Part I - Asia

2.1.1 Corporate Law Framework

The legal system in the mainland People’s Republic of China (PRC), as a jurisdiction that is distinct from the jurisdictions of Hong Kong (Chapter 3) and Taiwan (Chapter 9), falls broadly into the civil law tradition.. The primary source of corporate law is the PRC Company Law, a codified statute enacted by the PRC’s national legislature, the National People’s Congress Standing Committee (NPCSC). The Company Law was first enacted in 1993, and came into effect in 1994. The 1993 Company Law was subsequently repealed and replaced by the current Company Law, which was promulgated in 2005 and has been in effect since 2006, with important amendments in 2013 and 2018.Footnote ¹ Another important source of primary legislation on the corporate governance of listed companies is the PRC Securities Law, enacted in 1998 and since revised. The current Securities Law has been in effect since March 2020.Footnote ²

The Company Law and Securities Law lay out a broad framework for corporate law and governance. However, as with many other pieces of PRC national legislation, their provisions are often expressed in general terms and are lacking in specificity.Footnote ³ They are supplemented by important subsidiary provisions in the form of PRC regulations, rules and norms. The most important form of subsidiary backing is the regulations enacted by the State Council, the Chinese Cabinet. These regulations often take the form of policy pronouncements issued by the State Council in regard to, among other things, the direction of corporate governance reforms. They are therefore typically general in nature, but herald specific reform measures to be introduced by the ministerial-level, sector-based securities regulatory authority, the China Securities Regulatory Commission (CSRC).

Below the State Council’s regulations, but also an important source of law in respect of corporate law and governance in China, are the rules enacted by the CSRC. Of particular relevance to this chapter are three CSRC-made sets of rules. First, the Code of Corporate Governance. The current Code has been in effect since 2018, and repealed and replaced the original Code promulgated in 2002. The Code is applicable to all companies listed on China’s two official stock exchanges, the Shanghai and Shenzhen Stock Exchanges.Footnote ⁴ The Code is semi-mandatory; any significant non-compliance with the Code can lead to enforcement or disciplinary action brought by the CSRC, its local offices, the Exchanges or other self-regulatory organizations.Footnote ⁵ Second, the Guidance on the Articles of Association of Listed Companies (Model AoA).Footnote ⁶ The Guidance is in effect a model set of articles of association that Chinese listed companies are generally expected to follow. Deviations from the Model AoA are generally discouraged by way of, for instance, additional regulatory requirements for reporting and approval.Footnote ⁷ Third, the Rules on the General Meeting of Listed Companies (GM Rules).Footnote ⁸ The GM Rules set out the rules for the conduct of meetings of general shareholders. The Rules are legally binding on Chinese listed companies, and the CSRC, its local offices and the Exchanges can take enforcement or disciplinary actions against the listed company, the board of directors or responsible individuals for violations.Footnote ⁹

Finally, we should mention the self-regulatory rules made by the Shanghai and Shenzhen Stock Exchanges and other self-regulatory organizations. Of particular importance are the Exchanges’ listing rules, which specify detailed procedures for the conduct of the shareholders’ meeting and set out the circumstances where the majority of the minority rule applies.

2.1.2 Allocation of Corporate Decision-Making

Under Chinese company law, there are two types of companies: limited liability companies and joint stock companies.Footnote ¹⁰ The former is broadly the Chinese equivalent of the closed company, and the latter the equivalent of the public company. The listed company is a subcategory of the joint stock company. The Chinese company in general, and the Chinese listed company in particular, are generally required by law to have three governance organs: the shareholders’ meeting, the board of directors and the supervisory board.Footnote ¹¹ Both boards are elected by a meeting of the shareholders, and are held to account by the shareholders.Footnote ¹² The board of directors of a listed company should consist of no less than five and no more than nineteen members,Footnote ¹³ of whom no less than one-third should be independent.Footnote ¹⁴ The supervisory board should contain at least three members, of whom at least one-third should be representatives of the employees.Footnote ¹⁵

The PRC legal framework for corporate decision-making is characteristically shareholder-centric. The Company Law vests the shareholders’ meeting with decision-making over a wide array of corporate matters, leaving the board of directors a role that is broadly managerial in nature.Footnote ¹⁶ The demarcation of decision-making between the shareholders’ meeting and the board of directors is succinctly stated in an official explanatory note accompanying the original 1993 Company Law:Footnote ¹⁷

More specifically, the shareholders’ meeting has a wide array of authority prescribed by the Company Law:Footnote ¹⁸ determining the company’s business policies and investment plans; electing members of the board of directors and the supervisory board and determining their remuneration; approving the reports of the board of directors and the supervisory board; approving the company’s annual budget and accounts; approving the company’s profit distribution and loss recovery plans; approving resolutions on the increase or decrease of capital; approving resolutions on the issuance of bonds; approving resolutions on the merger, split, dissolution or liquidation of the company; and amending the articles of association. While some of these powers fall conveniently into the business of the shareholders’ meeting in other jurisdictions (such as director election and charter amendments), others (such as business planning and bond issuance) do not.

It should be noted that the Company Law authorizes the company’s articles of association to grant its shareholders’ meeting further powers in addition to the prescribed lines of statutory authority.Footnote ¹⁹ The Model AoA significantly widens the broad range of decision-making powers that the shareholders’ meeting already enjoys under the law. These matters include: passing resolutions on the appointment and removal of the accounting firm; approving the giving of certain types of guarantee; approving substantial acquisition or disposal of assets; approving of any changes to the purposes of funds raised; and approving share incentive schemes.Footnote ²⁰ These transactions either involve a potential conflict of interest (such as share incentive schemes, and the provision of guarantee in favour of the controlling shareholder or its affiliates) or are of fundamental significance to the company (such as acquisition or disposal of substantial assets, the size of which is equivalent to 30 per cent or more of the company’s assets). It should be borne in mind that the Model AoA prohibits the delegation to the board of any of the powers conferred upon the shareholders’ meeting by the Company Law and by the Model AoA. In other words, shareholder approval is mandatory in respect of those matters reserved for the shareholders.

The board of directors, on the other hand, mainly plays a managerial role. It is authorized by the Company Law to implement any resolutions of the shareholders’ meeting; to propose resolutions for approval by the shareholders’ meeting; to convene the shareholders’ meeting; to set out the company’s internal systems; to appoint senior executives and determine their remuneration; and perhaps most importantly, to make business plans and investment proposals.Footnote ²¹ The board of directors is also allowed by law to exercise any powers that the company’s articles of association confers upon it.Footnote ²²

It is evident that there remains considerable ambiguity under the Company Law regarding the apportionment of authority between shareholders and directors in respect of business and investment matters. Both organs are entitled to make decisions on those matters, and the wording in the statutory provisions regulating their respective authority is at best vague. As far as listed companies are concerned, the Chinese law approach to addressing this statutory ambiguity is to allow the shareholders to define in the company’s articles of association the parameters within which authority is delegated to the board of directors to make business decisions. This approach is manifested in the Model AoA. The board of directors is entitled to decide on such matters as investment, acquisition and disposal of assets, mortgage of the company’s assets, provision of guarantee, related-party transactions, so long as they act within the authority delegated by the shareholders’ meeting.Footnote ²³ Any residual powers belong to the shareholders, and any matters that go beyond the board’s delegated authority should be taken to the shareholders for approval.Footnote ²⁴

The Company Law, the Model AoA and the company’s articles of association, together, demarcate the respective spheres of authority for both shareholders and directors. The PRC jurisprudence is not yet settled in regards to whether the board is ‘supreme in its own sphere’,Footnote ²⁵ that is, whether the shareholders in meeting can interfere in the board’s exercising of the power that is conferred upon it either by law or delegation by the articles.Footnote ²⁶ The Company Law seems to approach this question from a shareholder right perspective. It provides that where the content of a resolution passed by the shareholders’ meeting violates the company’s articles of association, shareholders are entitled to apply to the court to rescind the resolution in breach.Footnote ²⁷ This seems to mean that the shareholders acting in violation of the articles and passing a resolution on a matter within the board’s delegated authority run the risk of being challenged by dissenting shareholders, but not by the board. The shareholders in meeting can of course either revoke the delegation or alter it ex ante, but this would require the approval of two-thirds of the votes present at the meeting by way of a special resolution.Footnote ²⁸

Overall, the PRC approach to corporate decision-making strongly emphasizes shareholder primacy. The shareholders in meeting are given authority both by law and by virtue of the Model AoA over a wide range of matters. In these areas, shareholder approval is mandatory, and may not be delegated. In respect of matters that can be delegated to the directors, the shareholders enjoy ‘residual’ authority. In other words, such matters are presumed to be reserved for the shareholders unless they have been explicitly assigned to the board by the articles of association. This shareholder-centric position has been shaped by a confluence of factors, both conventional and contemporary.

Conventionally, the shareholder-oriented model fits well with the state’s predominant concern to retain control over companies that were partially privatized from former state-owned enterprises. The notion of the modern corporation was not accepted by the Chinese state until the early 1990s. It was seen as a means to salvage China’s then ailing state-owned sector. Its attraction to the state lays in the fact that it offers a way of organizing businesses whereby private capital (in particular, the massive body of household savings) can be channelled into the state-owned sector and, typically, is allowed to take only a minority interest.Footnote ²⁹ The state was particularly concerned with holding its agents, that is, the directors and senior managers, to account. A legal strategy adopted was to leave decision-making on ‘major’ matters in the state’s own hands, and to delegate management powers to the agent/directors only in relation to relatively ‘minor’ issues. Moreover, this approach to corporate governance also mimics China’s broader political governance arrangements,Footnote ³⁰ under which all powers of the state are vested on principle in the National People’s Congress (NPC), and the State Council (China’s Cabinet) derives its authority by way of delegation from the NPC. Formally, at least, the NPC takes all decisions perceived to be of fundamental importance, and the State Council plays largely an executive and implementing role. This NPC–State Council relationship can be seen imitated in the setting of corporate governance, or more specifically, in how decision-making is apportioned between the shareholders and the directors.

A more contemporary consideration is China’s broader corporate governance reforms of the past two decades aimed at reducing agency conflicts between the controlling shareholders and the minority shareholders. The Model AoA requirement – deriving from a statutory requirement (Article 16, Company Law) – for mandatory shareholder approval of certain types of guarantee provision offers a good example.Footnote ³¹ The provision of guarantee has been a uniquely popular form of the controlling shareholder benefitting at the expense of the minority shareholders. The listed company, typically at the direction of its controlling shareholder, guarantees debts on behalf of the controller or parties related to the controller, thereby exposing the listed company to a heightened risk of default.Footnote ³² The requirement for shareholder approval of these transactions, a manifestation of the majority of the minority rule,Footnote ³³ effectively requires that these transactions be performed only with the approval of minority shareholders.

