In last week's edition of Ask Stamford Law, we have looked at the rights of the minority shareholders in an unlisted company. In a situation involving a listed target company (the “Target”), the minority shareholders can avail themselves to a more comprehensive protection through a host of regulatory tools such as the Singapore Code on Take-overs and Mergers (the “Takeover Code”), the Listing Manual of the Singapore Exchange Trading Limited (the “Listing Manual”), and the Code of Corporate Governance (the “Corporate Governance Code”).
In a takeover or a potential takeover of the Target, the board of the Target (the “Target Board”), or the offeror or the potential offeror (the “Offeror”), may often discuss or carry on negotiations with the major shareholders of the Target without involving the minority shareholders. Generally, unless otherwise provided by way of shareholders’ agreements or the constitutive documents of the Target, none of the Target Board, the Offeror or the major shareholders of the Target, has a legal obligation to involve the minority shareholders in the negotiations or discussions, provided that they otherwise act in a manner which is consistent with the law, regulations, rules and guidelines (in particular, the rules set out in the Listing Manual).
Protection of the interests of the minority shareholders
This does not mean that the minority shareholders are left wholly without protection. In particular, the primary objective of the Takeover Code is to ensure fair and equal treatment of all shareholders in a takeover and merger situation. Some key measures of protection are discussed below:
Right to Mandatory General Offer
Where an Offeror, together with persons acting in concert with him, (i) acquires shares carrying more than 30% of the voting rights of the Target, or (ii) holds not less than 30% but not more than 50% of the voting rights and the Offeror or his concert parties, acquire in any period of 6 months, additional shares carrying more than 1% of the voting rights, the Offeror is required to extend a mandatory offer to all the other shareholders.
Equality of Information
Under the Takeover Code, the Offeror, the Target or their advisers are prohibited from making available information on a selective basis to some (and not all) shareholders. Information must be made equally available to all shareholders as nearly as possible at the same time and in the same manner. Shareholders must be given sufficient information, time and advice to enable them to reach an informed decision on the offer. More generally, material information which is likely to materially affect the price or the value of the securities is also required to be promptly disclosed under the Listing Manual.
Equality of Treatment
An Offeror is required to treat all shareholders of the same class in the Target equally. Minority shareholders can be assured that they will not be treated in a manner which is less favourable than the major shareholders. The Takeover Code prohibits an Offeror from striking special deals or arrangements concerning the acceptance of an offer with favourable conditions which are not being extended to all shareholders, save in the strictest circumstances and with the approval of the Securities Industry Council.
An action by either the directors or some shareholders of the Target, which is oppressive or found to be unfairly discriminatory or prejudicial against other shareholders may also be reviewed and remedied by the court under the Companies Act.
Independent Directors and Duty of Directors
All listed companies should have a strong and independent element on their board, with independent directors making up at least one-third of the board. This ensures that the Target Board is able to exercise judgment on its corporate affairs independently, in particular, from the management and 10% shareholders. In the context of a public takeover, minority shareholders are protected to the extent that the Target Board is duty-bound to obtain competent independent advice on an offer, and, unless otherwise conflicted out, to provide a recommendation to the shareholders on the acceptance or rejection of the offer made by the Offeror. The directors, in addition to their general fiduciary duty to act in the best interest of the Target, are also specifically required, under the Takeover Code, to have regard to the interests of the shareholders as a whole in advising the shareholders in a takeover situation.
Independent Financial Adviser
The Takeover Code additionally requires the Target Board to obtain independent advice from an independent financial adviser (the “IFA”) which will opine on the fairness and reasonableness of an offer. The directors’ recommendations will almost always make reference to the opinion of the IFA. Despite the fact that IFAs typically provide that their advice is made to the independent directors, the Takeover Code requires that the substance of the advice by the IFA to the independent directors must be made known to the shareholders. As such, it is clearly intended that such advice and the basis for the advice be accessible to all shareholders. Therefore, the possibility that the shareholders may nonetheless have a right of action against the IFA under common law for a breach by the IFA of its duty of care towards the shareholders cannot be wholly dismissed.
Given the large number of shareholders in a listed company, individual participation and consultation in negotiations can potentially result in procedural inefficiency. While the regulatory framework may seem to only offer protective rights, which when examined individually, are passive in nature, in a public takeover situation, these rights often collectively result in a multi-faceted and robust web of protection for the minority shareholders to ensure that the decision-making process undertaken by the Target Board, the Offeror and the major shareholders is fair and without prejudice to the rights of the minority shareholders.