A Case for Shareholders’ Fiduciary Duties in Common Law Asia

A Case for Shareholders’ Fiduciary Duties in Common Law Asia seeks to reconceptualise the role of shareholders in listed companies as one that should include fiduciary duties, particularly the duty to act in good faith in the best interests of the company and the duty to avoid unauthorised conflicts of interest. The case study consists of the listed companies in four common law jurisdictions in Asia – Hong Kong, Singapore, India and Malaysia. My central argument comprises three primary claims. First, because the general meeting is an agent of the company, it owes fiduciary duties to the company, the most important of which for the purposes of this book is to act in good faith in the company’s best interests. I develop a theory of what these interests should be through a normative, legal and empirical analysis. Second, controlling shareholders in the common law systems in Asia should owe fiduciary duties to the company because: (a) the existing legal strategies for regulating extractions of private benefits of control by controlling shareholders are deficient; (b) the law does not regulate certain conflicts of interest between the company and controlling shareholders, and the latter could cause the company to take actions that benefit them but at the expense of the company and other shareholders; and (c) the justifications for subjecting directors to fiduciary duties should also apply to controlling shareholders. Third, institutional investors in the common law systems in Asia should owe fiduciary duties to the company because: (a) failure to do so would defeat the operation of the fundamental principle of the stewardship codes governing institutional investors under which they have to protect and promote the long-term success of their investee companies; and (b) their interests could conflict with those of the company and they could cause the company to take actions that benefit them but at the expense of the company and other shareholders. Bearing in mind the different types of shareholders in the listed companies in these common law systems in Asia, I explain the rationale and contents of the duties, who should impose the duties, when and how the duties should be imposed, and finally, issues concerning enforcement.

In doing so, this book seeks to contribute to the literature on English common law as well as comparative corporate law and governance in the following respects.

First, this book offers a sustained challenge to a long-standing, fundamental rule in English common law, and thus the laws of other common law jurisdictions, that shareholders, unlike directors, should not owe fiduciary duties to the company as they can vote as they please and they are not agents. It defends the provocative thesis that the general meeting is an agent of the company and thus owes fiduciary duties to the company. It also debunks the view that shareholders can generally vote as they please.

Second, this book advances the debate on a central and fundamental concept in corporate law and governance – the interests of the company ­– from a comparative, normative, legal and empirical perspective. Drawing on the theoretical literature on corporate interest and purpose, it is the first comparative work to critically examine this concept by analysing the laws and empirical realities in the four common law jurisdictions in Asia. In doing so, this book contributes to the resurgent debate on corporate interest and purpose.

Third, although there have been cursory suggestions that fiduciary duties ought to be imposed on controlling shareholders in common law Asia, this book is the first to develop this idea in a sustained, systematic and comparative way by examining not only why these duties should be imposed, but also, crucially, when the duties should be imposed, who should impose the duties, how the duties can be imposed, as well as how the duties can be enforced.

Fourth, this book deepens the existing analysis of the legal mechanisms that have been used to regulate extractions of private benefits of control. It not only shows that the existing mechanisms which include the use of independent directors and giving decision rights to minority shareholders (such as disinterested shareholder approval) are deficient and defective for the purpose of addressing specific transactions in which tunnelling is widespread (ie related party transactions), but this book also demonstrates that the existing law does not regulate the broader problem of conflicts of interest, which arises when controlling shareholders exercise not only formal power through voting, but also informal power through the exertion of influence.

Fifth, this book provides a critical and comparative examination of the role and regulation of minority institutional shareholders in listed companies in the common law jurisdictions in Asia with reference to the stewardship codes, the different types of institutional shareholders and the problems associated with these shareholders. This is also the first book to demonstrate not only why subjecting minority institutional shareholders to fiduciary duties can help to address these problems, but also when, by whom and how these duties should be imposed and how they can be enforced.

Finally, this book contributes to the debate on the strategies to promote the long-term success of companies by reconceptualising the role of controlling shareholders and institutional investors as fiduciaries. The current existing and proposed strategies include empowering or incentivising shareholders (such as by giving them greater voting powers, rewarding them with tax benefits or increased dividends) or limiting their rights (such as by suspending voting rights or removing the protection of limited liability under certain circumstances). But none of the strategies critically analyses the question of in whose interests or for whose benefit shareholders ought to exercise the already significant powers conferred on them, and whether legal obligations should be imposed on them, in the context of the concentrated ownership structures in common law Asia.

This book has at least two suggested implications for corporate law and governance in general:

First, one of the key arguments in this book – the interests of the company should refer to the long-term value and viability of the company that are not reducible to or synonymous with shareholders’ interests – is consistent with and strengthens the increasing shift from a shareholder primacy theory to alternative conceptions advanced by scholars in various disciplines (such as finance, economics, business management and law) that can better promote and protect the long-term value of companies, communities and societies.

Second, this book has implications for how corporate governance should and could be made.  According to one approach, which is the contractarian model, corporate governance ought to and could be made by companies which will adopt provisions that are best tailored to their specific needs and which will maximise firm value. Another approach is that corporate governance mechanisms should be adopted by or imposed on companies in order to protect them from self-serving or negligent directors and management. The analysis in this book suggests another approach that is able to draw on the advantages of both approaches. While I argue that fiduciary duties ought to be imposed on the general meeting, controlling shareholders and institutional investors, which seems to fall under the second approach, my analysis of the question of by whom and how these duties should and can be imposed does give companies and shareholders some say on the adoption of these duties, which in turn can accommodate aspects of the first approach. For example, if the legislature were to impose the duties, it may consider allowing the duties to be opted-out according to certain criteria. If the duties were imposed by the courts, consideration has to be given to the circumstances under which they can be contracted out. If the stock exchange were to impose the duties, it can develop a dual-tier listing standards, under which companies that do not wish their shareholders to be subject to fiduciary duties can choose to be listed on the second tier, and companies that wish to do so can decide to list on the first tier. And existing companies that are already listed on the stock exchange can choose to migrate to the first tier or to remain on the second tier. This raises the issue that in the critique, design and implementation of laws, attention has to be given not only to the nature, rationales, scope and effect of the laws (ie the question of ‘why’, ‘what’ and ‘when’), but also the appropriate legal institutions for imposing these laws, as well as the means through which they are imposed (ie the question of ‘who’ and ‘how’), bearing in mind the different contextual considerations in different jurisdictions. By analysing these questions in the context of the regulation of shareholders in the four common law Asian jurisdictions, it is hoped that this book will be valuable not only to those who seek to understand, evaluate and reform corporate law and governance, but also to those who are responsible for its creation, implementation and enforcement.

Ernest Lim is an Associate Professor at the National University of Singapore.