2.1.3 Ownership Structure

There were 1,980 firms listed on the main boards of one of the two official Exchanges at the end of 2019. Concentrated ownership is a common feature of Chinese listed firms. Their ownership information was sourced from the WIND database, a leading data source for corporate governance research on Chinese firms. The single largest shareholders of the Chinese firms owned on average 35.93 per cent (median 33.53 per cent) of the outstanding shares. Out of 1,980 sample firms, 59.95 per cent or 1,175 firms had a largest shareholder possessing 30 per cent or more of the company’s shares. This figure of 30 per cent is an important threshold of shareholding under PRC law.Footnote ³⁴ Crossing the 30 per cent mark generally triggers a legal obligation to make a general offer to all other shareholders so that the control premium is shared among shareholders in a change of control premium. This mandatory bid rule (first introduced back in 1993 under PRC law), in tandem with China’s corporate finance regime which has remained hostile to the notion of bank-loan-financed acquisition, is generally perceived to make any attempt of crossing the 30 per cent mark prohibitively expensive.Footnote ³⁵

The data on the share ownership of the largest shareholder can, however, understate the degree of control that the controlling shareholders have over the Chinese listed sector. It is well known that some other large shareholders are related to the largest shareholder, and that they often act in concert with the largest shareholder. No systematically organized data on these related shareholders (such as their identities and shareholdings) is available. Nevertheless, the shareholdings of the ten largest shareholders give an indication: the largest ten shareholders of the sample firmsFootnote ³⁶ possessed on average 60.54 per cent (median 61.65 per cent) of the shares. It follows that the next nine largest shareholders (some of them are related to the largest shareholder) held on average 24.61 per cent of the shares. It would thus be fair to state that it is the norm for a Chinese listed company to be under the control (defined as an interest of 30 per cent or more) of a controlling shareholder.Footnote ³⁷

The largest shareholders fall conveniently into four categories. First, the PRC central government and its agenciesFootnote ³⁸ as the ultimate owners. These are typically listed companies affiliated to the national champions.Footnote ³⁹ Of the sample firms,Footnote ⁴⁰ 16.98 per cent belonged to this cohort. Second, local governments at various levels and their agencies. Of the sample firms, 31.47 per cent fell into this category. The first and second groups are collectively known as the state-controlled firms. The third category consists of private individuals, contributing 49.54 per cent of the sample firms. Most of the private individuals are Chinese nationals, and some are foreign. These are privately owned companies. The remaining 2.01 per cent of the sample firms had the largest shareholders that do not fall into any of the afore-mentioned categories. These include the village ‘collective’ (a form of rural economic organization), employee shareholding schemes (trade unions) and charities. Earlier studies have shown that state-owned listed firms tend to be disproportionately larger than non-state-owned firms, measured by market capitalization. State-owned firms remain dominant in the Chinese stock markets.Footnote ⁴¹

Institutional investors are an important group in China’s A-share markets.Footnote ⁴² For the purpose of this study, China-domiciled institutional investors are distinguished from foreign institutional investors investing in the Chinese A-share markets. As will be discussed in the rest of this section, domestic institutional investors include securities investment funds, insurance companies, pension funds and so on. At the end of March 2020, they collectively owned 17.04 per cent of A-shares in value. Chinese retail shareholders, on the other hand, owned 28.64 per cent of A-shares.Footnote ⁴³ Foreign institutional investors owned a mere 2 per cent of A-shares, but can nevertheless play an important role in the governance of the Chinese firms in which they invested, as will be elaborated in this section. Overall, institutional investors, both domestic and foreign, held shares in 1,865 (out of 1,980) sample firms. They aggregately hold, on average, 4.88 per cent (median 1.89 per cent) of the shares in their portfolio companies.

The largest category of institutional investors in the Chinese stock markets consists of the securities investment funds. Broadly speaking, securities investment funds are the Chinese equivalents of mutual funds. They are governed by the Law on Securities Investment Funds,Footnote ⁴⁴ and are closely regulated and supervised by the CSRC. They typically invest in stocks, bonds and monetary market instruments. By the end of 2018, there were 135 licensed securities investment fund managers licensed, managing 5,625 securities investment funds with total assets under management of RMB13.05 trillion (approximately USD1.86 trillion).Footnote ⁴⁵ By 31 March 2020, securities investment funds owned 4.18 per cent of A-shares, measured by market capitalization.Footnote ⁴⁶ At the end of 2019, these funds held stakes, large or small, in over 97 per cent of the sample firms, with an average of 2.75 per cent (median 0.80 per cent) of the shares in their portfolio companies.

Insurance companies are the second largest institutional investors in A-shares. Chinese insurers have been allowed to hold equity shares for their own account since 2004. Chinese portfolio regulations have allowed insurance companies and their asset management arms to invest up to 30 per cent of their total assets into A-shares. By 31 March 2020, insurance companies owned 4.10 per cent of the A-shares, measured by market capitalization.Footnote ⁴⁷ At the end of 2019, Chinese insurers were present in 228 (out of 1,980) sample firms, with an average of 4.80 per cent (median 2.06 per cent) of the shares in their invested companies.

Pension funds are another important type of institutional investor. The principal player is the National Social Security Fund (NSSF), established in 2000 by the Chinese central government to fund the country’s social security system. The NSSF may invest in stocks, fixed-income products and unlisted equity. At 31 March 2020, the NSSF owned 2.08 per cent of A-shares.Footnote ⁴⁸ At the end of 2019, the NSSF was counted as a shareholder of 308 (out of 1,980) sample firms, with an average of 2.58 per cent (median 1.68 per cent) of the shares in their invested companies. Enterprise annuities, the Chinese equivalents of corporate pension plans, remain a modest presence in the Chinese stock markets. They were seen in only 3 (out of 1,980) sample firms.

Other important categories of China-domiciled institutional investors include securities companies (owning 0.59 per cent of A-shares by 31 March 2020)Footnote ⁴⁹ and their investment arms, trust companies, finance companies, banking institutions and private equity firms.

Of particular importance to our research is a unique type of institutional investor in the Chinese A-share markets, the Qualified Foreign Institutional Investor (QFII). The QFIIs are a selected cohort of foreign institutional investors authorized to invest in A-share stocks, typically on behalf of their ultimate beneficiaries. At the end of 2018, 309 QFIIs were licensed.Footnote ⁵⁰ Until recently, QFIIs were the main, if not the only, formal channel through which foreign capital could invest in China’s stock markets. The recent stock market open-up initiatives, such as the Shanghai–Hong Kong Stock Connect (introduced in 2014) and Shenzhen–Hong Kong Stock Connect (introduced in 2016), have enabled international investors to bypass the QFIIs and invest directly in the A-share markets. However, the QFIIs have remained important players and, as discussed in Section 2.3.2.1, some of them are particularly activist shareholders.Footnote ⁵¹ Official statistics show that, in August 2019, QFIIs owned 1.5 per cent of A-shares, amounting to just over 40 per cent of all foreign portfolio investments in the A-shares.Footnote ⁵² At the end of 2019, QFIIs held investments in 194 (out of 1,980) sample firms, with an average of 1.51 per cent (median 0.95 per cent) of the shares in their portfolio firms.

2.2.1 Shareholders’ Right to Call a Meeting

There are two types of shareholders’ meeting for the listed company: the annual meeting (AGM) and extraordinary general meeting (EGM).Footnote ⁵³ In general, the shareholder meeting is convened by the board of directors.Footnote ⁵⁴ The annual meeting, of course, is held once a year, and normally within the first six months of the calendar year. The extraordinary meeting is required to be held within two months of the occurrence of certain events prescribed by law.Footnote ⁵⁵ One such event is where shareholders owning, either individually or collectively, 10 per cent or more of the company’s voting shares request in writing that an extraordinary general meeting be held.Footnote ⁵⁶ The request should be made in the first instance to the board of directors, which shall take a decision within ten days upon receiving the written request as to whether to convene the requested meeting.Footnote ⁵⁷ Where the board of directors decides in favour of the request, it should give notice of the shareholders’ meeting within five days of taking the decision.Footnote ⁵⁸ The board of directors can decide against the request,Footnote ⁵⁹ but its decision is not final. The requesting shareholders are entitled to then take their request further, in writing, to the supervisory board which, if it agrees to the request, should give notice within five days of receiving it.Footnote ⁶⁰ If the supervisory board fails to give notice within this prescribed period, it is deemed to have refused to call the requested meeting, in which case the requesting shareholders are entitled to call the requested meeting and convene it on their own.Footnote ⁶¹

In the case that the requesting shareholders proceed to convene the shareholders’ meeting, they are required to notify the board of directors in writing.Footnote ⁶² The requesting shareholders should also give notice fifteen days in advance of the meeting.Footnote ⁶³ Chinese law requires a degree of regulatory oversight over these procedural issues, though it is generally applied with a light touch. So, both the notification served to the board of directors in respect of the meeting and the notice of the meeting are required to be filed with the CSRC’s local office of the company’s domicile and the Exchange on which the company is listed.Footnote ⁶⁴ No approval or endorsement is, however, required from the regulator and the Exchange.

The board of directors must assist the requesting shareholders in the convening of the meeting. The board is required to provide the requesting shareholders with the list of shareholders at the record day.Footnote ⁶⁵ The necessary costs of the meeting convened by the shareholders shall be borne by the company,Footnote ⁶⁶ removing an important financial hurdle for activist shareholders to call and convene a general meeting.

2.2.2 Shareholder Proposal Right

Shareholders holding, either individually or collectively, 3 per cent or more of the shares are entitled to initiate a proposal no less than ten days before the meeting.Footnote ⁶⁷ The proposal must be in writing and should be submitted to the board of the directors. The board must notify all shareholders of the proposal within two days of receiving it.Footnote ⁶⁸

The questions of whether the shareholder proposal is excludable, and if so by whom, are not well settled under PRC law. The relevant statutory provisionFootnote ⁶⁹ in the Company Law appears, on the one hand, to suggest that the convener of the meeting (typically the board of directors) is obliged to include in the meeting agenda any shareholder proposal received. It seems to follow that the shareholder proposal is not excludable. On the other hand, however, the same provision also stipulates that the shareholder proposal should meet certain criteria. It should concern matters falling under the authority of the shareholders’ meeting, and it must carry particular topic(s) and specific issues to vote on.Footnote ⁷⁰ It can be inferred that a proposal failing to meet these criteria may well be excludable. The Shanghai Stock Exchange has attempted to reconcile the seeming inconsistencies in law. In a regulatory guidance, it makes the following statement:Footnote ⁷¹

Under the Shanghai Stock Exchange’s approach, the board’s decision in respect of excludability of the proposal does not constitute a board resolution per se, which under the PRC law is judicially challengeable. Thus the board’s discretion is generally insulated from judicial scrutiny. However, the board may find its decision closely scrutinized by the Exchanges. Anecdotal evidence suggests that both the Shanghai and Shenzhen Stock Exchanges have intervened in respect of the board’s determinations about the excludability of shareholder proposals. The Exchanges have publicly questioned the boards for excluding shareholder proposals.Footnote ⁷²

2.2.3 Shareholder’s Informational Right at the Meeting

The shareholders are entitled to an annual work report from the board of directors and the supervisory board, respectively, at the annual shareholders’ meeting.Footnote ⁷³ The annual reports are routine agenda items for the annual meeting, on which shareholders cast their votes. Shareholders are also provided with detailed information on candidates standing for election. Such information includes candidates’ personal profiles, their relationship with the company or its controlling shareholder, their holdings in the company and the record of any disciplinary or enforcement actions taken against the candidate.Footnote ⁷⁴

