THE SINGAPORE STOCK EXCHANGE GUIDELINES ON DIRECTORS’ DEALINGS — A NEW DIMENSION IN ITS REGULATORY ROLE

• Published date: 01 December 1991
• Author: T C CHOONG
• Citation: (1991) 3 SAcLJ 285
• Date: 01 December 1991

I. INTRODUCTION

The public has formed the impression that directors of listed companies seem able to time their transactions in their respective companies’ shares ahead of substantial price changes. Such public perception, regardless of whether it is misconceived, certainly threatens to corrupt the confidence of investors. In response, the Stock Exchange of Singapore Limited (“SES”) issued a set of guidelines on 7 June 1991 for the purpose regulating share trading by directors of listed companies as well as associated companies. By these Guidelines, it is apparent that SES hopes to convince investors that the stock market provides a level playing field.

From a regulatory perspective, the Guidelines open up a new dimension in SES’s regulatory role. First, other than requirments of disclosure, SES rarely impose upon directors of listed companies personal obligations to comply with SES’s listing requirements.1 Secondly, by imposing direct and express obligations on directors to observe and comply with the Guidelines2, the SES broke its traditional reliance on disclosure and now seeks to regulate the conduct of directors and other insiders in a substantive manner. As a result of such a move, a commentator observed that the SES has assumed the role of a guardian of Singapore’s corporate probity.3 Interestingly, this new dimension in the SES’s regulatory role also brought on a comment that the SES will have more gum than teeth in the enforcement of these Guidelines.4

The criticisms would have been valid if the Guidelines were made prior to 1986. Before then, the Listing Rules made by the SES were considered to be contractual in nature and lack statutory status. As such, there were inherent limitations in their enforcement. First, under the doctrine of privity, the “Listing Rules” were enforceable only by the parties to it, and

could only be enforced against the parties to it. A person could only come under an obligation to observe the Listing Rules if he was bound by contract to do so. The listing agreement was in substance a contract between a listed company and the SES. A director would not be privy to such a contract. In any event, the obligation to comply with the listing requirements was never made personal to a director. It also followed that an associated company which was an unlisted company was not under any obligation to observe the Listing Rules. Even in the case of a listed company, an Australian decision5 held that it was unnecessary, in the absence of express obligations imposed on a listed company by the relevant Listing Rules, to imply a term based on business efficacy that the listed company in question be held under an obligation to observe the listing requirements.6

Secondly, the SES’s remedies for enforcement were also limited in that “whilst the Exchange’s power to threaten, to suspend or delist may often provide an effective tool to enforce compliance with the Rules by listed companies, actual suspension or delisting of a company can damage the interests of those which many of the Rules are intended to protect.”7

However, it is submitted that the position has since changed with the enactment of the Securities Industry Act 1986 (“1986 Act”), which repealed and replaced the 1973 Act (“1973 Act”).8 Section 20 of the 1986 Act enables the Listing Rules to be judicially enforceable. In support of SES’s move to regulate directors’ dealings, it is timely to make an assessment of the enforceability of the Listing Rules and the Guidelines. If the Listing Rules and Guidelines are enforceable in law it would certainly strengthen SES’s confidence in its new role as a guardian of the probity of those in control of listed companies.

II. JUSTIFIABILITY OF SES’S ROLE AS CORPORATE OMBUDSMAN

Broadly speaking, investors who purchase shares of public listed companies knowing that other persons control them may be regarded as absentee owners. With increased securitization, the market place for

securities is becoming an arena where conflicts of interest between insiders and absentee owners are increasingly being sharpened. Unfortunately, the law is not able to respond to the additional tension and strain in this relationship brought on by the fact that the respective market positions of the absentee owners and insiders are never equal. The market situation merely offers new scope for insiders with superior knowledge and with substantial power over their own corporation, to operate the system to their own advantage.

Traditional company law principles which regard directors as trustees owing fiduciary duties are anachronistic. Unfortunately, legislation that has been put in place rendering insider trading a criminal offence has inherent limitations. Unfair and questionable market transactions often fall short of infringing the law. It should be realised that the nature of the problem is essentially one of ethics. What is needed in the marketplace is the presence of an enforcement agency capable of meeting investors’ demand for fairness.

