Citation(2005) 17 SAcLJ 52
Published date01 December 2005
Date01 December 2005

This article surveys the recent cases that have brought a welcome rationalisation of the content of directors’ duties in Singapore, in particular the recognition of independent ratification. It is submitted that two areas of further development remain: first, the need to move the articulation by the courts that they should not second-guess management decisions to a more formal business judgment rule and second, with the recent disclosure problems in our capital markets, a need to recognise a duty that is owed to future shareholders.

I. Introduction

1 Issues of directors’ duties have remained relatively dormant in Singapore until recently. The textbooks continue to refer mainly to a duty to act bona fide in what they consider to be the best interests of the company, the core of which is the duty to the shareholders as a whole. Professor Walter Woon’s Company Law,1 for example, lists under the “Fiduciary Duties” of directors first, the requirement to act in good faith in the company’s interests and only subsequently, the proscription against conflicts of interest. It is possible that the former is not even a fiduciary duty, which consists arguably of just the negative “no-profit” and “no-conflict” rules.2 In contrast, and translated into the language of modern-day

business, the duty of good faith requires directors to positively “maximise shareholder value”, which has, probably mistakenly,3 encouraged them to take a short-term view of their businesses.4 The immediate danger with, and advantages of, this focus (seemingly subjective) on one constituency within the corporate structure is that it overlooks the other extant duties of directors, namely the duty of care and skill, fiduciary duties, and the duty to exercise the powers for proper purposes.5 But the concern of this article is more with how the use of independent ratification or approval facilitates the subjective good faith

standard. The article then goes on to discuss the situations where ratification or approval is not forthcoming or appropriate, and suggests a formal business judgment rule to replace the no second-guessing rule that has been developed by the courts here. It then goes on to discuss the problem that directors face as to whose interests they should further when, say, the shareholders have dissimilar interests. This is a particular problem in the capital markets where the disclosure rules (and their contravention) are such that one generation of shareholders may benefit at the expense of another.

II. The statutory derivative action, ratification and business judgments

2 The statutory derivative action was introduced in Singapore in 1993.6 This has now resulted in a number of decisions directly addressing the core content of directors’ duties in Singapore, which as we shall see, has rationalised law and practice in the area. But it has taken some time for these actions to materialise, presumably because there was only one previous example of statutory intervention, namely Canada.7 A search by Assoc Prof Pearlie Koh of local cases from 1993 to 2000 revealed only seven reported decisions where a company sued a director for breach of a duty owed to it (compare this with the number of shareholder oppression actions).8 Since then, there have been numerous additions to the corpus of cases interpreting s 216A of the Companies Act (Cap 50, 1994 Rev Ed). Yet, there are still a few remaining signs that courts do not always favour a derivative action, given that it usually means that the majority are being dragged against their wishes into a costly action that may eventually indirectly benefit that same majority, through a rise in the value of their shareholding, more than any other constituency within the company. In Pang Yong Hock v PKS Contracts Services Pte Ltd,9 for example, the court preferred to wind up the company rather than sanction a derivative action under s 216A. It appears, however, that the tide cannot be turned, particularly given that the statutory derivative action has now also been

adopted in Australia10 and New Zealand,11 and has now been firmly proposed on numerous occasions in the UK.12

3 There is something about how the statutory derivative action has developed that partly indicates where directors’ duties themselves are again headed. This concerns the additional factors to be considered by the court under s 216B(1) in deciding whether to permit a s 216A action. Unlike the traditional common law derivative action, where “fraud on the minority” has been linked to the question of whether the wrong has been ratified by the shareholders, or perhaps whether it was ratifiable,13 it is the quality of ratification that is relevant here, as a number of commentators have argued should be the case for the common law exception as well.14 This means that ratification by a majority of independent shareholders would be given more weight by the court in its determination of whether to permit a derivative action to proceed. This is indeed part of the current recommendation by the Company Law Review Steering Committee (“CLRSG”) for the proposed statutory derivative action in the UK, although initially the Law Commission there had taken the view that ratification in this context should be as efficacious as it is at common law in barring a derivative action.15

4 The more nuanced approach is really gleaned from Smith v Croft (No 2)16 where Knox J attempted to discern whether the wrongdoers were in control by looking at the wishes of the independent shareholders to decide whether to permit a derivative action to proceed. He thought that even if an act was unratifiable, a decision not to sue could still legitimately be taken by a majority of the independent shareholders. And it is really a throwback to Prudential Assurance Co Ltd v Newman Industries Ltd (No 2),17 where Vinelott J in deciding whether the fraud on the minority exception to Foss v Harbottle had been satisfied, attempted to identify the proper decision maker that could decide what was in the best interests of the company regarding the corporate action. He thought that:18

[I]f the persons against whom an action might be brought do not control the company there is no obvious limit to the power of the majority to resolve in general meeting to condone the injury to the company or not to pursue the action whatever may have been the act or transaction giving rise to the cause of action and whether fraudulent or not.

While the CLRSG evidently now prefers to utilise a principle of independent shareholder voting, after taking into account feedback to its proposals in an initial consultation paper,19 it proposed something very similar to s 216B, which gives greater discretion to the court, but which will take into account the independence of ratification (or decision not to sue — in contrast it is not clear whether this is relevant under s 216B) rather than having it as a conclusive factor.20

5 If the non-conflicted and independent shareholders can be isolated, a court would then likely give weight to their decision and would not scrutinise it except to see perhaps that it was properly informed.21 Except where it comes to the alteration of articles of association, where the relational balance in the company between its members may be destabilised,22 members are not usually constrained from voting in their own interests.23

6 But what if the views of independent directors were, regardless of what the shareholders thought, that it was not in fact in the best interests of the company to proceed? The Court of Appeal in Prudential24 thought that the issue of standing should have been settled as a preliminary matter, which it believed would have required Vinelott J to have taken into account the fact that the board which was almost wholly disinterested (except for one director) had decided before the start of the action that the action was not in the best interests of the company.

7 In this context, s 216A requires the court to have regard to the company’s best interests. Although some cases in Canada simply treated this as the likelihood of the action’s success, Pearlie Koh has noted that this is not the case in Australia and Singapore. Instead, a type of business judgment rule clearly has a part to play in s 216A, as it would in the UK as the UK’s proposals for a statutory derivative action stand.25 In the context of s 216A, cases like Teo Gek Luang v Ng Ai Tiong26 have stated that:

[M]anagement decisions should generally be left to the Board of Directors. Members generally cannot sue in the name of [their] company.”

This point has been reiterated in Re Winpac Paper Products Pte Ltd27 citing Howard Smith Ltd v Ampol Petroleum Ltd28 for the proposition that courts do not second-guess the correctness of board decisions, there, concerning the raising of finance, but here, specifically, concerning litigation on behalf of the company. But Koh has argued that such a business judgment rule should have no part to play when the matter involves a conflict of interests, as compared to mere negligence, on the part of the wrongdoers who are usually directors. This point will be taken up below where we discuss directors’ duties more generally and outside the more complicated realm of ratification and derivative actions (where shareholders may have a larger role to play). It will also be argued there that there are preconditions for a proper business judgment rule to work (as compared to the weak form which it appears that our local courts are presently utilising), one of which is that the director or directors making the decision must be disinterested in its outcome. Koh would go further and say that these independent directors should not be permitted to decide on litigation matters involving conflicts of interests of their brethren.29 Arguably, the fear of some form of infection is too great in such situations.

III. Independence and waiving conflicts of interest

8 This...

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