!

II. Characteristics of Singapore's family-owned businesses

A. Family monopoly on strategy-making

6 A stark feature that emerged in studying Chinese business firms is the Chinese entrepreneur's urge to control. Sociologically, this urge to control could have arisen from mistrust, a sense of threat arising from the political turmoil of the last century in China, and the Chinese tradition of perpetuating the family name. A few anecdotes gathered from Redding's interviews with Hong Kong entrepreneurs would serve to highlight the almost instinctive culture of retaining control within the Chinese business firm:4

Hu: ‘I think the Chinese are rather obsessed with power, personal power, and the Chinese managers and owners are very afraid to let go and lose control.’

Hoi: ‘I think it has something to do with the family tradition. In the Western world, family is not a coherent factor, so companies are not handed down; for various reasons, conglomerates take place easier. But then particularly for the southern Chinese, the independent spirit of owning a company is somehow very strong. Conglomerates will not take place in Hong Kong because somebody will have to give up control.’

Hsia: ‘I have this idea of building a large corporation and to hand it over to my child. I just cannot accept the idea of having a professional man to take care of the company which I have started. I don't know why. I may even think of getting a son just for this purpose.’

7 Whilst the late Kwek Hong Png was still alive, control of the Hong Leong empire rested within a small group of family members who handled business associates and clients. Professional managers were employed for middle level management posts but family members were put in charge of the subsidiaries. Decision-making, particularly on financial matters, remained centralised.5 As one of the sons put it:6

My father just says ‘go there’ and we go. He will decide who to transfer, who to go where. He is the head of the family. Though I am given charge of an outlet, I still refer to my father and uncle for direction and instructions. My father and uncle visit each of the branches once or twice every week. At the end of the month, the family meets to report on sales and other matters.

8 Even after the company became a listed entity, one company director noted:7

The board of directors made decisions only in name. My father (owner and chairman) made most of the decisions: he only consulted the directors on technical matters …. It is slightly dictatorial; and even if he asks you, you may say something, but he will still go ahead with what he wants anyway.

9 Kwek Hong Png's successor, Kwek Leng Beng, was inducted into the family business for more than 30 years, and it was only when his father died that Leng Beng had the chance to prove his worth as a world-class deal-maker in acquiring hotels at bargain prices. As Fortune magazine described it: “Leng Beng was kept on a tight leash. It's gone now.”8 Even today, the Hong Leong group is controlled by senior family members working from a central management committee.9

III. Tunnelling

10 As outlined above, 93% of family-owned businesses in Singapore are under moderate to strong family control. The landscape of the Chinese family-owned businesses is littered with subsidiaries and

related companies spanning the length and breadth of South-east Asia but controlled tightly by core family members. It is inevitable that the family patriarch treats all his companies and subsidiaries as one big family corporation, and overwhelming control is exerted by the patriarch or core family members. Related-party transactions including self-dealing transactions are commonplace in these family corporate structures. A survey of interested-person transactions reported by the 69 family-owned companies in their 2010 and/or 2009 annual reports revealed that such transactions which were carried out without shareholders' mandate amounted to S$960,374,11710 and those carried out with shareholders' mandate amounted to S$957,106,457.11 Though these figures amounted to a small percentage of the total revenue of $305bn, in absolute terms they can be considered to be significant as they approached the $1bn mark.

11 As these companies are listed on the local stock exchange, the emerging problem is the expropriation of the interests of minority shareholders by the controlling shareholders. The expropriation of the interests of minority shareholders in emerging countries has been termed “tunnelling” by La Porta et al to denote expropriation of such interests in the Czech Republic where assets were removed through underground tunnels. Specifically, “tunnelling” refers to the transfer of resources out of a company to its controlling shareholder, who is often also a top manager. Such transfers may take the form of outright theft or fraud, which is illegal, or more insidious forms as in asset sales or transfer pricing on advantageous terms to the controlling shareholder, excessive executive remuneration, loan guarantees and the usurpation of corporate opportunities. In addition, controlling shareholders may expropriate value by insider trading, diluting minority positions through dilutive share issuance and minority freeze-outs.12

IV. The economics of self-dealing

12 Bernard Black has ably explained the pernicious effects of self-dealing on stock markets. The potential for self-dealing creates a “market for lemons” or an adverse selection problem.13 Investors do not know which insiders are honest and will not expropriate assets or interests of minority shareholders, and which are dishonest, and so they

will discount the price they will offer for the shares of a company. This...

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