A disclosure-based regulatory regime suffers from several shortcomings and is unable to respond to the fervent demands for fair play. First, it cannot prevent insiders who have enough corporate power to carry through an objectionable market transaction. Further, where regulatory rules have not kept pace with market malpractices compliance with disclosure requirements ironically legitimises unfair market transactions.

In contrast, it is significant to take note that in the United States a combination of factors led to the creation of a strong securities regulation regime that is effective in tackling fraudulent market dealings, insider trading and, most significantly, unfair market dealings by those in control of listed corporations.

As early as the 1930s, the enactment of legislation that was sensitive to investors’ demand for a level playing field, a strong Securities and Exchange Commission (“SEC”) and a supportive judiciary contributed to the creation of a regulatory regime that went far beyond disclosure and endorsed substantive regulation of the conduct of those in control of listed corporations. For example, Section 16 (b) of the 1934 Securities Exchange Act created a cause of action by which a corporation, or a security holder suing in the corporate name, might recover any profit realized by a director or substantial shareholder on short-term dealings in his corporation’s securities, regardless of whether there is any misuse of confidential information. Early this year, the SEC, pursuant to its rule-making power under the Securities Exchange Act, issued revised rules under Section 16

regarding short-swing trading by insiders.9 The detailed changes are perhaps outside the scope of this paper. However, in substance the revised rules imposed further reporting and other requirements on the sale and purchase of equity securities pursuant to employee benefit plans and compensation arrangements. In addition, Section 10 (b) of the 1934 Securities Exchange Act in broad terms prohibited the use of any fraudulent device or course of business which would operate as a fraud or deceit on any person, or the issue of any false statement, or the concealment of any material fact in connection with the sale or purchase of any security.10

For the purpose of this paper, it is instructive to trace the historical development of Section 10 (b) of the 1934 Securities Exchange Act and the derivative Rule 10b-5. (Rules made by the SEC for the enforcement of the main provisions of the Securities Exchange Act are named or numbered in accordance with the original Section number in the main Act.) Regardless of what the present position regarding Section l0b and Rule 10b-5 might be, it is interesting to note that since the 1940s much reliance had been placed on the Rule for regulating the conduct of corporate insiders including insider trading, misleading corporate publicity11 and even corporate mismanagement12. In 1946, a federal district court held that notwithstanding the absence of an express private right of action, rule l0b-5 provided a private remedy in the hands of injured investors.13 Building on this development, the SEC was able to bring, for the first time, a civil action on behalf of an injured class of investors pursuant to Rule 10b-5 in the landmark case of SEC v Texas Gulf Sulphur Co.14 This interventionist move by the SEC sent a clear signal that the SEC regarded the integrity of those in control of a listed corporation as a matter affected with so much public interest that individual shareholders could not be relied upon to assert their own legal rights.

The haplessness of the minority shareholders following the Pan El debacle is a poignant reminder of the regulatory gap that existed in Singapore’s regulatory regime. Preventive measures such as the establishment of audit

committees and the introduction of prudential regulation of the securities industry have since been introduced. However, the provisions of Section 20 of the 1986 Act hold greater promise in that in broad similarity to the US securities legislation the Section allows an external agency to intervene on behalf of hapless investors and shareholders. Briefly, Section 20 of the 1986 Act provides that the Monetary Authority of Singapore (“MAS”), as well as a securities exchange or an aggrieved person, may apply to the High Court for an order to compel observance or enforcement of rules or listing rules of a securities exchange. It is a thesis of this paper that Section 20 of the 1986 Act which came into force on 15 August 1986 has transformed the legal nature of the Listing Rules.

III. ENFORCEABILITY OF THE LISTING RULES AND THE GUIDELINES

A. The Definition of Listing Rules

As a preliminary observation, it is relevant to note that the Memorandum and Articles of the SES provide for three categories of rules. They are categorised as “Rules”, “Bye-Laws” and “Listing Requirements”. Rules and Bye-Laws...