Directors' roles and responsibilities in guiding companies through corporate actions

The Singapore market has seen a number of sizeable deals this year encompassing equity fund raisings, asset acquisitions and sales, as well as privatisations. In all of these, a company's board of directors plays a crucial role.

The Companies Act states that the business of a company should be managed by its directors. In line with this, directors have important decisions to make during corporate actions such as takeovers, merger and acquisition (M&A) activities, rights issues, spin-offs and even the issuances of dividends.

Robson Lee, a partner in Gibson Dunn's Singapore office and a member of the firm's mergers & acquisitions and capital markets practice groups, elaborates on the roles and responsibilities that directors of companies listed on the Singapore Exchange (SGX) play during such events.

Q: What are the general guiding principles for directors who are making decisions related to corporate actions?

A: To recap from an earlier article in this series, directors have a fiduciary duty to act not for their own benefit, but for the benefit of third parties. They must act in good faith, and with reasonable care and diligence. Directors must consider, in their duties, the interests of the company and, as appropriate, its shareholders.

Directors also have a duty to exercise their powers for the proper purpose. If the directors exercise their powers for any other purpose, then any action or transaction arising from the exercise of such powers is voidable.

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The company may choose to annul any such action or transaction. Alternatively, it could seek compensation from the errant director(s) for any loss it suffers as a result thereof. It is immaterial that the director(s) honestly considered the transaction to be in the interests of the company if the decision of the director(s) was motivated by a collateral or improper purpose for the transaction.

We have an example of this in the case of Howard Smith v Ampol Petroleum (1974) - an important case that is frequently referenced in takeover bids.

Industrial conglomerate Howard Smith and petrol company Ampol were both trying to take control of a coal and shipping company called RW Miller. The directors of Miller considered that it would be in the interest of the company to be taken over by Howard Smith. But Ampol, which already owned shares in Miller, used its voting power to block Howard Smith's bid.

To get around the problem, the directors of Miller used their power to issue new shares to Howard Smith. This diluted Ampol's voting power.

Even though the directors of Miller had the power to issue the shares, and even though Miller needed the money, the court held that the shares were issued for an improper purpose. It was improper because the reason for issuing the shares was to allow Howard Smith to take over Miller, notwithstanding that the directors of Ampol were honestly trying to advance the interests of the company. The Privy Council held that the power to issue shares was for the purpose of raising money for the company, not to forestall a takeover bid, and hence was an abuse of power.

Q: What about in the cases of corporate actions in which a director deals with a company? Are there special provisions under such circumstances?

A: Direct dealings between a company and one or more of its directors inevitably lead to conflicts of interests. This is so even where the transaction in question is fair to the company on terms and price, the director concerned has acted in good faith, and the transaction is in the interest of the company.

As long as the transaction involves a sale of property or goods by the director to the company, there is a real and sensible possibility of conflict of interests - as the company would wish to secure the lowest price possible from the director and the director would wish to extract the highest price possible from the company.

The company can therefore seek rescission of the contract if the market value of the asset or transaction declines. In addition, the company can seek disgorgement of any profits the director receives from the transaction.

Directors can also exercise their powers to allot shares to themselves. If the shares are allotted at a price below the market price of the shares, then the directors are liable to account for the price difference as a personal profit gained by them as a result of the exercise of their powers.

If such shares were sold by the directors at a price higher than the market price of the shares at the date of allotment, the company can recover the full price difference from the directors.

Under the Companies Act, a director must declare to the company's board the nature of his interest in a transaction or proposed transaction after the relevant facts have come to his knowledge.

There must be some form of disclosure, whether formal or informal.

But disclosure alone will not automatically absolve the director of liability. The director still has an overarching fiduciary duty to act in good faith and in the best interests of the company.

He may be caught for a breach of duty, particularly if he makes or acquires a personal profit as a result of the relevant transaction.

One way the issue can be resolved is through a ratification by way of shareholders' resolution. The broad consensus seems to be that even if the transaction can be ratified, it should be done by a majority of disinterested shareholders.

Q: Related to this, what about transactions involving interested parties? Do directors have special responsibilities in such transactions too?

A: An interested person would include:

(a) A director

(b) The company's chief executive

(c) A controlling shareholder

(d) An associate of any of the above.

As long as a transaction takes place between an interested party and the company, a subsidiary or an associate over which the company has control, then that transaction would be classified as an interested person transaction (IPT).

Singapore-listed companies are required to observe the rules under Chapter 9 of the SGX Listing Manual in respect of such IPTs.

These rules include having to make an immediate announcement of any IPT if the value of the transaction, or the aggregate value of all transactions entered into with the same interested person during the same financial year, is equal to or above 3 per cent of the latest audited net tangible assets (NTA) of the group.