To obtain further information about the agenda items and more generally about the company, shareholders have the right to make queries at the shareholders’ meeting.Footnote ⁷⁵ Members of both boards and senior executives present at the meeting should respond to those queries, providing shareholders with ‘explanations’,Footnote ⁷⁶ presumably, on given courses of action the company has taken that have come to shareholders’ attention. Shareholders are also entitled to make ‘suggestions’ at the meeting, to which the board members and executives present are to respond and reply.Footnote ⁷⁷ The shareholders’ queries and suggestions are required to be recorded in the meeting minutes; so are the explanations and replies given.Footnote ⁷⁸ However, the minutes are not publicly accessible.Footnote ⁷⁹

The shareholder meeting theoretically offers shareholders an important avenue to access information and voice their concerns. There is, however, little legal guarantee that their questions and suggestions will be taken seriously by the management. Anecdotal evidence suggests that sometimes those queries have been brushed aside by the management as unwanted ‘disruptions’ to the conduct of the meeting, or have simply been ignored.Footnote ⁸⁰

2.2.4 Voting, Cumulative Voting and the Majority of the Minority Rule

Votes are cast by shareholders in Chinese listed firms at both AGMs and EGMs. As indicated above, the listed company is required to hold its AGM on an annual basis.Footnote ⁸¹ The EGMs are required to be held within two months where any of the circumstances prescribed by the PRC Company Law and the company’s articles of association occur.Footnote ⁸² These include: where the number of directors falls below two-thirds of the number stipulated by the Company Law or the company’s articles of association; where the uncovered loss exceeds one-third of the company’s paid-up capital; where shareholders owning, either individually or collectively, no less than 10 per cent of the company’s shares so require; where it is deemed necessary by the board of directors; where it is proposed by the supervisory board; and in any other circumstances prescribed by the company’s articles of association.Footnote ⁸³

Shareholders can cast votes in person and by proxy at the meeting.Footnote ⁸⁴ The shareholder is entitled to authorize an agent (or proxy) to attend the general meeting, and the authorization must be in writing.Footnote ⁸⁵ The proxy votes in the name of the shareholder within the scope of the shareholder’s authorization.Footnote ⁸⁶ Proxy solicitation has been permitted since the early 1990s under PRC law.Footnote ⁸⁷ It has been codified as part of China’s recent overhaul of its Securities Law, which came into effect in March 2020. A shareholder owning 1 per cent or more of the shares is entitled to publicly solicit proxies,Footnote ⁸⁸ provided that the proxy materials provide accurate and sufficient information and that shareholders are not remunerated for granting proxies.Footnote ⁸⁹ According to recent studies, 415 proxy solicitations were recorded during the period from 2004 to 2017.Footnote ⁹⁰ Of these, 83 per cent were initiated by independent directors, 17 per cent by the board of directors and 1 per cent by the majority shareholder. None of the recorded proxy solicitations was initiated by minority shareholders. Of these proxy solicitations, 71 per cent concerned the share option scheme, 23 per cent concerned an ad hoc reform initiative imposed by the CSRC in 2006 and the remaining 6 per cent concerned other matters. Out of the 415 instances of shareholders’ solicitations, 412 were successful.Footnote ⁹¹

In theory, a Chinese listed company must hold physical shareholder meetings.Footnote ⁹² In other words, virtual-only meetings are not permitted. However, shareholder participation in the meeting by Internet or other electronic means has been strongly encouraged in recent years, and shareholders participating online are deemed as being present at the meeting.Footnote ⁹³ The regulatory emphasis has been on shareholder voting via the internet, which has been allowed since 2004 and was made mandatory for Chinese listed companies in 2014. The time window for, and methods of, online voting must be stated in the meeting notice.Footnote ⁹⁴ Online voting is conducted through the platforms hosted by the Exchanges.

As a matter of general principle, each share is entitled to one vote on each matter voted on at the shareholders’ meeting.Footnote ⁹⁵ The one share–one vote rule is, however, subject to important exceptions, one of which is cumulative voting.Footnote ⁹⁶ Cumulative voting has become mandatory since 2002 in China for blockholder firms (i.e., firms where the blockholder owns more than 30 per cent of the company’s outstanding shares), though it remains elective for non-blockholder firms. Empirical studies have shown that cumulative voting has been widely adopted both by blockholder firms (for which cumulative voting is mandatory) and by non-blockholder firms (for which cumulative voting is only optional).Footnote ⁹⁷ Cumulative voting is generally understood to give (large) minority shareholders some representation on the board, and therefore a greater voice.

Another important deviation from the one share–one vote principle is the majority of the minority (MOM) rule. The MOM rule is widely perceived as a device to limit controlling shareholder conflicts of interest, by requiring disinterested shareholder approval of transactions where the conflicts are acute. A prime example of such transactions is the related-party transaction, where the controlling shareholder engages in a transaction with its controlled company. The MOM rule is expressed in Chinese law as a rule that excludes the interested shareholder from voting on an interested agenda item at the meeting.Footnote ⁹⁸ Where a shareholder is interested in a transaction voted on at the shareholder meeting, insofar as that transaction is concerned, the votes that related shareholder holds do not count toward the total number of votes cast on the transaction.Footnote ⁹⁹

2.2.5 Stewardship Code

The notion of institutional investor stewardship has gained some traction in China’s recent overhaul of its Code of Corporate Governance.Footnote ¹⁰⁰ The Code adopts a “soft” approach; stewardship is encouraged for institutional investors, but is not mandatory. The Code envisages two ways in which institutional investors engage their portfolio firms. First, the shareholder right. Institutional investors are encouraged to exercise their shareholder rights, such as the right to vote, the right to make queries and the right to make suggestions.Footnote ¹⁰¹ The second way centres on the board. Institutional investors are encouraged to recommend candidates for the board of directors and the supervisory board, and to monitor the performance of board members.Footnote ¹⁰² However, the Code stops short of suggesting that institutional investors, subject to their holdings in the invested firms, initiate shareholder proposals for, among other things, director nomination. The Code also encourages transparency. The institutional investor is encouraged to disclose publicly its objectives and principles of engagement, its strategies on shareholder voting, its engagement activities and the extent of their effectiveness.Footnote ¹⁰³

Several types of institutional investors are named specifically in the Code for the stewardship role: social security funds, corporate annuities, insurance companies and securities investment funds.Footnote ¹⁰⁴ The Code also highlights a unique institution: the China Securities Investor Services Centre (CSISC). The CSISC claims to be a non-profit, shareholder-protection organization, and it is officially affiliated to the CSRC. Of particular note is the CSISC’s initiative coined as ‘holding shares, exercising rights’, under which it holds, though open market acquisition, 100 shares in each of the companies listed on the Shanghai and Shenzhen Stock Exchanges. Though almost negligible, CSISC’s shareholding serves, however, an important purpose: it gives the CSISC the necessary standing required under Chinese law to act in the capacity of a shareholder, thereby entitling it to all rights conferred upon the shareholder. The CSISC claims that it avails itself of the wide array of shareholder rights vested in it as a shareholderFootnote ¹⁰⁵ in order to serve a public good, namely the safeguarding of the legal rights and interests of minority shareholders.Footnote ¹⁰⁶ It may do so on its own or, where appropriate, acting in concert with other shareholders.Footnote ¹⁰⁷

The CSISC has in recent years emerged as an activist shareholder, wielding considerable influence on the Chinese listed sector. By August 2019, the CSISC had participated in 2,471 shareholder meetings, exercised shareholder rights on 3,210 occasions and brought one lawsuit against a listed company.Footnote ¹⁰⁸

2.3.1 Voting in Practice

Chinese listed companies have since 2006 been required to disclose, after each shareholders’ meeting, information on shareholder turnout and voting outcomes. Such disclosures include the number of shareholders (and proxies) attending the shareholders’ meeting, the number and percentage of shares held by them and the voting outcomes of each of the resolutions.Footnote ¹⁰⁹ An additional disclosure requirement was introduced in 2014 for minority votes. As well as disclosing the votes cast by all of the shareholders, listed companies are now also required to disclose separately the votes cast by minority shareholders, as a group, on the resolutions that are deemed to have a significant impact on their interests. Minority shareholders are defined as shareholders holding 5 per cent or less of the company’s shares. The purpose of the reform was to amplify the ‘voice’ of minority shareholders, thereby incentivizing their participation in the governance of their invested firms.Footnote ¹¹⁰ The disclosure requirement for minority votes, per se, does not confer upon disinterested, minority shareholders the power to veto a resolution.

Data on shareholder voting was manually and systematically collected from the company disclosure documents released after each and every shareholders’ meeting of all Chinese companies listed on the main board of the Shanghai Stock Exchange (SHSE) during the four-year period from 2015 to 2018. The period of investigation commenced in 2015 because this was the first year in which the disclosure requirement for minority votes was universally observed.Footnote ¹¹¹ The sample firms were all drawn from those listed on the SSE, and did not include those listed on its sibling Shenzhen Stock Exchange (SZSE). This was because new initial public offerings (IPOs) on the SZSE were halted in 2000. All Chinese IPOs since then have been floated only on the SHSE. The SHSE samples thus present a considerably fuller and less biased picture of the A-share listed sector.

The source of the sample firms’ disclosure documents is CNInfo,Footnote ¹¹² a website officially designated by the Chinese regulatory authorities for online release of disclosure documents. These documents are in PDF format, and are mostly machine readable. Data has subsequently been extracted from them by using advanced data mining programmes that have been developed for the special purposes of this study.

Our dataset thus includes 1,041 SHSE-listed firms in 2015, 1,117 firms in 2016, 1,341 firms in 2017 and 1,434 firms in 2018, respectively.Footnote ¹¹³ These firms held 14,959 annual and extraordinary shareholders’ meetings during the period 2015 to 2018. In other words, each Chinese listed company held, on average, 3.03 meetings per year. In total over 124,652 resolutions (or, on average, 8.33 resolution per shareholders’ meeting) with voting outcomes were recorded in our dataset. To the best of our knowledge, this is by far the most comprehensive and inclusive dataset on shareholder voting in China’s A-share markets.

As Figure 2.1 shows, there was a marked variation in shareholders’ turnout, ranging from close to 0 per cent to close to 100 per cent. The close to 0 per cent attendance occurred in rare circumstances where a shareholders’ meeting was not attended by the largest shareholder (or indeed any large shareholders) but by only small, minority shareholders. A closer look at the data shows that attendance differed significantly from one company to another, and often differed within the same company from one meeting to another. However, there appears, overall, to have been a general uptick of shareholders turnout during the 2015–18 period. The median (and average) ratios of shares held by the shareholders participating in the shareholders’ meeting increased from below 50 per cent in 2015 to slightly over 50 per cent in 2018. To place the turnout ratios in context, it is worth noting that the single largest shareholders of the Chinese firms owned on average 35.93 per cent of the shares, as indicated above.

Figure 2.1 Shareholder turnouts at the Shanghai Stock Exchange, 2015–18

Note: Turnouts are defined as the shares held by the participating shareholders relative to the company’s total outstanding shares, expressed in percentage terms.

