Directors should be required to say if they will take part in cash calls
The advantages of the regulators making this mandatory outweigh the disadvantages, and will help develop a more informed, more empowered investing public.
PANDEMIC-hit Singapore Airlines undertook a massive S$15 billion fundraising exercise earlier this year. Readers may remember the extensive media coverage and online ads promoting the rights issue, which was oversubscribed. To the surprise of many, only six of the airlines' nine directors took up their rights shares, and only one took up the bonds.
Given that the positive disclosure of a listed company's directors' intention to participate in a fundraising is not mandated by the securities regulations of Singapore, this incident raises an important corporate governance and ethical point: Should listed company directors - having made certain recommendations to shareholders - positively disclose their intention as shareholders to subscribe or not subscribe in a fundraising?
This is particularly important when considering directors are making recommendations to retail investors, many of whom do not have the technical knowledge, depth of experience or even familiarity with the relevant business that they do.
From the perspective of individual directors, the instinctive answer is that "it is nobody's business what I do as a shareholder". People often forget that directors who are also shareholders wear two hats, one of which is inherently personal.
While the Securities and Futures Act (SFA) mandates that directors announce any changes in their interest in securities, it extends only to factual changes and requires no disclosure of their intentions prior thereto.
People also often forget that directors of listed companies may have financial limitations to participate in the fundraising.
Can and should directors who are also shareholders so clearly delineate their roles?
Under common law, they are regarded as fiduciaries, which obligates them to act in the best interest of the companies under their charge. Singapore's Companies Act further prescribes that a director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office.
In this light, there is adequate case law to support the position that a director who is also a shareholder can only be considered to have acted in the best interests of his company by making the appropriate recommendation to the shareholders to participate in the fundraising, and if he so recommends the fundraising and chooses not to participate as a shareholder, then he can only be said to have been diligent in his duties if he so discloses.
As a guide and general rule to public offer of shares, Section 243 of the SFA provides that "all the information that investors and their professional advisers would reasonably require to make an informed assessment" must be in a prospectus.
In addition, the Singapore Exchange's listing manual requires an issuer to announce any information known to it concerning its group which is necessary to avoid the establishment of a false market or would be likely to materially affect the price or value of its securities.
Arguably, the information that a director who has recommended the fundraising but is not participating in it would fall under information required for an investor to make an informed assessment under Section 243 of the SFA, and a false market may have been created without the said disclosure.
The substance of the securities regulations governing the London Stock Exchange is largely similar to the Singapore Exchange. In terms of the issuer's duty to disclose information material to its shareholders, both Exchanges are guided by Principle 14 of the International Organisation of Securities Commission's Objectives and Principles of Securities Regulation, which states that issuers should ensure that there will be "full, timely and accurate disclosure" of material information to its shareholders.
However, both Exchanges diverge on the specific requirement imposed on the issuer's directors to make a statement of recommendation to the voting actions of its shareholders in the circulars proposing the rights issue. Rule 814(1)(j) of the Singapore Exchange's listing manual obliges the directors of the issuer to make the recommendation in consideration of the issuer's interests, whereas Rule 13.3.1(5) of the London Exchange's listing manual obliges the directors of the issuer to make the recommendation in consideration of the interests of the issuer's shareholders. This difference may not be significant in substance, but it is practically significant when one compares the practices of listed companies in the Exchanges.
Out of the 10 companies surveyed between July 28, 2018 and June 25, 2020, the board of directors of nine companies listed on the London Stock Exchange included their statement of intention to take up in full or in part of their entitlement under the proposed rights issue. This is so even if some of the directors are concerned about their financial capacity to participate in the fundraising.
In the Enquest PLC's prospectus dated Sept 7, 2018, it is observed that the board of directors were concerned that not all directors possessed the requisite funds to participate in the fundraising. Nevertheless, the board of directors of Enquest PLC disclosed that they intend, to the extent that they are able, to subscribe in full their rights under the rights issue.
Based on the foregoing, it is clear that it is a common practice among listed companies on the London Stock Exchange to disclose their directors' intention to participate in the proposed fundraising. Furthermore, this also shows that the disclosure of intention is widely recognised as material information for investors among the community of directors of companies listed on the London Stock Exchange.
Considering that such disclosures are not mandated by law, this practice demonstrates the ethical and responsible behaviour of the board of directors of listed companies on the London Stock Exchange to not merely ensure their compliance with the law, but to go above and beyond to assist their shareholders in making properly informed decisions.
It may not yet be a standard market practice in Singapore, but an ethical, responsible board should disclose all material facts relevant for a shareholder to make an informed decision; it appears that a personal decision which differs from the board's recommendation to the shareholders may be considered a material one under Section 243 of the SFA.
Going back to the securities regulations of Singapore, an issuer is obliged to provide the particulars of any undertakings from its substantial shareholders. The motivation of this statutory requirement of disclosure stems from its materiality as it can signal to other shareholders the level of support to the fundraising and the likelihood of the fundraising's success in achieving its objectives.
Since materiality of information is a key consideration in determining whether it warrants a disclosure, arguably, a disclosure of a listed company's directors' intention to subscribe or not subscribe to the proposed rights issue should be warranted.
Without a doubt, as compared to other shareholders, the company's directors command superior technical knowledge, depth of experience and familiarity with the relevant business that they manage. Their intention to subscribe or not subscribe to the proposed rights issue will be a better measure of the likelihood of success and level of support to the fundraising as compared to the undertakings of substantial shareholders. Thus, a disclosure of the directors' intention is as material as that of an undertaking from any substantial shareholders.
On the other hand, this places a disproportionate burden and pressure on directors to participate in the fundraising. The materiality of the disclosure of intention lies in its ability to signal the likelihood of success of the fundraising in achieving its objectives.
Every shareholder, including the directors of the company, are limited by their financial capacity to participate in the fundraising and it would not be uncommon for directors to be unable to confirm their intention to participate in the fundraising. Hence, the implementation of this requirement could place an unreasonable burden on the directors to procure funding to participate.
A LACK OF CONFIDENCE?
More importantly, such a disclosure can potentially mislead the shareholders. If directors of a company do not disclose their intention to participate, even if it is due to their personal financial limitations, this could easily be misconstrued by shareholders as a lack of confidence in the success of the rights issue.
These issues can be resolved with a properly constructed disclosure. In the example of Enquest PLC's fundraising, the directors of Enquest PLC underlined that the directors' intention to subscribe to the proposed rights issue is subject to their financial means. By doing so, the Enquest PLC directors would have informed the shareholders that they are confident of the success of the rights issue and may not participate due to their lack of financial means.
This eliminates the pressure on the directors to procure funding. Accordingly, a properly constructed disclosure would have the ability to achieve its primary aim of helping shareholders make a properly informed decision without the risks of burdening directors and misleading shareholders.
An irrevocable undertaking by a substantial shareholder cannot be withdrawn, while it is possible for the director's intention to participate in a fundraising to be withdrawn under certain circumstances (such as the lack of financial capacity).
Since the requirement for directors to disclose their intention is not exceedingly onerous as compared to the statutory requirement to disclose undertakings by substantial shareholders, I believe the requirement for directors to disclose their intention should be implemented.
The advantages of implementing this requirement far outweighs the disadvantages. It is high time for the securities regulators to consider its implementation to further uphold their objective of ensuring well-informed and empowered investors.
Even if this requirement is not implemented, the community of directors in Singapore could perhaps consider adopting the practices of listed companies on the London Stock Exchange from the perspective of a responsible and ethical board.
- The writer is senior partner at RHTLaw Asia LLP, and non-executive chairman of the RHT Group of Companies
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.