By Sim Shuzhen
SMU Office of Research & Tech Transfer – Most entrepreneurs would agree that running a successful business involves taking some degree of risk; without it, there would be no reward.
But consider a situation in which a company’s directors end up losing a large sum of money on a gung-ho, somewhat risky investment decision – albeit one they believed was in the firm’s best interests. If a civil or criminal case were to be brought against them, would this high-risk investment be considered a breach of directors’ duties?
The courts in Singapore typically apply an objective standard to situations like this – that is, it considers whether a ‘reasonable person’ would have acted in the same way.
“The problem with that is that we have a range of different types of companies, and the qualifications of directors can also vary quite widely,” says Associate Professor Pearlie Koh of the Singapore Management University (SMU) School of Law.
Professor Koh studies the interactions between various groups of people with interests in a firm – its directors and shareholders, for example – and assesses whether or not the laws meant to govern these interactions are effective at doing so.
In this particular case, the objective standard with regard to directors’ duties may be overly stringent, she thinks. “Listed companies have highly qualified directors, so we expect a higher standard of them. On the other hand, in small, mom-and-pop companies, directors may be experienced in business but have no inkling of what the law requires of them,” she explains.
A fairer standard
In Singapore, the Companies Act provides that directors must act honestly – that is, in the interests of the company – and exercise reasonable diligence when performing their roles.
Given the serious consequences for a director if he or she is found guilty of criminal offence, Professor Koh thinks the courts would do better to impose a subjective standard when considering the duty of honesty, taking into account the individual’s circumstances and motivations.
What matters then is whether the director himself believed – when entering into a particular transaction or voting in favour of a particular decision, for example – that he was acting in the best interests of the company, says Professor Koh.
Indeed, directors may have legitimate reasons behind their actions which are not obvious to people outside the company, she says. For example, in deciding whether or not to bring a lawsuit against another company, a director may be considering how the reputation of his own firm will be affected by the litigation; for him, this may outweigh the benefit of potential financial gain.
Getting the courts to move in the direction of a subjective standard, however, will be a slow process. “The courts are very concerned about maintaining standards, and there is some room for arguing that that perspective is correct. But companies and directors run the gamut, so it gets complicated when you apply an objective standard,” explains Professor Koh, who contributed a chapter on the subject to Corporate Law, a textbook on Singapore company law.
In addition to directors, another key group of people in a company are shareholders. Professor Koh studies the law’s provisions for minority shareholders, focusing on whether this group has sufficient courses of action to take in the event that it is oppressed by the majority.
“Generally speaking, a company is like a democracy – everything is decided by majority rule,” she explains. “If you’re in the minority, there is nothing you can do because those are the boundaries of your participation in the company. But what happens if every decision always benefits the majority?”
The majority could, for example, vote not to declare dividends, and instead pay the money to the company’s directors – who are themselves the majority shareholders. The law therefore needs to deal with oppressive behaviour by tilting the balance in favour of the minority, says Professor Koh. Her work on shareholder oppression has been published in a 2015 paper in the Journal of Corporate Law Studies, titled ‘The Oppression Remedy—Clarifications on Boundaries’.
On the other hand, giving the minority too much power can also undermine the company’s ‘democracy’. Consider a situation where a company is deciding whether or not to sue another party. “If you allow shareholders – anyone, all and sundry – to bring an action on behalf of a company, then out goes your majority rule and out go all your procedurals. Any shareholder can just commit the company to litigation,” says Professor Koh.
From black-letter law to empirical research
Most of Professor Koh’s work thus far has been in theoretical or black-letter law. But a new project of hers – a survey of company directors aimed at determining how well they understand the law – has seen her venture into research that is more empirical in nature.
Just as there are many minor offences that citizens may not be aware of (leaving one’s car running while it is stationary, for instance), directors may also be unaware of all the duties and standards that apply to them, explains Professor Koh.
“It’s well and good to have all these laws, but thus far, we’ve always been looking at them in isolation. I’m trying to figure out the extent to which the subject of these laws – the directors themselves – appreciate what is expected of them,” she explains.
One aspect of company law that drew Professor Koh to the field is its relevance to the real world. “Companies are a very large part of our lives,” she says. “We deal with them on a daily basis, and I enjoy appreciating how they operate.”
Back to Research@SMU Issue 49
Last updated on 05 Jan 2018 .