Counterintuitively, the general upward trend in respect of shareholders’ participation as measured by shares they represented did not translate into a similar increase in the headcounts of attending shareholders. On the contrary, the average (and median) numbers of shareholders participating in the meeting, either in person, by proxy or online, decreased sharply from 46 (21) in 2015 to 36.19 (15) in 2016, as shown in Figure 2.2. The numbers have generally stabilized since. The sharp drop seen in 2015–16 seems perplexing. It may have resulted from the turmoil in the securities market in the summer of 2015, when the SSE Composite Index fell by as much as 43 per cent in the three months of June, July and August. The market boom in 2015 seems to have propelled the yearly number of active share trading accounts to a historical high of 58.8 million in 2015, up from 33.8 million in 2014. The number dropped sharply by over 55 per cent to 26.2 million in 2016.Footnote ¹¹⁴ The marked decline in the headcounts of shareholders in 2015–16 may have mirrored a broader drop in the number of active investors in the A-share markets. Taking the modest increase in shareholder turnouts and sharp decline in shareholder headcounts together, the drop seems largely to have been attributable to investors holding insignificant equity stake. It may also have resulted from growing interest, albeit modest, among large shareholders in participating in shareholders’ meetings.Footnote ¹¹⁵

Figure 2.2 The numbers of shareholders participating in the shareholders meetings at the Shanghai Stock Exchange, 2015–18

Note: Outliers have been removed.

Consisting of over 120,000 resolutions, our dataset sheds fresh light on the types of resolutions on which Chinese shareholders in the sample firms voted. The parameters for the resolution types are defined broadly by the Model AoA, as indicated above. Table 2.1 shows that, among the fifteen types of resolutions prescribed by the Model AoA,Footnote ¹¹⁶ the largest cohort of resolutions consists of election of directors/supervisors and their remuneration, accounting for 21.48 per cent. It is followed by business policies and investment plans (15.61 per cent) and capital increase/decrease (14.11 per cent). The least common types of resolutions are merger, split, dissolution or liquidation (0.64 per cent) and share-option scheme (2.01 per cent). It should be noted that 10.15 per cent of the resolutions did not fall conveniently into the resolution types preset by the Model AoA, and have been classified by us as ‘Others’.

Formal shareholder dissent was infrequent in the sample firms, as our data shows in Figure 2.3. Of sample resolutions (ex-director/supervisor elections), 22.73 per cent were approved unanimously, and a further 49.10 per cent were approved by between 99.9 per cent and 100 per cent of the participating shareholders. Another 16.56 per cent of the sample resolutions were supported by over 99 per cent but less than 99.9 per cent of shareholders who cast votes. Together, close to 90 per cent of the sample resolutions had approval rates higher than 99 per cent. Clearly, formal shareholder dissent is almost unknown in the Chinese listed sector. It is notable that 0.50 per cent of the sample resolutions were not supported by a majority of the shareholders.Footnote ¹¹⁸ Among these resolutions, 34 per cent fall into the category of ‘business policies and investment plans’, and 22 per cent into the group of ‘capital increase or decrease’.

Figure 2.3 Resolution-level approval ratios at the Shanghai Stock Exchange, 2015–18

Having said this, the levels of shareholder approval differed across various types of resolutions, as shown in Table 2.1. Shareholder approval was the highest in the more routine and mundane types of resolutions considered at the annual shareholders’ meeting. These include the work report of the board of directors (99.43 per cent on average), the work report of the supervisory board (99.38 per cent on average) and the annual budget and accounts (99.45 per cent on average). Bond issuance was another resolution type that received high levels of shareholder support (99.43 per cent on average). Shareholder dissent was most common in two types of resolutions known for their potential conflicts of interest in China’s institutional settings: (1) capital increase, typically via rights issues or private placements (97.56 per cent on average); and (2) substantial acquisition (or disposal) of assets (97.50 per cent on average). Surprisingly, the provision of a guarantee (typically in favour of the listed company’s controlling shareholder or its affiliates), a once-popular method of ‘tunnelling’ in the Chinese markets, did not record particularly high levels of shareholder disapproval (such resolutions, on average, were supported by 98.85 per cent of the shareholders).

2.3.2 Shareholder Activism: Case Studies

Our dataset offers a new window through which the role of institutional investors can be examined more empirically. Importantly, they offer a way of more directly identifying companies that were targets of activist investors, by pinning down the resolutions that were either voted down (typically receiving less than 50 per cent of the votes cast) or faced high levels of shareholder disapproval. This enabled us to focus our inquiry on a relatively small pool of target companies.

Having identified these target companies, we arranged semi-structured elite interviews, to the extent that access could be secured, in which we met face-to-face with activist investors and, where possible, management of the sample companies. The circumstances surrounding the activist events were discussed with interviewees. In keeping with standard practices, interviewees were promised total anonymity and confidentiality. Importantly, because of the highly sensitive nature of the matters involved, interviewees’ identities are anonymized to the best of our ability.Footnote ¹¹⁹ Interview data were verified against, and supplemented by, news media coverage of the activist events.

Two activist scenarios have emerged: activist investors voting down resolutions initiated by the management or the controlling shareholder; and activist investors initiating their own proposals. Each of the scenarios are illustrated in reference to specific activist cases.

3.1.1 The Role of the Board and Directors’ Duties

The board structure of Hong Kong companies follows the UK and US model, with a unitary board in charge of managing corporate affairs. General management power is usually vested in the board of directors by the company’s constitution.Footnote ⁹ In general, directors owe a duty of care and fiduciary duties to the company. They must consider the interests of the company, meaning the interests of shareholders as a general body, when making business decisions.Footnote ¹⁰ Even though directors do not owe duties to creditors directly, they have a duty to consider the interests of creditors when the company is in the vicinity of insolvency.Footnote ¹¹

In the past, Hong Kong followed English common law in regulating director duties. The UK codified director duties in the Company Act of 2006. Following the UK, Hong Kong codified directors’ duty of care in the Companies Ordinance in 2014. However, fiduciary duties are still largely governed by general law. Directors’ equitable duties include a duty to act in good faith in the interests of the company; exercise power for a proper purpose; avoid conflicts of interest; not make secret profits; and not misappropriate company assets.Footnote ¹² In addition to these equitable duties, statutory law strengthens the regulation of conflict-of-interest transactions that are of significance to the company’s business by requiring the disclosure of material interests by directors and additional approval by boards of directors.Footnote ¹³ The HKSE’s Listing Rules set out additional disclosure and procedural requirements for entering into ‘connected transactions’ with connected persons by listed companies.Footnote ¹⁴ In general, connected transactions require the approval of shareholders advised by an independent board committee solely comprising independent non-executive directors (INEDs).Footnote ¹⁵ Continuing connected transactions also require an annual review by INEDs and auditors.

INEDs play an important role on boards. The Listing Rules require at least one-third of the boards of listed companies to consist of INEDs.Footnote ¹⁶ To maintain their independence, the Corporate Governance Code stipulates a nine-year maximum period of service for INEDs. If an INED serves for more than nine years, any further appointment must be subject to a separate resolution approved by shareholders.Footnote ¹⁷ However, the effectiveness of independent directors has been widely questioned. The challenge in Hong Kong lies in the fact that boards are typically controlled by founding families or close-knit shareholding groups.Footnote ¹⁸ It is thus difficult for INEDs, who make up only one-third of boards, to effect changes or voice contrary opinions. A number of suggestions have been made for improving the professionalism of INEDs, including enhancing their training and education, limiting the number of directorships and reserving seats for minority shareholders.Footnote ¹⁹

3.1.2 Division of Corporate Powers

The division of corporate powers between the board and general meeting is generally decided by company’s articles of association (AoA). As noted, management power is generally vested in the board of directors. However, in cases where the articles are not clear about the division of powers, the courts must decide whether and how shareholders can override directors on management decisions. Before 2003, the division of corporate power was an unresolved, and even controversial, issue in Hong Kong. There are two views under general law: one allows shareholders to take over the management power of directors by a resolution, the threshold of which depends on the relevant regulation in the AoA, whilst the other treats directors’ management power as exclusive – that is, shareholders can remove directors only if they do not agree with them.Footnote ²⁰

The issue was resolved in 2003 by adopting provisions in the Model Articles allowing shareholders to give directions to the board via a special resolution passed with the approval of 75 per cent of the total voting rights of the shareholders presented.Footnote ²¹ According to the Model Articles, management powers are vested in directors but are subject to control by shareholders through a special resolution of the general meeting.Footnote ²² However, to protect the third parties involved in a given transaction, shareholders cannot invalidate a prior act of directors.Footnote ²³ In addition to the general power-allocation provision, certain powers are vested specifically in directors or the general meeting pursuant to the Companies Ordinance or Model Articles.Footnote ²⁴

3.1.3 Ownership Structure

There are two main features of the ownership structure of Hong Kong-listed companies: share concentration and foreign incorporation. Around 85 per cent of the listed companies on the HKSE are foreign incorporated companies.Footnote ²⁵ A study on the shareholding structure of fifteen major Hong Kong corporate groups found that more than 60 per cent of them were controlled by families or the state, whilst less than 10 per cent had a dispersed ownership structure.Footnote ²⁶ In addition, a survey on the changes in controlling shareholdings from 2003 to 2012 found that the distribution of shareholdings moved towards concentration rather than dispersion in that period.Footnote ²⁷ Family ownership is more common amongst listed companies in Hong Kong than it is in Indonesia, Korea, Japan or Singapore. A study published in 2000 revealed that the fifteen families in Hong Kong controlled 84 per cent of the listed assets of Hong Kong companies and that 72.5 per cent of the largest companies in Hong Kong were family-owned.Footnote ²⁸

Recent statistics show that mainland China concept firms, incorporated in the mainland or elsewhere, dominate the listing market in Hong Kong. There are three main types of mainland concept firms: H-Share, red chip and mainland private enterprises.Footnote ²⁹ In 2004, mainland enterprises comprised only 16.6 per cent of HKSE listed companies and 27.7 per cent of HKSE market capitalization.Footnote ³⁰ By the end of 2021, however, mainland enterprises accounted for 53 per cent of all Hong Kong listed companies and more than 79 per cent of HKSE market capitalization.Footnote ³¹ The composition of listed companies poses challenges for the HKSE and relevant government agencies in monitoring corporate governance and enforcing the Listing Rules and securities regulations. They must reconcile the differences in corporate governance standards in different jurisdictions and enhance cross-border cooperation in securities law enforcement, especially because 11 per cent of listed companies are Chinese state-owned enterprises, in which the Chinese government is the controlling shareholder.Footnote ³²

3.2.1 Right to Attend the General Meeting

In Hong Kong, shareholders have the right to attend general meetings. That right is fundamental because it affords shareholders an opportunity to meet and discuss corporate affairs, inspect annual financial statements, consider the reports of directors and auditors and elect directors.Footnote ³³ Shareholders attending a general meeting are also entitled to raise questions with management concerning the company’s affairs.Footnote ³⁴ A hybrid meeting (online and in person) is generally allowed, meaning that a company can use relevant technology to hold a general meeting at more than one place unless its AoA state otherwise.Footnote ³⁵ Shareholders can vote and speak even if they attend meetings online. In general, purely virtual meetings are not supported by the Companies Ordinance; listed companies are required to convene either physical or hybrid shareholder meetings.Footnote ³⁶

