Battle for the board

WHO controls the boardroom of Kitchen Culture Holdings is a question that yields different answers depending on whom, and when, you ask.

In November, substantial shareholder Ooway Group and seven other shareholders held an extraordinary general meeting (EGM) on their own after the company rejected their attempt to requisition one. At this meeting, the Ooway bloc says, shareholders in attendance voted in new directors to the company’s board. To those dissenters at the time, it was clear that Kitchen Culture had a new set of directors.

But the directors they were supposed to replace are still running the show at Kitchen Culture. Ask them, and their answer will be that the unsanctioned Ooway EGM was invalid. The incumbent directors are therefore still in charge.

It has been a messy he-said, she-said affair at Kitchen Culture, and the inevitable journey to the courts in search of a resolution has been long-drawn and painful for all shareholders.

A functioning board is essential to the running of a listed company, and resolving contentious nominations should be a process with clear rules and principles. There are certainly rules on paper, but in practice, boardroom fights have often been messy affairs. A suggestion to oversee these instances through an out-of-court, independent body may be just what is needed.

Battles for control between shareholders and incumbent directors are not uncommon, says Professor Mak Yuen Teen of the National University of Singapore Business School, noting that similar cases have also taken place in the past. Research by The Business Times (BT) showed that in the past two years, at least 10 Singapore Exchange (SGX)-listed companies have faced similar boardroom challenges from their shareholders as Kitchen Culture.

“Some of these cases, it comes up because the board in place has not really governed well, and management has not run the company well,” Prof Mak says.

But there are also “nonsense type” cases where shareholders would have to question seriously the motives behind the requisitioning parties, he adds.

In the past two years, nearly all the boardroom battles involving SGX-listed counters involved smaller companies with market capitalisations under S$100 million.

Companies that are listed on the junior Catalist board have also accounted for a large number of recent challenges, including the likes of Metech, QT Vascular and ecoWise.

Ong Hwee Li, chief executive of sponsor SAC Capital, attributes boardroom coups or hostile manoeuvres to disagreements between either or both directors and shareholders over the future of the company. When the differences cannot be resolved through regular means, the intention to change board members could come as a result.

For one investor, Jerry Low, it was the dissatisfaction with decisions made by the managers of Sabana Reit that led him to requisition an EGM in 2017.

Low was a unitholder and disagreed with the Reit manager’s decision to buy 3 properties, with a rights issue to finance the proposed acquisitions. When investor relations did not respond to his concerns, he decided to take further action.

“At that time, I did not think there was any other way to resolve the issue,” he says. But getting through with the process and finding the necessary support also proved challenging.

Low says: “I knew nothing about EGM requisition and I was not ready to pay legal fees to call that meeting.”

Execution

For investors wanting to execute a boardroom challenge, getting familiar with the appropriate protocol is the key.

The law has provisions on how shareholders can go about convening an EGM, and the appropriate notice period when it comes to removing directors.

Under Section 176 of the Companies Act, a shareholder holding at least 10 per cent of the paid-up shares of the company can requisition for a general meeting, and the directors are required to take steps to convene an EGM.

If directors fail to convene a meeting for a valid requisition under this section, reasonable expenses incurred by the party making the requisition will be recoverable from the directors that were in default.

Meanwhile, Section 177 allows for two or more shareholders that hold at least 10 per cent of the issued shares of the company to call the meeting themselves.

The Code on Collective Investment Schemes sets out similar provisions for investment trusts.

Giving shareholders the power to remove directors is an important governance safeguard. This is especially so in Singapore where directors are only re-elected every three years, Prof Mak says.

In jurisdictions like the US and UK where the whole board goes up for re-election every year, shareholders have an opportunity every year to remove undesirable directors. In Singapore, it could take three years to change the entire board.

Shareholders could abuse that power by repeatedly calling for meetings, but this is must be accepted, Prof Mak says.

“You may disagree with the shareholders, and in some cases you kind of sympathise with the board, but that is a fundamental shareholder right,” he says.

“The best defence against this is to have good governance and management.”

Beyond satisfying the rules, requisitioning shareholders also need to ensure that they have enough support for their resolutions to succeed.

Robson Lee, partner at Kennedys Legal Solutions, says: “In a board fight, it’s not a question of your group of shareholders against mine. There will be a big block of shareholders who are fence sitters.”

Lee adds: “Sometimes... when you convene an EGM and the incumbent directors in question feel that they don’t have enough to stave off the coup, they choose to resign.”

For Low, who organised the 2017 Sabana Reit EGM, canvassing votes was part of the process.

“I went to stock forums, namely ValueBuddies and ShareJunction, to get more to come along. Surprisingly, many other unitholders held the same view,” he says.

He adds that SGX was helpful during the process, and other unitholders also assisted along the way. But the requisitioners still lost the vote at the EGM.

Success and failure

Recent boardroom tussles involving SGX-listed companies have seen varying degrees of success for requisitioning parties, and not all cases are straightforward.

