Securities and Financial Services Regulation
Citation | (2021) 22 SAL Ann Rev 748 |
Publication year | 2021 |
Date | 01 December 2021 |
27.1 The eclectic nature of securities regulation can be seen in the selection of cases discussed in this Annual Review. There were few traditional Singapore cases involving insider trading or prospectus disclosure1 but important ones about a restructuring of a business trust in the US which concerned a Singapore real estate investment trust (“REIT”), Eagle Hospitality Trust, as well as a case dealing with an old company law principle that prevents a shareholder from claiming for damages for loss to its value of shares while it has not rescinded the contract through which it purchased those shares. Both show the difficulties of applying corporate and securities laws to entities which have some but not all the attributes of the modern-day registered company.2
27.2 It has been argued elsewhere that there is now renewed conflict between shareholders and creditors given the amount of share repurchases and dividends paid to shareholders even when a company may not be doing well.3 Where the former is concerned, previous Annual Reviews examined both the High Court and Court of Appeal decisions in Enterprise Fund III Ltd v OUE Lippo Healthcare Ltd4 which had held
27.3 The world also waits with bated breath the UK Supreme Court judgment in BTI 2014 LLC v Sequana7 (“BTI”) which has heard a drawn-out appeal from the Court of Appeal decision that a dividend paid to a holding company by its subsidiary when the subsidiary had a large contingent liability for environmental clean-up costs was a conveyance at an undervalue intended to defraud creditors even though the subsidiary was not insolvent at that time. In that case, the subsidiary became insolvent only ten years after the dividend payment, but the Court of Appeal also held that its directors, whose duty is to act in the best interest of the company, had to take into account creditor interests at the time where there was a “real, as opposed to a remote, risk of insolvency”,8 which was not the case here. In any case, that duty did not give rise to any right on the part of creditors to bring an action against the directors. Any wrong caused by the wrongful payment was to the company, and it was the proper plaintiff to bring an action against the directors. It has been highlighted9 that Rose J at first instance in BTI had acknowledged that there may have been a separate duty owed by directors under the proper purpose rule that may have been of assistance to the claimants, but this was not followed up by counsel in the Court of Appeal.
27.4 COVID-19 has tipped the balance even further in favour of shareholders in many countries with, for example, the suspension of wrongful trading rules which are intended to stop a company incurring further debts when there is no reasonable possibility of repaying them.10 As the leading UK corporate law academic Paul Davies has said, however, “continued trading in the vicinity of insolvency might be absolutely the right thing”.11 At the same time, in Australia, the continuous disclosure rules for listed companies have been relaxed due to COVID-19. In May 2020, the federal government introduced the requirement that listed companies would only be liable if they knew or were reckless or negligent with respect to whether information would, if it were generally available, have a material effect on the price or value of their securities. Then, in December 2020, the Australian Parliamentary Joint Committee Report recommended that this change be made permanent to align the standards with those in the US and UK. Their continuous disclosure regime is otherwise based on what the reasonable investor needs to know regardless of the issuer's state of mind, but with COVID-19 this was seen to set too high a standard. Singapore had studied the extant Australian position during the drafting of the Securities and Futures Act 200112 (“SFA”) in 2001 and the initial consultation bill had a somewhat similar position. However, as enacted in 2002, s 203 of the SFA set the standard for civil penalty or liability as one of negligence, and criminal sanction fraud or recklessness. While this shows that so far the right balance has been obtained, and COVID-19 has increased the imperative (rightly so) to preserve existing businesses, the Ministry of Law13 has said that they are monitoring the balance to make sure that it is maintained in the longer term. Too much protection for management, especially in insider-type companies where they are tied to the controlling shareholder, can create moral hazards.
27.5 It may be too simplistic to say that correlation is not causation, as there is clearly increased probability that the bond defaults that are being witnessed everywhere has some link to these changes. This leads to bond workouts and restructurings as haircuts and variation of bondholder
27.6 Where the restructuring of REITs and business trusts (as opposed to companies) are concerned, however, the issue has been with respect to jurisdictional basis for such schemes. It is ostensibly O 80 r 2 of the Singapore Rules of Court17 (“ROC”) or Pt 64 of the UK Civil Procedure Rules18 which gives the court supervisory jurisdiction over trusts. In the restructuring of Soilbuild, however, at the court hearing approving the scheme, Vinodh Coomaraswamy J reportedly expressed “great interest in a separate question as to where the legal basis of a REIT trust scheme can be found” and said that it was “mindful of the fact that (it had) doubts about the basis on which the rights of unitholders can be expropriated, even under a trust scheme”.19 This was so even though in the earlier decision of Re Croesus Retail Asset Management Pte Ltd,20 the High Court analogised the listed business trust there with the corporate form for restructuring purposes and said that it was “apparent that the proposed orders largely paralleled that in an application for a scheme of arrangement under section 210 of the Companies Act”.21
27.7 While this issue has not been fully resolved in the Singapore appellate courts, useful guidance can be gained from the Delaware
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