In light of the COVID-19 pandemic, the Hong Kong government has put social distancing measures in place to prohibit group gatherings in public places, including any place that the public or a section of the public can access or is permitted to access from time to time.Footnote ³⁷ Following the prohibition on group gatherings, the Securities and Futures Commission (SFC) and HKSE released a joint statement on 1 April 2020 to instruct public companies on how to properly conduct general meetings during the pandemic.Footnote ³⁸ By and large, annual general meetings (AGMs), which are required under the Companies Ordinance, are exempt from the group-gathering prohibition. Although extraordinary general meetings (EGMs) also fall within the exemption, they must be held within the prohibition’s effective period to comply with the law or another regulatory instrument. The aforementioned joint statement also encourages listed companies to consider longer adjournments or delays and to ensure that necessary precautions are in place to ensure the safety of attendees.Footnote ³⁹

3.2.2 Right to Vote

In the general meeting, shareholders vote to make decisions collectively by resolution. The Companies Ordinance requires a quorum of two members for a general meeting.Footnote ⁴⁰ As a general rule, there are two types of resolution in Hong Kong: ordinary resolutions and special resolutions. Pursuant to section 563 of the Companies Ordinance, ordinary resolutions are passed by a simple majority. All resolutions stipulated in the Ordinance and companies’ AoA are ordinary resolutions unless otherwise specified.Footnote ⁴¹ Special resolutions, in contrast, are passed by a majority of at least 75 per cent.Footnote ⁴² Certain affairs must be decided by special resolutions, such as an alteration in the company’s AoA,Footnote ⁴³ a change of the company name,Footnote ⁴⁴ a reduction in the company’s share capitalFootnote ⁴⁵ or members’ voluntary winding-up.Footnote ⁴⁶

Every shareholder has a right to vote in the general meeting subject to the company’s AoA.Footnote ⁴⁷ In principle, one share is entitled to one vote unless the company issues dual-class shares and defines relevant rights in its AoA.Footnote ⁴⁸ In the past, the HKSE followed the one-share-one-vote principle, and consequently rejected Alibaba’s initial public offering (IPO) request.Footnote ⁴⁹ Because Alibaba is a benchmark enterprise and its 2014 IPO on the New York Stock Exchange was the largest IPO in the world at the time, the HKSE experienced immense pressure from market participants in Hong Kong to lift the ban on dual-class shares and other similar governance structures.Footnote ⁵⁰ After three public consultations, the HKSE finally decided to allow the dual-class share structure in firms listed in or after April 2018.Footnote ⁵¹ To protect minority shareholders, the Listing Rules require that firms that issue so-called ‘weighted-voting rights’ shares must cap these super-voting shares at ten votes per share and decide certain issues, such as article alterations, on a one-share-one-vote basis.Footnote ⁵²

Shareholders can vote for or against a resolution. In general, voting is conducted by a show of hands unless a poll is demanded.Footnote ⁵³ However, for listed companies, the HKSE requires that all votes at the general meeting be taken by poll except for those concerning procedural or administrative matters decided by the chairperson of the meeting.Footnote ⁵⁴ Shareholders can attend the meeting either in person or online. They also have the option not to attend the meeting but to submit a proxy to appoint nominees to attend, speak and vote on their behalf.Footnote ⁵⁵ Normally, such appointments are made in the form of a signed hard copy of a written proxy document with the member’s name and address and the nominee’s name on it unless the company provides an online submission alternative.Footnote ⁵⁶ As a general protection for shareholder interests, companies are obliged to endeavour to ensure that all shareholders are aware of their right to appoint nominees under the Companies Ordinance.Footnote ⁵⁷ The HKSE further mandates that listed companies send their registered shareholders proxy forms with voting options on each resolution and notice of the general meeting.Footnote ⁵⁸

However, to attend the meeting in person or online or submit a proxy, investors must first be registered with the company concerned. Under the current regime, registered shareholders are usually not public investors who buy shares through a broker, bank or custodian. Accordingly, shares are either held by intermediaries through the Central Clearing and Automated Settlement System (CCASS), which is run by the Hong Kong Securities Clearing Company (HKSCC), or registered in the name of the intermediary’s own nominee. Currently, most shares are held through CCASS because they must be in the system to be traded.Footnote ⁵⁹ Shares so held are registered in the name of Hong Kong Securities Clearing Company Nominees (HKSCCN), which is the nominee subsidiary of HKSCC. Therefore, in reality, HKSCCN is the true legal owner, whilst investors are only the beneficial owners of their shares.Footnote ⁶⁰

Shareholders are eligible to attend, speak and vote at the general meeting only if they are the shareholders whose names are entered into the company’s register of members.Footnote ⁶¹ Therefore, public investors who wish to attend the meeting can either try to register with the company as registered shareholders or, if the shares are held by intermediaries or CCASS, instruct them to appoint investors to attend the meeting in respect of their shares. Even if investors do not wish to attend the meeting, they can still instruct the intermediaries or CCASS, depending on how the shares are registered, how to vote their shares. The HKSE maintains an investor participant system by which shareholders can instruct the HKSCC on how to vote on corporate actions and activities.Footnote ⁶² Investors can send their instructions to CCASS either by phone or via the internet, and CCASS then sends its nominee or nominates the chairperson of the meeting to vote upon the investor’s demand with a proxy form in the name of the HKSCC.Footnote ⁶³ No vote is made if the investors concerned do not make such a demand.

However, when it comes to shares held by institutional investors, such as mutual funds and pension funds, those investors are expected to seek to vote all shares held for their clients according to the Principles of Responsible Ownership published in March 2016. The investors referred to in the Principles are those ‘who invest money, or hold shares, on behalf of clients and other stakeholders and are accountable to such clients and other stakeholders’, including but not limited to institutional shareholders.Footnote ⁶⁴ The Principles are not intended to apply to retail and individual investors. If it is inappropriate to vote all of the shares held, institutional investors should disclose the reasons to their stakeholders. They should also not automatically support the board.Footnote ⁶⁵ Having said that, the stewardship code in Hong Kong is entirely voluntary and non-binding.

3.2.3 Right to Call a Meeting

A company must call an AGM at least once a year. Under the Companies Ordinance and Model Articles, the board of directors has the power to call a general meeting.Footnote ⁶⁶ Such power must be exercised by the board as a corporate organ, not by an individual director, unless otherwise authorized by statutory law or the company’s AoA.Footnote ⁶⁷ Companies must give proper notice to all parties eligible to attend the general meeting,Footnote ⁶⁸ including notice of the place and time of the meeting, the issues to be discussed at the meeting, whether the meeting is an AGM and the content of any resolutions.Footnote ⁶⁹ A company and its officers commit an offence if they fail to hold an AGM within the specified period.Footnote ⁷⁰

In general, shareholders do not have the power to call a general meeting if the board is capable of and willing to convene the meeting.Footnote ⁷¹ Shareholders who wish to have a meeting called must first demand that the board do so. Under the Companies Ordinance, shareholders who hold at least 5 per cent of total shares are entitled to demand that the board call an EGM.Footnote ⁷² Upon receiving a shareholder’s demand, the board of directors is required to call the meeting within a specified period; otherwise, the shareholder who made the demand or any shareholders representing more than one-half of shareholders’ total voting rights can call a meeting at the company’s expense.Footnote ⁷³ If a company lacks a director or sufficient directors capable of acting to form a quorum, two or more shareholders representing at least 10 per cent of the total voting rights can directly call a meeting without first demanding that the board do so.Footnote ⁷⁴

3.2.4 Shareholder Proposal Right

Shareholders have a right to make proposals at both the AGM and EGM. In an AGM, shareholders with at least 2.5 per cent of the voting rights of the total shares eligible to vote on the proposed resolution, or at least fifty shareholders entitled to vote on the resolution, can request in writing that the company include the resolution for discussion in the AGM’s agenda.Footnote ⁷⁵ Pursuant to section 616(1) of the Companies Ordinance, companies must also send a notice of the resolution proposed by shareholders to each member at the AGM.Footnote ⁷⁶ For an EGM, the shareholders who demanded that the board convene the EGM can simultaneously propose a resolution intended to be moved at that meeting.Footnote ⁷⁷ Also, according to the Corporate Governance Code, listed companies must provide their shareholders with the information they need to add a proposal to the meeting agenda.Footnote ⁷⁸

3.3.1 Shareholder Voting in Practice

The HKSE maintains a disclosure website on which investors can search and obtain information on voting in general meetings.Footnote ⁷⁹ However, no single consolidated report exists on the aggregate level of shareholder voting and attendance in Hong Kong. Computershare, a proxy management firm, published a report on the voting statistics of the 377 Hong Kong-listed companies they managed from April to June 2017. It observed an increasing trend in retail shareholder attendance in recent years. The overall voting rate reached 70.10 per cent of total issued share capital in 2017. However, that high percentage was not the result of retail shareholder attendance, as only 26 per cent of those present actually voted. It was chiefly the result of votes cast by the HKSCC and majority shareholders.Footnote ⁸⁰ According to Computershare, most retail shareholders attend general meetings to collect the gifts or souvenirs distributed by the companies concerned. More than 55 per cent of the questions asked at AGMs are related to gifts and souvenirs rather than to business or governance.Footnote ⁸¹

Institutional Shareholder Services (ISS) also gathered general meeting voting data on the fifty largest companies in the HKSE, which represented around 60 per cent of its market capitalization from 2010 to 2013. The ISS report shows that the average voter turnout rate for AGMs and EGMs in Hong Kong increased from 68.8 per cent in 2010 to 74.4 per cent in 2013.Footnote ⁸² Based on the 2013 data, the voter turnout rate in Hong Kong in that year was higher than that in mainland China (54.7 per cent), France (69.6 per cent) or the UK (73.5 per cent) but lower than that in the USA (86.5 per cent).Footnote ⁸³ As for the voting results, the average approval rate for Hong Kong-listed companies declined from 95.9 per cent in 2010 to 93.3 per cent in 2013.Footnote ⁸⁴ Compared to the four other jurisdictions, the average approval rate of Hong Kong companies in 2013 was the lowest, meaning that shareholders in Hong Kong had a lower degree of consensus with the board than their counterparts in the other jurisdictions.Footnote ⁸⁵ Closer study of the type of proposals that receive low approval rates shows that Hong Kong shareholders disagree with management most often on share issuance without pre-emptive rights (80.4 per cent), commonly known as ‘general mandates’ in Hong Kong.Footnote ⁸⁶ Such disagreement probably stems from the law granting boards broad power to issue shares with general mandates authorized by the general meeting. Once shareholders approve general mandates, boards have the power to issue up to 20 per cent of outstanding shares with a maximum discount of 20 per cent, which common shareholders may find excessive.Footnote ⁸⁷

Table 3.1 shows the voting items and approval rates of the types of proposals discussed at the general meetings of the fifty sampled Hong Kong-listed companies from 2010 to 2013. Of the 1,863 agenda items, the most commonly discussed were director elections (762), share issuance without pre-emptive rights (290), audit-related issues (155), share repurchases (155) and statutory reports (147). The proposals that received the lowest approval rates were share issuance without pre-emptive rights (80.39 per cent), equity-based compensation plans (85.39 per cent), a share capital increase (86.75 per cent), related-party transactions (RPTs; 91.58 per cent) and board-related proposals (93.35 per cent).Footnote ⁸⁸

3.3.2 Shareholder Engagement in Practice

Shareholders in Hong Kong, like their counterparts in other jurisdictions, generally communicate with firms through both informal and private engagement.Footnote ⁸⁹ Overall, private engagement is the dominant and preferred mode of communication between activists and companies in Hong Kong, which is consistent with the situation in other parts of the world.Footnote ⁹⁰ In practice, unobservable, undocumented private engagement occurs behind the scenes. Public communication or intervention is typically considered only after the failure of private engagement because of the costs and risks involved.Footnote ⁹¹ The goal of private engagement is to inform investors about voting decisions and to bring about changes that benefit both firms and their investors. If private engagement is ineffective, shareholders may escalate by making their interventions public. Almost all public interventions by shareholders involve the public announcement of their demands. However, if those demands are made against the interest of the controllers, they are likely to be ignored by controllers.