Shareholder approval must be obtained if the value of the transaction or the aggregate value of all transactions entered into with the same interested person during the same financial year is equal to or above 5 per cent of the latest audited NTA of the group.

A company is also required to announce a sale or proposed sale of any units of its local property projects to an interested person or a relative of a director, CEO or controlling shareholder within two weeks of the sale or proposed sale.

The objective of this is to guard against the risk that interested persons could influence the listed company, its subsidiaries or associated companies to enter into transactions that may adversely affect the interests of the listed company and its shareholders.

Several safeguards are also included in the Listing Manual to specifically prevent unfair dealing of a company's property projects.

For instance, when deciding whether to offer any sale of units in its property projects to a listed company's interested persons or a relative of a director, CEO or controlling shareholder, the listed company's board of directors have to be satisfied that the terms of the sale are not prejudicial to the interests of the company and its minority shareholders.

The company's audit committee must also review and approve the sale and satisfy itself that the terms of the sale are fair and reasonable and are not prejudicial to the interests of the listed company and its minority shareholders.

In the event that a sale or proposed sale to an interested person requires shareholder approval, the company must also obtain the approval within 6 weeks of the date of the sale or proposed sale.

An interested person or his nominee must abstain from voting on all resolutions approving the sale or proposed sale to the interested persons.

Q: Let's move on to takeovers and mergers. What responsibilities do directors have for such transactions?

A: The Take-Over Code states directors must ensure that proper arrangements are in place to enable them to fulfil their responsibilities in such an event. A fundamental objective of the Take-Over Code is to ensure that only shareholders have the right to determine the merits of an offer.

As such, the Take-Over Code contains rules and general principles that clarify a director's duties under a take-over.

Such arrangements comprise:

• ensuring that directors are provided with all relevant documents, announcements and information in connection with the offer;
• ensuring that directors with a day-to-day responsibility for the offer are able to justify to the board their actions and proposed causes of action; and
• ensuring that the opinions of advisers are available to the board where appropriate.

The delegation of responsibility to a committee of the board for supervision of documents is also permitted under the Take-Over Code. Each of the remaining directors of the company must, however, reasonably believe that the persons to whom supervision has been delegated are competent.

The business judgment of directors will not be second-guessed if exercised in good faith. In a take-over, this means that the recommendation of independent directors to an offer is seldom questioned.

Directors who may face conflicts of interests are, however, required to consult the Securities Industry Council (SIC) on whether it is appropriate for them to assume responsibility for any recommendations the board may make on the offer to its shareholders.

Q: In some M&A transactions, we have seen break fee arrangements. What are the rules governing such arrangements?

A: A break fee is an agreed fee paid by the target of an offer to the offeror if a specified event occurs that prevents the success of the offer. When a break fee is proposed, the directors of the offeree company and its financial advisers are required to provide certain confirmations to the SIC.

These confirmations are:

• that the break fee arrangements were agreed as a result of normal commercial negotiations;
• that all other agreements in relation to the break fee arrangements have been fully disclosed; and
• that each of the directors and financial adviser believe the fee to be in the best interest of the offeree's shareholders.

In the context of break fees, confirmation that the fee is "in the best interest of the offeree's shareholders" is also an application of the business judgment rule.

Accordingly, the SIC is unlikely to second guess the business judgment of an offeree's directors when such confirmation is given.

Q: Could you also briefly touch on the disclosure responsibilities of a director as a company is preparing for an IPO?

A: The prospectus regime under the Securities & Futures Act (SFA) prescribes civil and criminal penalties for the failure to disclose material facts, or the disclosure of misleading information.

In deciding what information to include in the prospectus, the company should have regard to the nature of the shares, the matters that potential investors may reasonably be expected to know and the matters that professional advisors of such investors would reasonably be expected to know.

The SFA prescribes criminal penalties for misstatements contained in a prospectus for an offer of shares to the public. Misstatements include:

(i) The provision of false and misleading information;

(ii) An omission to state information required to be included under Section 243 of the SFA; or

(iii) An omission to state a new circumstance that has arisen after the lodgement of the prospectus with the Monetary Authority of Singapore (MAS) and would have been required to be included.

All the same, a director will not be liable for misstatements in a prospectus if he had made all reasonable enquiries and, after doing so, believed on reasonable grounds that the statement was not false or misleading, or that there was no omission.

Also, a director will not be liable for misstatements in a prospectus if he reasonably relied on information given to him by someone other than his employee or agent.

A proposed director will not be liable for misstatements in a prospectus if he publicly withdraws his consent from being named in the prospectus, or if he is unaware of new circumstances that had arisen since the lodgement of the prospectus with the MAS.

In addition to the above, a director charged under the criminal section can avoid liability by showing that the misstatement is not materially adverse from the point of view of the investor.

This article is brought to you by Robson Lee, a partner of Gibson Dunn