SAC Capital’s Ong notes: “Directors and shareholders with more shares will usually get the resolutions passed during a shareholders’ meeting without much fight.”

He adds: “Ugly public fights are usually between directors and shareholders with close shareholdings exercising their shareholder rights to push the resolutions through.”

In the case of Allied Technologies, requisitioning shareholders convened an EGM themselves and successfully booted out the incumbent board. Catalist-listed ecoWise’s shareholders finally got what they wanted in April last year after earlier failed attempts at holding an EGM.

But others have also failed to remove incumbent directors. For example, Metech’s EGM last October and QT Vascular’s EGM in November 2021 saw more shareholders vote in favour of the incumbents.

In some recent cases, simply getting to the starting point of holding an EGM has proved challenging.

Last October, mainboard-listed USP Group received an EGM notice from requisitioning parties seeking to remove directors and appoint new ones.

But its board said it would not hold a meeting, noting among other reasons that the requisitioners did not specify how the incumbents were “not qualified or lacking in credentials and/or experience to hold his office”.

The requisitioning parties have since taken the case to the High Court.

Similarly, Kitchen Culture’s requisitioning shareholders also brought their case before the court, after two attempts at holding an EGM late last year. Ooway sought court validation of the resolutions passed in the disputed EGM, but has since discontinued its claim. In fact, Ooway sent a new request this month for a third EGM, seeking again to remove existing directors and appoint new ones.

The incumbent directors have said that the withdrawal of the case means they can disregard resolutions passed at the disputed meeting.

Kennedys’ Lee noted that such situations are never simple and “ultimately it has to be decided in a court of law”.

Mounting a legal challenge, however, demands resources. Potential appeals could also mean a lengthy period before cases are concluded.

“Individuals might just say forget it... why throw good money after bad?” Lee says. “But then is this really desirable? Is this not a fundamental right of shareholders?”

Referee desired

Market watchers see merit for greater involvement from regulators such as the Accounting and Corporate Regulatory Authority (Acra), which administers the Companies Act.

This may be useful in adversarial cases when both sides cannot come to an agreement.

“I’ve seen too many cases where companies have been resorting to technicalities, basically (saying) your resolution doesn’t tick all the right boxes (and) buying time,” Prof Mak says, adding that some may simply be hoping for shareholders to give up.

This could result in cases where it becomes a “fight with no referee”.

“We have a Takeover Code that says do not frustrate a takeover, but we don’t have anything about frustrating the change of board using the Companies Act provision,” Prof Mak says.

In response to queries from BT, an Acra spokesperson said it expects the shareholders and directors of a company to comply with the requirements of the Companies Act and the company’s constitution.

“If the directors of a company do not comply with their obligations in respect of a valid requisition, Acra will not hesitate to investigate and undertake enforcement actions against them, as appropriate,” it said.

“We also expect that any general meeting of a company be properly conducted in accordance with the requirements of the Companies Act and the company’s constitution (including giving proper notice of the meeting to shareholders),” the spokesperson added, noting that failure could result in a court declaring the proceedings to be invalid.

But there may be room for even greater oversight, similar to how the Takeover Code is governed by the Securities Industry Council (SIC), which in turn has a primary objective of “fair and equal treatment of all shareholders in a takeover or merger situation”.

Lee says: “Effectively changing the board and succeeding in putting people in, it’s also in a sense taking control of the company; here it’s management control, whereas the Takeover Code governs shareholding control.”

He believes that it is worth considering whether the same rigour imposed on takeovers could be applied to board battles, given the significant role management plays in the day-to-day operations of a company. A possible consideration would be to empower a regulatory body to administer and consider such boardroom challenges. This could fall under either Acra and/or SGX Regulation for listed companies.

Lee says: “I think this regime needs to be reviewed with a view to minimising such protracted delays and fights, which ultimately will hurt minority shareholders, and certainly is not in the interest of the company.”

Beyond helping shareholders, boards and management who sometimes deal with repeated requests for an EGM could also find it helpful to have an independent oversight body. For example, a mandatory “time out” before requisitioning shareholders can return with similar resolutions could save time and unnecessary costs.

Minority interest

Minority shareholder, Anthony Ooi, who invested in Kitchen Culture before the stock was suspended, welcomed that suggestion and expressed frustration over the impasse.

“I’m very sad there’s no EGM. If there is an EGM, I can ask the questions,” he says.

“In every company that you have shares in, the minority shareholders have the right to ask questions, and there must be a law protecting minority interests.”

He adds that the current situation has been confusing for him and a few friends, who are unsure of whom they could turn to.

For now, he just hopes to avoid similar situations in his future investments.

Indeed, prevention could well be the best option for minority shareholders. That is a message that Low, who organised the 2017 Sabana Reit EGM, would not mind sharing today.

“The lesson I learnt from this – if you cannot change the management direction with shareholders vote, it is best to vote with your feet,” he says. “Just sell your shares, it is so much easier.”