In 2019, the author collected data on activist initiatives against companies listed in Hong Kong from April 2003 to April 2017. The study identified twenty-four cases and investigated how the law influenced strategy planning and activism outcomes in practice.Footnote ⁹² It focused on activist activities initiated by institutions because institutions have more financial resources and professional knowledge than individuals and are more capable of employing legal tools to exert influence on controlling shareholders.Footnote ⁹³ The study found initiatives involving formal legal mechanisms to have the highest success rate compared with those involving only non-legal mechanisms. Amongst the legal tools available, minority veto rights were the most popular mechanism used by activists in Hong Kong, who are quite effective at leveraging their positions in controlled firms. The following subsections summarize the study’s key findings on the legal tools utilized by activists.

4.1.1 The Board of Directors

India follows a one-tier board structure, and boards are central to the decision-making and governance processes.Footnote ¹⁶ The board of directors is collectively responsible for supervising the management of the company. The legislative intent to make the board liable for any kind of malfunctioning within the company is evident from the provisions of the Companies Act. Over the years, many structural reforms have been implemented for boards to improve corporate governance. CA 2013 provides for the composition of the board along with other requirements for an effective board.Footnote ¹⁷ It also introduced the terms ‘key managerial personnel’ (KMP) and ‘senior management’ to distinguish boards from the management of companies.

4.1.2 Shareholder versus Board Supremacy

CA 2013 allocates powers to shareholders and company boards. The board of directors is entitled to exercise all such powers and to do all such acts and things that the company is authorized to exercise and do.Footnote ²⁶ However, the board’s powers are not absolute. There are two major limitations on the powers of boards. First, the board can exercise its powers subject to any provisions contained in CA 2013 or in the company’s memorandum, articles or regulations, including regulations made by the company in a general meeting. Second, the board cannot exercise any power that is directed to be exercised by the company in the general meeting. No regulation made by the company in the general meeting can invalidate any prior act of the board that would have been valid had the regulation not been made.Footnote ²⁷ The board of directors functions as the ‘brain’ of the company, and directors’ powers are thus co-extensive with those of the company itself. The board of directors, after a resolution passed at board meetings, is vested with a range of powers, namely, powers to make calls on shareholders in respect of money unpaid on their shares, to authorize the buyback of securities, to issue securities, including debentures, to borrow monies, to invest the funds of the company, to grant loans or to give a guarantee or provide security in respect of loans, to approve the company’s financial statement and the board’s report, to diversify the business of the company, to approve an amalgamation, merger or reconstruction and to take over a company or acquire a controlling or substantial stake in another company, as well as powers concerning any other matter that may be prescribed.Footnote ²⁸ The board of directors may also, subject to a resolution passed at a meeting, delegate the power to borrow money, to invest the funds of the company and to grant loans or give a guarantee or provide security in respect of loans. Such delegation may be made to any committee of directors, the managing director, the manager or any other principal officer of the company.Footnote ²⁹

Shareholders’ supremacy is reflected in the general meetings of the company, wherein directors are appointed by the company and the board cannot exercise some of its powers without the consent of shareholders.Footnote ³⁰ The board cannot exercise its discretion in matters that can be decided only with the consent of the company by a special resolution.Footnote ³¹ Such powers include the power to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company; to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation; to borrow money where the money to be borrowed, together with the money already borrowed by the company, exceeds the aggregate of its paid-up share capital; to free reserves and securities premiums; and to remit or allow additional time for the repayment of any debt due from a director. However, shareholders are not authorized to affect any reduction in the share capital of the company except in accordance with the provisions of CA 2013.

Thus, the inherent and ultimate powers lie with the general meeting of shareholders, and they exercise those powers through the passing of an ordinary or special resolution. The approach of CA 2013 is to a large extent aligned with the English Companies Act 2006, which is shareholder-centric with enabling provisions. The only difference is that CA 2013 provides for the allocation of powers, whereas the English Act does not dictate how corporate power is to be allocated, leaving it as a matter for the constitution of the company.

There have been occasions on which shareholders have displayed their supremacy over the board. The Supreme Court of India had held that

CA 2013 also takes care of the interests of small shareholders in a listed company by empowering them to elect their own representative on the company’s board.Footnote ³³ The company may appoint a director elected by small shareholders if it receives a notice by at least 1,000 small shareholders or one-tenth of the total number of small shareholders, whichever is lower.Footnote ³⁴ A listed company may also opt to have a director representing small shareholders suo motu.Footnote ³⁵ The appointment of such a small shareholders’ director is subject to the same qualifications as those prescribed for other directors under section 152 of CA 2013.Footnote ³⁶ However, to date no such appointments have been made owing to the combined effects of entrenched promoters and regulatory provisions.Footnote ³⁷

4.1.3 Ownership Structure

Majority control, which is the first step towards the separation of ownership from control, is the ownership form most prevalent amongst listed companies in India through majority shareholdings lying with promoters and promoter groups. Control through a legal device without major ownership, namely, pyramiding, is also observed in listed companies and takes place through networks of group companies, including subsidiary and associate companies. Cross shareholdings have created complex webs, and steps to reduce them have been taken even in public sector undertakings, as well as in listed companies.Footnote ³⁸ Minority control is not commonly observed in Indian companies. Management control is exercised through control over the appointments of directors, KMP and senior management.

Family businesses are prominent in India.Footnote ³⁹ From the common law understanding of the term ‘promoter’ as the person who promotes a company to the first definition of the term provided by the erstwhile SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009, effort has been made to make promoters accountable within the companies they promote. CA 2013 introduced a definition that is in line with SEBI regulations.Footnote ⁴⁰ It is also important to understand who is included in the ‘promoter group’ because control within companies is exercised through the shareholdings of such groups.Footnote ⁴¹

The promoter’s role does not end with the formation of the company. The legislative intent behind the CA 2013 definition is to make promoters liable and responsible for other company matters that may arise during the company’s lifetime. In the pilot study of Nifty-50 companies, the pattern of shareholdings depicted in Table 4.1 amongst the promoter and promoter group (P&PG) for the year 2017–18 was observed.

Seven companies had more than 50 per cent foreign holdings in their P&PG shares, as shown in Table 4.2.

The average shareholding pattern for the categories of Indian and foreign P&PG and institutional and non-institutional public shareholdings, along with depository receipts, has been calculated to afford a picture of the true concentration of power in various categories of shareholders.Footnote ⁴² The results are reported in Table 4.3.

Foreign institutional investors (FIIs) are a major category of shareholders in Indian listed companies owing to the government’s liberal FDI policy. However, data collected for FY 2017–18 on the shareholdings of FIIs reveal an interesting pattern: no FIIs had a major shareholding in a Nifty-50 company in that FY, with non-institutional investors appearing to be a more important stakeholder in Indian listed companies. These results are presented in Table 4.4.

Public shareholdings in Indian listed companies are regulated by SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018. As stated earlier, SEBI mandates that listed companies maintain a minimum public shareholding level of 25 per cent.Footnote ⁴³ However, the data collected from Nifty-50 companies indicates that in FY 2017–18, only twenty-three companies maintained that level, with the remaining twenty-seven companies failing to do so.Footnote ⁴⁴

4.1.4 Role of Promoters As Shareholders and Directors

The changed role of the promoter highlights the fact that a shareholder, director or other party who has direct or indirect control of a company can be the company’s promoter. Moreover, a person can be a promoter without being a shareholder or director by way of being someone in accordance with whose directions the board of directors is accustomed to act.Footnote ⁴⁵ By holding the majority block of shares in the company, promoters are able to control the affairs of the company, dominate and influence the management of the company, and get resolutions in general meetings passed with an adequate majority.Footnote ⁴⁶ Retail, institutional and non-institutional shareholders do not make strategic investments in these companies and are unwilling to participate in their internal affairs. Owing to P&PG dominance, it seems that these shareholders are interested only in receiving returns on their investments by way of capital appreciation.

It is pertinent to note here that vide the amendment of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015,Footnote ⁴⁷ the recommendations of the Kotak Committee regarding the reclassification of promoters have been implemented, and the promoters of listed companies are now allowed to reclassify as public shareholders to reduce their shareholding to 75 per cent.Footnote ⁴⁸ To reduce their shareholdings, promoters have been given many options, such as the facility of a single window for selling shares by auction, in addition to the options already available, such as offering shares for sale, institutional private placements and further public offers.Footnote ⁴⁹ At that time, because promoters had also reclassified themselves without supplying information to SEBI, it had to come up with a mechanism to permit reclassification.

Reclassification of the promoters of existing listed companies as public shareholders can be done only after obtaining the permission of the stock exchange(s) on which the company’s shares are listed, subject to satisfaction of the conditions stipulated in the regulations.Footnote ⁵⁰ The main conditions for the reclassification of an outgoing promoter include the relinquishment of special rights and control over the affairs of the listed firm and maintaining a shareholding exceeding no more than 10 per cent.Footnote ⁵¹ After board approval, such a reclassification request must be approved by the general meeting by way of an ordinary resolution on which persons related to the promoter seeking reclassification are prohibited from voting.Footnote ⁵² Hence, shareholder approval is significant when promoters seek to change and reclassify their status to public shareholder.Footnote ⁵³ Similarly, a public shareholder can also seek to reclassify as a promoter.Footnote ⁵⁴ It is important to mention here that SEBI is examining the possibility of changing the terminology from ‘promoters’ to ‘controlling shareholders’ on the ground that the latter is more prevalent globally.Footnote ⁵⁵

4.2.1 Calling a Meeting

A forum for self-protection is provided to shareholders in the form of general meetings, and every company in India except for one-person companies is statutorily mandated under section 96, CA 2013 to hold one general meeting as its annual general meeting (AGM). An AGM can be called only on the authority of a resolution by the company’s board of directors.Footnote ⁵⁸ The board also has the power to postpone the meeting after it has been called. However, that power can be exercised only for bona fide and proper reasons.Footnote ⁵⁹ In the case of a default to hold the AGM, the NCLT, upon the application of any member, may call or direct the calling of the meeting to consider the agenda outlined in the application.Footnote ⁶⁰ The board’s power is restricted to calling the meeting; it cannot decide upon the validity of a meeting that has already been held.Footnote ⁶¹ Only a member can apply for the calling of an AGM; a company cannot do so because a company cannot seek a direction against itself.Footnote ⁶² A meeting held by order of the NCLT is deemed to be an AGM.Footnote ⁶³ A maximum gap of fifteen months is permissible between two consecutive AGMs, although the Registrar of Companies permits extensions of up to three months in certain circumstances.Footnote ⁶⁴ The company does not have suo motu authority to hold an AGM beyond the prescribed time period because the holding of an AGM is an obligation of the company rather than a right. In a 2011 court case, it was held that an AGM convened by a company itself beyond the prescribed time period would not be considered a validly convened meeting.Footnote ⁶⁵ However, this judgment was held not to be correct in law later by courts. A delay in holding a meeting leads only to the imposition of a fine.Footnote ⁶⁶ If an AGM is adjourned, the adjourned meeting should be held within the prescribed maximum time limit.Footnote ⁶⁷

