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Should there be a scheme to fund class actions by minorities?

INDIA is said to be considering setting up a scheme that would help fund class-action suits brought against companies by minority shareholders, to ensure that those who need the financial support to assert their legal rights have access to it.

It's a development that calls attention to minority shareholders' rights and access to justice in Singapore, and begs the question of why a similar scheme has yet to be considered here.

The scheme in India, some details of which were said to have been shared by the government with the media there, was described by corporate lawyer Bhumesh Verma, who runs his own firm Corp Comm Legal, in a LinkedIn post last week.

He said that India's central government, recognising that not all minority investors are financially able to preserve their legal rights and economic interests in the company, is working on formulating a scheme that would offer financial assistance to minority shareholders filing class-action suits pursuant to the provisions of the country's Companies Act.

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The plan is to provide financial assistance via India's Investor Education and Protection Fund (IEPF), which comes under the Ministry of Corporate Affairs (MCA). Under the plan, investors will be entitled to a reimbursement of the legal expenses incurred in the filing of their class-action suits.

Mr Verma said this move was precipitated by the "repeated occurrence of fraudulent cases (involving unofficial siphoning of funds) causing monetary loss to investors and downgrading the (country's) corporate governance standards".

"The proposed scheme will not only bolster investors' move to file class-action suits, but will also provide the (necessary) financial succour to ensure that a class-action suit is not being dropped due to a lack of funds," he said.

His post garnered some positive reactions from the legal sector in India, and caught the eye of a few in the legal and corporate governance space in Singapore as well.

Companies Act

Nicholas Narayanan, who runs Nicholas & Tan Partnership, said Singapore's regulators ought to consider initiating a similar fund, and that lawmakers here should mull over this in the next round of revisions to the Companies Act.

National University of Singapore associate professor and corporate-governance advocate Mak Yuen Teen fully agrees.

"Improving minority shareholders' access to justice is happening in different ways around the world, including Asia, but seems to have bypassed Singapore," he said.

In Singapore, class-action suits or representative actions are rare; class actions brought about by minority shareholders over corporate wrongdoing, also known as statutory derivative actions, have yet to be attempted.

But statutory derivative actions are provided for under Sections 216A and 216B of Singapore's Companies Act, thanks to a 1993 amendment - a recognition that, whatever the perceived shortcomings of such actions, there is the need to confer such rights on minority shareholders here.

One could argue that a fund or a scheme to provide some form of financial assistance to minority shareholders in such actions would, therefore, simply be an extension of such reasoning - and, as in the case of India, ensure that their rights are not compromised simply because they cannot afford the legal fees.

Financial assistance, in fact, makes a significant difference in the particular instance of statutory derivative actions or class-action suits brought by minority shareholders against companies.

The point is made by Associate Professor of Law Pearlie Koh of the Singapore Management University (SMU) in her excellent piece, "The Statutory Derivative Action in Singapore: A Critical and Comparative Examination".

In it, she wrote: "The question who bears the costs of any litigation action plays a large part in the decision whether to commence an action.

"In derivative actions, this concern is particularly acute since, by the very nature of the action, the benefits of the suit flow to the company as a whole, with the individual shareholder receiving only a small pro-rata benefit. This, and the fact that the other shareholders will free-ride on the plaintiff shareholder's action, creates a disincentive to commence litigation. Notwithstanding the fact that it is the company that takes the benefit of the action, the individual shareholder who institutes the action, unless it is otherwise provided, will have to be responsible for the litigation costs of the action. Under the Singapore system, if the action is unsuccessful, the plaintiff will have to bear the legal costs of the defendants."

Prof Koh also cited the example of how the issue of cost made a great impact on the utility of class actions in Japan: Dramatic changes in Japanese law in late 1993, which made it easier and cheaper for shareholders to bring class-action suits against companies, fuelled the increased number of such actions against corporate leaders there.

Some might argue that providing funding might increase the likelihood of frivolous class actions being taken against companies, thereby making directors' duties more onerous.

A valid concern

It's a valid concern. But I would point out that Singapore, upon deciding to enact a scheme providing funding to minority shareholders for statutory derivative actions, would also build in safeguards to ensure that funding would be granted only upon applications passing the test for rationality and good sense.

At the end of the day, if the point is to make available this course of action to minority shareholders so that it acts as a check and balance against corporate wrongdoing, then providing much needed financial support can only enhance that purpose.