INVESTOR lobby group Securities Investors Association (Singapore), or SIAS, announced this week that it will not hesitate to take errant companies to court - representing minority investors in class-action suits more commonly seen in jurisdictions like the United States.
The association's announcement begs the question: is such an action a viable alternative for minority investors here seeking to bring recalcitrant companies to heel? To answer that, we need to examine if such an action can be successfully brought about, if it will yield the outcome that investors desire, and if this will impact positively on Singapore's capital markets.
To begin with, class-action suits - or representative actions, which include class actions - are not often seen in our courts. Singapore is, by nature, not a litigious society; and it is even less common to have large groups of people pursuing similar legal redress against the same party.
As one litigation lawyer pointed out, there have been "only a handful" of such cases in the last decade.
But, while rare, representative actions have been pursued successfully in Singapore.
The best known would be the Raffles Town Club case. In 2000, some 5,000 members sued the club's shareholders for misrepresentation and breach of contract; they claimed it misrepresented to them that it was the most "prestigious private city club" in Singapore and demanded a refund of their $28,000 membership fees.
After a lengthy court battle, the members won the suit in 2005. The Court of Appeal awarded the claimants a total of $45 million in damages.
Perhaps less well known, but of greater importance, was the Treasure Resort case. In 2009, 202 ex-members of the Sijori Resort Club - represented by seven plaintiffs - sued the club's owner, Treasure Resort. They alleged they had been denied membership privileges after the club was sold by Sijori to Treasure in 2006.
The case was important because it laid out a comprehensive roadmap for representative actions in Singapore. Among various things, the Court of Appeal ruled in 2013 that:
- the case brought forth in a representative action will determine the rights of, and be binding on all claimants;
- not all interests of the claimants must be identical before the "same interest" requirement is met, but the claimants must share some common interests in relation to a substantial question of fact or law, and that this is to be determined on a case-by-case basis;
- the trial judge will have the discretion to refuse to permit a representative action from going forward, even after the "same interest" condition is met.
It is important for investors to note that no shareholder representative action has ever been undertaken here - so any such suit would be a test case. There will be procedural hurdles to overcome.
Benefits and downsides
There are benefits to undertaking a representative action - especially under the auspices of SIAS - as opposed to going it alone.
For one, because one would be banding together with other similarly aggrieved investors, legal costs are shared.
For another, having an investor lobby group like SIAS be the representative in such an action means SIAS will act as the leader in such an effort, helping to galvanise the others, liaise with the lawyers and coordinate other details.
SIAS's access to a reputable legal team and the association's experience in dealing with minority shareholder issues could also offer a considerable advantage over most retail investors' solitary efforts.
The downsides? Having to depend on others to move the process ahead. And, as in the case with any lawsuit, being involved in a possibly very time-consuming, unpleasant and long-drawn-out affair.
In terms of legal costs, SIAS has said that it is thinking of setting up a litigation fund, which members and minority investors - whether or not they are involved in the action - could contribute too. Depending on how padded this war chest gets, one could conceivably still be shelling out a substantial sum in legal fees.
And what if the outcome isn't as desired? As with all lawsuits, the end result of a representative action cannot be determined beforehand - no matter how good a legal team one has, or how deep one's pockets are, though these could help with the fight.
"Strength in numbers" does not necessarily mean a stronger case.
So, as with any lawsuit, minority shareholders intending to take action against a company or its board need to first determine the merits of their case. They should either seek independent legal advice, or work with SIAS and its lawyers to understand their case.
They will need to familiarise themselves with the legal process, and be prepared for how long it might take and how much it could cost. They should also build in contingencies and back-up plans, in the event the case does not unfold as they expect or hope.
There is also the broader impact to consider. Would a growing prevalence of representative actions - should investors increasingly favour them as a means of resolving shareholder disputes and other perceived cases of wrongdoing - be a good or bad development for capital markets here?
SIAS president and CEO David Gerald is not in favour of lawsuits becoming the preferred course of action for aggrieved minority shareholders. He's in favour of a more conciliatory approach - having investors meet the company's management and board, along with market regulators, to work out an acceptable solution in the interests of all parties. Mr Gerald believes that, "when you have acrimony in the capital markets, people will think twice about investing in our country".
There is some truth in that. Also of concern is the risk of payouts from such class actions ballooning into billions of dollars, as is not uncommon in the US.
To address such concerns, Singapore could take a leaf from the United Kingdom's book. The UK is gradually allowing its courts to hear class-action-style claims from groups of consumers seeking compensation from companies alleged to have practised anti-competitive behaviour, under its Consumer Rights Act 2015.
But, concerned that these claims could result in damages awards of the quantum seen in the US, "the regime has built in a number of safeguards against what are perceived to be the 'excesses' of the US system," competition law specialist Anna Morfey told the BBC recently.
Among these, is the fact that the losing party will typically be required to pay the winner's costs (acting as a deterrent to frivolous claims), that there will be no trebling of or "exemplary" damages, and no jury trials of these claims as there are in the US. This should ensure that damages awards really are compensatory and not windfalls for claimants, she said.
Managed carefully, having access to and a growing preference for representative actions might not be a bad thing. Some would even argue that it provides another check and balance for listed companies here.
This article was first published on April 21, 2016.
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