The first AGM must be held within nine months of the date of the company’s FY-end, and in other cases it should be held within six months of that date.Footnote ⁶⁸ A notice of the AGM should be given in writing or electronic mode no less than a clear twenty-one days in advance of the meeting, although shorter notice may be given if 95 per cent of members entitled to vote at the AGM consent in writing or by electronic mode.Footnote ⁶⁹ Because of the difficulties arising from the COVID-19 pandemic, the rules were relaxed to allow companies whose FY (other than first FY) ended on 31 December 2019 to hold their AGM for that FY within nine months of the FY-end (i.e. by 30 September 2020). Doing so would not be viewed as a violation. The references to the AGM due date or the date by which the AGM should have been held under CA 2013, or rules made thereunder, would be construed accordingly.Footnote ⁷⁰

The AGM agenda is generally divided into two categories: general business and special business. The general business agenda is set as per the provisions of CA 2013 and includes the presentation by the board of directors of financial statements, accounts and the directors’ report to shareholders.Footnote ⁷¹ The declaration of dividends for the FY, appointment of directors and auditors and the fixation of their remuneration also fall within the general business agenda.Footnote ⁷² Any business other than general business is deemed to be special business. Adequate information is required to be provided to shareholders in advance to allow them to make informed decisions on the agenda items. A statement containing the material facts of each item of special business to be transacted is to be annexed to the notice calling the meeting in question. The nature of the concerns or interests of each director, manager, KMP and their relatives should be disclosed in the statement. Where any special business affects any other company, that should also be mentioned in the statement if the shareholding of each promoter, director, manager and KMP of the company conducting the AGM is more than 2 per cent in the second company.Footnote ⁷³

The right to call a shareholder meeting is granted to shareholders by CA 2013. Under section 100, such a meeting is known as an extraordinary general meeting (EGM).Footnote ⁷⁴ An EGM can also be called by the board if it deems fit. The NCLT also has the power to call a meeting of a company other than the AGM under section 98 if it is impracticable to call or hold and conduct the meeting under the provisions of CA 2013 or the company’s articles of association (AoA).Footnote ⁷⁵ The NCLT may, either suo motu or upon the application of any director or member of the company entitled to vote at the meeting, order a meeting and give necessary ancillary or consequential directions.Footnote ⁷⁶ Holders of one-tenth of paid-up share capital having the right to vote or as many members having one-tenth of voting power can requisition a meeting in case of need. The board should move for the meeting on requisition within twenty-one days, and the actual meeting must be held within forty-five days from the date of the requisition; otherwise, the requisitionists themselves may call the meeting within three months of the requisition date. The requisition must set out the matters for consideration of which the meeting has been requisitioned. No other matter can be dealt with in the meeting. The agenda of an EGM falls within the category of special business.Footnote ⁷⁷ Shareholders must provide the agenda for the EGM that they have requisitioned. Failure of the board to hold the meeting is not punishable. However, companies’ reimbursement of expenses to the requisitionists holding the EGM is deducted from the fee or remuneration paid to the directors in default.Footnote ⁷⁸

The results of the pilot study suggest that the right to call an EGM is not frequently exercised by shareholders in Indian companies (see Table 4.5). Within the decade from 2009–18, forty-three companies called for EGMs less than twice. The data include both the EGMs called by shareholders and those called under the direction of the NCLT. Only three companies, namely, the Bank of Baroda, United Spirits and Vodafone Idea Ltd, called EGMs more than five times. Vodafone was restructuring after the merger of Vodafone and Idea Ltd, the Bank of Baroda had to issue preference shares to the government of India and the Life Insurance Corp of India and United Spirits had to call EGMs to discuss the erosion of its net worth, as well as distribution agreements and rehabilitation.

CA 2013 contains no provision allowing the conduct of meetings through video conferencing or other audiovisual means. All meetings are required to be held physically. In view of the pandemic, however, companies have been allowed to request members’ approval on urgent matters through a postal ballot or e-voting without holding a general meeting requiring the physical presence of members, although this is not permitted for ordinary business or business involving any member’s right to be heard. In the event that holding an EGM became unavoidable before 30 June 2020, it could be held by video conferencing or other audiovisual means. Recordings of meetings are required to be kept in safe custody and, in the case of public companies, should be uploaded to their websites as soon as possible after the meeting.Footnote ⁷⁹

4.2.2 Shareholders’ Right to Add a Proposal to the Agenda

Holders of one-tenth of paid-up share capital having the right to vote or as many members as have one-tenth of voting power can move any resolution in an AGM or EGM or insist that the company include such a matter in the meeting agendaFootnote ⁸⁰ and can ask to serve notice to members.Footnote ⁸¹ They may also requisition the circulation of any statement with respect to matters on the proposed resolution or business that is to be dealt with in the general meeting after complying with other requirements. Two or more copies of the requisition signed by all of them should be deposited at the registered office of the company. If a notice of a resolution is required, it should be deposited six weeks before the meeting; otherwise, two weeks is sufficient. When requirements are complied with, the company becomes bound to notify members of the intended resolution.Footnote ⁸² If the company receives notice of any resolution or statement to be circulated by fewer than the specified number of members, directors may, under their ordinary power of resolution notification, circulate it, but not under section 111 of CA 2013. Nominations for directorship and resolutions for the removal of a director can be proposed under sections 160 and 169, respectively.

Figure 4.1 Frequency of EGMs in Nifty-50 companies (2009–18)

4.2.3 Voting

Before discussing voting procedures, it is important to reiterate that promoters with a controlling block of shares maintain cross holdings in their group companies to retain control.Footnote ⁸³ CA 2013 introduced a few provisions to regulate such cross shareholdings. In addition to bringing related entities or associations of individuals into the ‘promoter group’, restrictions have been placed on subsidiary companies holding shares in their holding company. A subsidiary company cannot have shares in its holding company, and the transfer of shares in a company to its subsidiary is void.Footnote ⁸⁴ A new type of company called the ‘associate company’ was introduced by CA 2013 in which the relationship between an associate company and another company is established through significant influence being exercised over the associate company by the other company.Footnote ⁸⁵ Joint venture companies fall within this category.

It is also important to mention here that the term ‘group companies’ is defined by SEBI (Issue of Capital and Disclosures) Regulations 2018. Regulation 2(1)(t) provides that ‘group companies’ include companies (other than the promoter and subsidiary/subsidiaries) with which there were related-party transactions (RPTs) during the period for which financial information is disclosed, as covered under the applicable accounting standards, as well as other companies considered material by the issuer’s board.Footnote ⁸⁶ A ‘material subsidiary’ is defined in regulation 3(f) of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015.Footnote ⁸⁷

4.2.4 Question and Information Request Rights of Shareholders

Shareholders have the right to discuss all proposed resolutions and move amendments. If an amendment is reasonably germane to a proposed resolution, it must be admitted.Footnote ¹⁰⁸ CA 2013 does not contain any direct provision providing shareholders with a right to question or seek information but such rights occur on the basis of their power to pass resolutions in general meetings of the company. Such rights are also indirectly provided under the Secretarial Standards (SS) with respect to general and board meetings, which are required to be observed by every company under section 118(10), CA 2013. As per SS-2, the chair of a general meeting is required to explain the objective and implications of each resolution even though resolutions forming part of special business are accompanied by a special note. The chair is also required to provide a fair opportunity to members who are entitled to vote to seek clarifications and/or offer comments related to any item of business and to address the same, as warranted. He or she is further required to provide a fair opportunity to members to raise questions relating to agenda items and to ensure that members who have sought clarifications, information or explanations are given an effective and timely reply.Footnote ¹⁰⁹ Members have the right to speak on a motion even if there is a clear majority on the agenda item concerned.Footnote ¹¹⁰ The company may invite members to submit questions in advance to limit the time of debate on each resolution and restrict repetitive questions. In addition, it may select common questions to provide a comprehensive answer at the general meeting.

4.3.1 Voting in Practice

4.3.2 Resolutions for Shareholding Voting and Quorum for General Meetings

Shareholder resolutions may be passed as ordinary or special resolutions. An ordinary resolution is a resolution passed by a simple majority of members present and voting, whereas a special resolution requires the support of a three-fourths majority of shareholders present and entitled to vote at the meeting.Footnote ¹²⁸ The intention to propose a resolution as a special resolution should be declared in the notice calling the general meeting. A special notice may be required for certain resolutions by the provisions of CA 2013 or the company’s articles.Footnote ¹²⁹ In such a case, notice of the intention should be given by members holding a minimum of 1 per cent of total voting power or shares on which an aggregate sum not exceeding 5 lakh rupees (US$0.5 million) has been paid up. The company is also required to give notice of the meeting and inform shareholders that the resolution concerned is an ordinary resolution with special notice. Companies are given the flexibility for the entrenchment of articles, which means that specified provisions in the articles may be altered only if conditions or procedures stricter than a special resolution are met or complied with.Footnote ¹³⁰

Ordinary resolutions are required to be passed for the general business of an AGM, whereas special resolutions are required for alteration of the articles and/or memorandum of the company, a variation in shareholder rights, the issue of sweat equity shares, the further issue of capital through employee stock options, the conversion of debentures or loans into company shares, a reduction in share capital, the purchase of the company’s own shares and/or the buy-back of shares, the reappointment or removal of a retiring auditor, the reappointment of an independent director, restrictions on the powers of the board, loans to directors, the remuneration of directors in the event of inadequate profits, investigations of the company’s affairs, removal of the company’s name from the register of companies and winding up by the NCLT and arrangements relating to such winding up.

Unless the company’s AoA provide otherwise, the quorum for meetings is five members personally present in the case of a public company with 1,000 or fewer members. If the number of members is between 1,000 and 5,000, the quorum is 15 members personally present, and if the number exceeds 5,000, then 30 members personally present make a quorum.Footnote ¹³¹ Along with the e-voting facility provided in companies with 1,000 shareholders, hybrid meetings are allowed in Indian listed companies, although fully virtual meetings are not. On the basis of the aforementioned quorum requirements, one might assume that shareholder engagement is minimal in Indian companies. However, generally high levels of voting by institutional investors are seen when it comes to such important matters as the issue of employee stock options at par or at a huge discount on the current market price.Footnote ¹³²

4.3.3 Observations on Voting Patterns

Some interesting observations on voting are offered here before discussing the voting patterns identified in the pilot study. These observations are based on reported incidents.

