August 13, 2015
Being appointed to a company’s board of directors comes with serious duties and responsibilities. In Singapore, the Companies Act, Chapter 50 of Singapore ("Act"), is the main source of directors’ duties. Other sources of regulations include the Listing Manual ("Listing Manual") of the Singapore Exchange Securities Trading Limited and the Singapore Code on Take-Overs and Mergers ("Take-Over Code").
The regulatory climate of directors’ duties is evolving in Singapore. The Companies (Amendment) Act 2014 ("CA Amendments") was recently passed in October 2014. Overall, the changes reflect a commercial approach to directors’ duties in Singapore, recognising the need to liberalise the position in some areas while imposing stricter obligations in others. These changes will be implemented in two phases — the first phase from 1 July 2015 and the second phase from the first quarter of 2016 ("Q1 2016"). The Take-Over Code is also slated to be amended following a consultation paper issued by the Securities Industry Council ("SIC") on its proposed revisions.
A detailed overview of directors’ duties and responsibilities in Singapore may be found HERE. This client alert summarises the following significant points in relation to the law on directors’ duties in Singapore as well as the latest regulatory changes:
Summary of directors’ duties and responsibilities
- Who is a director? The Act defines a "director" broadly to include any person occupying the position of director of a corporation by whatever name called. This would include executive directors, de facto directors, nonexecutive directors as well as independent directors. Alternate or substitute directors are also considered "directors" for which the duties and obligations under the Act would apply. Shadow directors are also likely to fall within the ambit of the Act even though it is not explicitly defined. However, the CA Amendments have since clarified that a director also includes a person in accordance with whose directions or instructions the directors or the majority of the directors of a corporation are accustomed to act.
- Appointment and qualifications of a director. Under the Act, a director must be a natural person, attain at least 18 years of age and have full legal capacity. In absence of any provision in the Act, the present position is that the company’s articles will provide for the appointment of directors. The CA Amendments will introduce a new provision to allow the appointment of a director by ordinary resolution passed at a general meeting, subject to any contrary provisions in the articles. The age limit of 70 years for directors will also be abolished. These changes will come into effect in Q1 2016. The following categories of persons would commit an offence under the Act if they act as directors:
- Undischarged bankrupts;
- Unfit directors of insolvent companies;
- Persons convicted of certain offences;
- Persistent default in delivering documents; and
- Being a director in not less than three companies which were struck off within a five-year period (new disqualification pursuant to the CA Amendments which will take effect in Q1 2016).
- Remuneration. Under the Act, a company is prohibited from compensating a director for loss of office or retirement unless shareholders’ approval has been sought. The CA Amendments provide an exception to this requirement where payment of compensation for termination of employment is provided in an agreement between the company and the director. These changes came into effect on 1 July 2015. The Governance Code also provides that a company’s board should establish a remuneration committee for the determination of a director’s remuneration.
- Fiduciary Duties of Directors, Disclosures and Conflicts of Interest. Directors are under a common law duty to act in good faith and in the interests of the company. The Act imposes both civil and criminal sanctions on directors in breach of their duties. Disclosure obligations are also imposed on directors under the Act. Examples under the Act include disclosure at a board meeting of any interest a director has in a transaction or proposed transaction with the company, disclosure of a director’s shareholdings in the company and in any related corporation etc. The Listing Manual and Governance Code also impose additional disclosure obligations on directors. Directors are also prohibited by the Act from engaging in certain transactions that may give rise to a conflict of interest. This includes loans to directors and companies controlled by them, subject to certain exceptions. The CA Amendments will also extend these restrictions to quasi-loans, credit transactions and related arrangements.
- Exoneration of Directors. Generally, any attempt by the company to exempt or indemnify directors from any legal liability arising from negligence or breach or duty is void under the Act. In clarifying this restriction further, the CA Amendments will introduce a new provision to allow a company to indemnify a director against third parties’ liability if they do not fall within certain circumstances. These changes will come into effect in Q1 2016. However, the Act permits a company to purchase insurance policies for its directors to insure against any liability incurred by them except where the liability arises out of dishonest or wilful conduct. The Act further grants the court the power to relieve a director from liability for negligence, default, breach of duty or breach of trust. Likewise, shareholders of a company may choose to release a director from liability subject to certain limitations.
- Shareholders’ Remedies. The Act also provides recourse for disgruntled shareholders. Generally, shareholders may bring an action against the company if there is oppression or unfair discrimination of a shareholder or where a shareholder’s interests are disregarded. The courts had also pronounced in a recent case in Singapore that such a claim need not be based on a corporate wrong. Alternatively, a shareholder may also have recourse to the common law "proper plaintiff" rule which is codified under the Act. Accordingly, a complainant may apply to the court for leave to bring an action on behalf of the company. The CA Amendments expanded this provision to allow courts to grant leave to a complainant to commence arbitration in the name of the company. These changes came into effect on 1 July 2015.
- Directors’ duties under the Take-Over Code. The Take-Over Code clarifies a director’s duties under a take-over. In particular, the offeree board is prohibited from taking any action without shareholders’ approval that may frustrate a bona fide offer. The proposed amendments to the Take-Over Code seek to clarify this restriction further to provide that the solicitation of a competing offer would not amount to frustrating the original offer. The Take-Over Code also provides safeguards in relation to break fees, where directors are required to provide confirmations on certain matters to the SIC where a break fee is imposed. Other obligations imposed by the Take-Over Code include the need for directors to be provided with all information and relevant documents in connection with an offer, the need to consult the SIC in potential situations of conflict of interest, and the assumption of responsibility by directors for documents issued by the company.
Conclusion
As noted above, directors are subject to many onerous duties and responsibilities. This is due to the need to protect shareholders and those who deal with the company from the negligence or malfeasance of errant directors who often control the management of the company. Thus, while being a director brings with it a certain amount of prestige, it is not a position to be taken lightly. Instead, such an executive appointment should only be assumed by those with a wealth of experience in business and management in order to run a company competently.
Please click below for a detailed overview of directors’ duties and responsibilities in Singapore:
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work or any of the following:
Robson Lee – Singapore (+65.6507.3684, [email protected])
Grace Chow – Singapore (+65.6507.3632, [email protected])
Kelly Austin – Hong Kong (+852 2214 3788, [email protected])
© 2015 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.