Hurdles in requisitioning EGMs point to need for changes to law, say experts

Source: Business Times
Article Date: 10 May 2023
Author: Raphael Lim

This follows legal dispute between USP Group and its shareholders who had sought an EGM to remove directors of the company.

Recent developments suggest legislative changes are needed to smooth the path for shareholders requisitioning an extraordinary general meeting (EGM), market watchers told The Business Times.

Their comments come in the wake of a legal dispute between USP Group and its shareholders who had sought an EGM to remove directors of the company.

The High Court ruled last month that USP Group’s requisitioning shareholders did not have standing to requisition such a meeting, pursuant to section 176 of the Companies Act (CA).

Judicial Commissioner Goh Yihan said in a written judgment that he was “compelled” to conclude in this manner, even though he would have “preferred to allow the democratic process of USP Group to take its course”.

“I would also have preferred not to intervene to prevent shareholders or members from having a voice in the affairs of a company, except where absolutely necessary,” the judge wrote. “Unfortunately, despite these sentiments, ... I am compelled by the law to say that the requisitionists are not ‘members’ for the purposes of s176(1).”

S176 relates to the convening of an EGM upon requisition. If members holding 10 per cent or more of a company’s paid-up shares requisition a meeting, the directors must convene this meeting within two months of receiving the requisition.

Failure to convene a meeting gives the requisitioning members the right to call this meeting themselves.

In the case of USP, the requisitionists were beneficial owners of around 11 per cent of the company. But they were not considered “members” based on provisions in the CA and the Securities Futures Act (SFA), because the interest was held through nominee accounts at brokerages.

Robson Lee, partner at Kennedys Legal Solutions, called the judgment a “landmark decision”, with the provisions being interpreted by the court in great depth.

The ruling highlighted an “intrinsic lacuna”, or gap, in the way the legislation is drafted, he added.

JC Goh noted in the judgment that the terms “member” and “shareholder” are distinct, even if they are often used interchangeably.

Under the CA, a member is a person listed in the register of members kept by a public company. A shareholder, directly or indirectly, has an interest in the shares of the company.

Provisions under the SFA set out that only those who directly hold an account with the Central Depository are deemed members – not sub-account holders such as the requistionists.

The judge also found that there are no other means for the requisitionists to be recognised as members pursuant to s176 of the CA.

In 2007, the Ministry of Finance set up a steering committee to review the CA. The report by the committee said that consideration was given to whether beneficial shareholders should enjoy membership rights.

The report noted that provisions in the United Kingdom enable indirect investors to exercise membership, voting and requisition rights. These provisions were not adopted in Singapore, however, as the committee concluded they were unnecessary.

The judge said: “In light of the intentional step taken not to enfranchise indirect investors in the way done in the UK Companies Act 2006, the requisitionists cannot be deemed as ‘members’ for the purposes of s176(1) of the Companies Act by making the requisition notice on behalf of the brokerage houses and with the relevant authority letters.”

Corporate governance advocate Professsor Mak Yuen Teen of the NUS Business School expressed disappointment that the steering committee had not proposed amendments to the provisions previously. He noted that the committee had looked at the definition of members, and recognised that UK had changed the law at the time, but added: “The committee should have questioned why the UK changed the law… They (UK) must have recognised it disenfranchised shareholders; because if only members can requisition, then clearly, they would have the same issues our shareholders are finding here.”

Mak believes the CA should be amended to take into account the first principles on why such provisions are even present.

“The reason why we have sections 176, 177 and also 183…in our CA, clearly, is to allow shareholders who hold a significant enough stake – whether it is 5 per cent or 10 per cent – to be able to hold the board accountable,” he said.

“Once you agree that the spirit is you want to empower shareholders, clearly the spirit cannot be that we allow only people who are on the register of members to remove directors.”

Melvin Tan, chief executive officer of Hinterland Energy – one of the shareholders requisitioning the USP EGM – said in a LinkedIn post that there could be some flaws in the current system that may need to be addressed.

“Why can’t beneficial owners with shares held in financial institutions like banks and stockbrokers be allowed to requisition an EGM? As a financial hub, it is inevitable that many entities ... will hold the shares of public companies in custody,” he said.

He added that requisitionists should also not have to face a six-month wait to hold an EGM.

“We need to set the right tone for Singapore and our reputation as a global business centre,” he said.

Singapore Exchange Regulation (SGX RegCo) chief executive Tan Boon Gin noted in a column last month that boards should “seriously and objectively” consider requisitions and the proposed resolutions.

“While the requisition may be unwelcome, boards should consider the merits of the proposals from the perspective of the issuer and its shareholders as a whole,” he said. “A public dispute does not serve the interests of the issuer or its shareholders as a whole. Boards should seek to find common ground with the requisitionists. This may include taking on some of the suggestions proposed.”

The provisions allowing members to requisition an EGM come under the CA, however, and not SGX listing rules.

Kennedys’ Lee said amendments would be needed in both the CA and SFA.

“There has been considerable public disquiet (over) certain cases in which companies have simply sat on it and not convened an EGM,” he said, noting that shareholders who want to remove non-performing directors would now face another barrier.

Since April 2021, at least 13 SGX-listed companies have gone up against requisitionists seeking an EGM to remove directors, with varying degrees of success.

Most companies that encounter such challenges are small, with market capitalisations below S$100 million.

Apart from USP Group, other companies that have received requisitions in the past six months include ASTI Holdings, Kitchen Culture and Metech International.

Lee added that the relevant government agencies would need to consider this issue and propose amendments.

“The rightful body to amend such a provision in order to cure such an intrinsic defect should be Parliament, and that should be done soonest,” he said.

Acra hauls USP Group to court for not holding AGM

The Accounting and Corporate Regulatory Authority (Acra) is taking action against USP Group for failing to hold its annual general meeting (AGM) within four months after the end of its financial year.

In a bourse filing on Tuesday (May 9), USP Group said it received a letter from Acra on Apr 28 informing them of the charge against the company. A representative of USP Group will be required to appear at the State Courts on May 24 when the case will be mentioned.

USP Group said it is being charged under Section 175(4)(a) of the Companies Act for defaulting in holding its AGM within four months after the end of its financial year on Mar 31, 2022. Under the section, the company and every officer of the company who is in default shall be guilty of an offence and liable on conviction to a fine not exceeding S$5,000 and a default penalty.

The company said it is in the process of seeking legal advice and will provide shareholders with updates following the hearing.

Since October last year, USP Group has been battling with a group of shareholders who have been attempting to requisition an extraordinary general meeting (EGM) to remove the existing board of directors and appoint a new board.

The High Court ruled last month that the EGM notice was invalid as the requsitionists did not meet the definition of “members” under the Companies Act. Judicial Commissioner Goh Yihan said in a written judgement he was compelled by the law to rule in this manner, but added that it was unacceptable that USP Group was trying to disrupt the democratic processes of the company.