One of the earliest examples of shareholder engagement through e-voting was seen in Tata Motors Ltd when a resolution to ratify the salaries of three executives was voted against by nearly 64 per cent of institutional investors and 41 per cent of the company’s public shareholders in 2014. Such large-scale participation by institutional and public shareholders is rare in Indian companies, as few shareholders turn up at AGMs, where such proposals are usually put to the vote.Footnote ¹³³ A comparatively higher participation rate of institutional investors in companies listed on the National Stock Exchange was observed in 2018 relative to 2017, with more than 20 per cent of institutional shareholders voting against 716 resolutions in the latter year compared to voting against 629 resolutions in the former. Proxy advisors played an important role in increasing the voting rate. There was a 14 per cent increase in resolutions over the two years, with most of them relating to the appointment of directors or their remuneration and stock options.Footnote ¹³⁴ Around 700 votes were cast owing to the higher shareholdings of promoters. The increase can be credited to the facility to engage in e-voting, as well as to the applicability of the stewardship code to institutional investors.Footnote ¹³⁵ Forty-five dissenting votes were cast in 2018, compared with thirty-four and twenty-eight in 2017 and 2016, respectively.

A resolution to approve the continuation of Deepak Parekh’s directorship of HDFC Ltd when he came up for reappointment as a non-executive director upon attaining the age of seventy-five on 18 October 2019 exemplifies the role of proxy advisory firms in India. Two US-based proxy advisory firms advised their investors not to vote in favour of his reappointment because, in their view, the HDFC board was not sufficiently independent. The disclosed voting pattern reveals that 24.86 per cent of shareholders in the public institution category voted against the resolution, with the remaining 75.14 per cent voting for it.Footnote ¹³⁶ Because proxy advisory firms are playing an increasingly prominent role in listed companies, they are now required to disclose any conflicts of interest in giving recommendations and to make adequate disclosures regarding their business model and ancillary business activities.Footnote ¹³⁷

In another example, a proposal to appoint an independent director representing small shareholders in Alembic Ltd was made in 2017 by an institutional investor in a company called Unifi Capital Pvt Ltd. However, Alembic’s board did not accept the proposal on the ground of the close nexus observed between Unifi and its group of companies, which were found to have a large shareholding in Alembic. Out of 914, 320 shareholders, who had made the proposal, become shareholders in Alembic just five days before the proposal and were discovered to be clients of Unifi.Footnote ¹³⁸

As stated earlier, the conduct of AGMs was relaxed by the Ministry of Corporate Affairs (MCA) in view of COVID-19, with companies afforded the flexibility to hold AGMs virtually.Footnote ¹³⁹ Four big-cap companies, that is, TCS, SBI, RIL and Tech Mahindra, duly held their AGMs by means of a virtual conference or other audio-visual means pursuant to the MCA’s relaxation and SEBI GuidelinesFootnote ¹⁴⁰ until Unlock 3.Footnote ¹⁴¹ A total of twenty-one resolutions were passed in the four companies’ AGMs, as seen in Table 4.6 below. The preferred mode of voting was e-voting. Public institutions registered dissent rates of 13.2 per cent in resolutions for the reappointment of directors. It can be observed that the dissent rate was diluted in comparison to the total votes polled on the various resolutions.

5.1.1 Indonesian Corporate Law Framework

The ICL classifies companies into three types: private companies, non-listed public companies and publicly listed companies. State-owned enterprises (SOEs) are regulated separately outside the ICL. This section elaborates on each company type under Indonesia’s existing legal framework.

5.1.2 Indonesian Corporate Board Structure

The ICL bestows upon the GMS authority beyond that afforded the BoD and BoC, as long as it remains within the limits provided under regulations and/or the company’s AoA.Footnote ²² It grants the GMS the authorityFootnote ²³ to approve changes to the company’s AoA, approve company plans for share buy-backs or the further transfer of shares, approve additions or reductions of the company’s capital, approve the BoC’s supervisory reports and the company’s annual and financial reports, decide on the utilization of the company’s net profits, appoint and dismiss members of the BoD and BoC,Footnote ²⁴ approve merger and acquisition transactions, approve the salaries, honoraria and incentives of BoD and BoC members and authorize decisions on the company’s dissolution.

The ICL and relevant lawsFootnote ²⁵ also outline the duties of the BoD, which has the authority to hold a GMS, create the company’s annual reports and financial documents, declare and distribute interim dividends after obtaining BoC approval, record transfers of shares and maintain all company documents. All companies in Indonesia must have at least one member on their BoD. If a company’s BoD consists of two or more members, the allocation of duties and authority amongst the directors must be determined by a GMS resolution. If the GMS does pass such a resolution, then it must be determined by a BoD resolution.Footnote ²⁶ No term limits for BoD members are specified in the ICL, but the Indonesian Financial Services Authority – Otoritas Jasa Keuangan (OJK) – stipulates that the terms of office for elected BoD and BoC members must not exceed five years for issuers and public companies.Footnote ²⁷ BoD members may be dismissed at any time through a GMS resolution provided that they have been given a chance to submit a defence.Footnote ²⁸

The BoC acts as the supervisory organ in a company and reports its supervisory duties for each financial year during the annual GMS. BoC members may assist and/or approve BoD legal actions, as well as perform management tasks at certain times or in specific situations, as allowed under the company’s AoA or by a GMS resolution.Footnote ²⁹ Publicly listed companies are required to have at least two members on their BoCs, one of whom serves as the chair.Footnote ³⁰

Indonesia only recently eliminated the requirement for public companies to have independent directors, and affiliated directors and commissioners constitute a de facto longstanding practice. OJK’s stance also reflects a focus on independent supervision by the BoC instead of independent directorship. The matter is addressed in the OJK Corporate Governance Roadmap of 2014 and OJK Regulation No. 33/POJK.04/2014 Concerning the Board of Directors and Board of Commissioners of Issuers or Public Companies.Footnote ³¹

5.1.3 Shareholding Structure

The shareholding structure under Indonesian law takes into account the different types of shares regulated under the ICL, as such differences may give rise to different shareholder rights. The following paragraphs thus discuss both share types and differing shareholder rights. The share ownership structure and corporate control in the Indonesian listed sector are discussed at greater length in Section 5.3.1 of the present chapter.

5.2.1 GMS Mechanism

The ICL specifies that an annual GMS must be held no later than six months after the fiscal year end,Footnote ⁴³ whereas an extraordinary GMS can be held at any time depending on the needs of the company. A GMS is generally initiated by the BoD, although a shareholder representativeFootnote ⁴⁴ or the BoC can also request the organization of a GMS. The ICL also specifies the required timeline for holding a GMS. In the event that a GMS has been held but did not fulfil the attendance quorum requirement, then a second GMS can be held. Invitations for the second GMS must be distributed at least seven days before the second GMS is held and must state that the first GMS has been held but failed to fulfil the attendance quorum requirement. The second GMS must be held within ten to twenty-one days of the first. If the second GMS also fails to fulfil the attendance quorum requirement, then a third GMS can be held, although doing so requires authorization from OJK. The invitation for the third GMS must also state that the second GMS failed to fulfil the requirement. OJK determines the timing and quorum for the third GMS.

If the BoD does not make a GMS announcement, then shareholders have the right to submit a request for a GMA to the BoC, which should then make the announcement no later than fifteen days from the date of the request’s receipt. If neither the BoD nor BoC makes a GMS announcement within fifteen days, then it is required to provide an explanation for why it has not done so within fifteen days. If the BoC still does not make a GMS announcement, then shareholders can file a request with the district court for permission to hold a GMS.

A certain set of information and documents must be distributed to shareholders at the GMS. Further, in addition to specifying the date of the meeting, the GMS announcement must declare that shareholders have the right to attend the meeting and propose a meeting agenda. The ICL also lists the information that must be presented to the GMS by the BoD, most notably the annual company report, which must have been produced no later than six months after the fiscal year end. A company is also bound by other requirements, including, inter alia, an obligation to determine the salaries and remuneration of BoD and BoC members through the GMS. The list of mandatory GMS agenda items is usually regulated by the company’s AoA, but commonly includes approval of the annual report, a determination of net profit utilization, changes in management structure, a determination of BoD and/or BoC salaries and incentives for the next financial year and public accountant appointments for the subsequent year’s audit.

Article 77 of the ICL specifies that a GMS can be held via a teleconference, video conference or other electronic means as long as all participants can directly see and hear one another and participate in the meeting. Shareholders can attend the GMS in person, appoint a proxy and/or vote online. In the event that a GMS is conducted by electronic means, the GMS minutes must be signed by all shareholders, a considerably more onerous requirement than is the case for a conventional GMS, where only the head of the meeting and one shareholder representative are required to sign the minutes. This requirement is the likely explanation for the general reluctance of public companies to conduct an electronic GMS.

After the GMS has been held, publicly listed companies need to publish a summary of the meeting minutes in at least one national newspaper in the Indonesian language, on the IDX website and on the company’s official website in both Indonesian and another language (generally English).Footnote ⁴⁵ Non-listed public companies are obliged only to publish the summary in a national Indonesian-language newspaper and on their official website.

5.2.2 Modes of Participation and Voting

According to the ICL, GMS resolutions must be adopted through ‘deliberation to reach a consensus’, meaning the consensus of all shareholders who are present or represented at the GMS.Footnote ⁴⁶ If consensus is not achieved, then deliberation must be conducted by way of voting in accordance with the ‘one vote one share’ principle unless the company’s AoA provide otherwise. Some companies’ AoA allow for the possibility of issuing shares without voting rights.

Voting takes place after the GMS chair has invited each shareholder or his or her proxy to vote subsequent to the discussion of a certain agenda item. There is no ICL requirement pertaining to the format of voting ballots, but the ballot must offer three voting options for each agenda item: ‘agree’, ‘disagree’ or ‘abstain’. Public companies are required to announce the result of each vote before moving on to the next agenda item. A decision is generally considered valid if it is approved by a qualified majority (more than one-half) of the total votes cast unless the law or the company’s AoA require a greater number of affirmative votes. For example, the ICL mandates a higher number of affirmative votes for the passage of AoA amendments. The requirements for AoA amendments vary for different GMS stages and agenda items, as summarized in Table 5.1.Footnote ⁴⁷

If the group of shareholders affected by a change in the rights attached to shares holds only non-voting shares, then OJK Regulation No. 10/POJK.04/2017 Concerning the Amendment of OJK Regulation No. 32/POJK.04/2014 Concerning [the] Planning and Holding of General Meetings of Shareholders of Public Limited Companies grants them rights to attend the GMS and be involved in the decision-making process pertaining to those rights.

5.2.3 GMS Minutes

For every GMS held, GMS minutes must be drawn up and signed by the GMS chair and at least one shareholder appointed from amongst and by the GMS participants.Footnote ⁵⁰ GMS minutes are mandatory and imperative. If they are not provided after the GMS, then the GMS will be considered not to have been held, which gives rise to legal consequence because all of the matters decided and agreed upon at the GMS will be unenforceable and non-executable. The published summary of the GMS minutes must contain at least the following information.

1. (1) The date, place, time and agenda items of the GMS;

2. (2) the BoD and BoC members present at the GMS;

3. (3) the number of shares with valid voting rights present at the GMS and the percentage of all shares with valid voting rights;

4. (4) whether or not shareholders had an opportunity to submit questions and/or provide opinions related to the meeting agenda;

5. (5) the number of shareholders who submitted questions and/or provided opinions regarding the meeting agenda if shareholders were given an opportunity for such submission/provision;

6. (6) the GMS decision-making mechanism;

7. (7) the voting results for each agenda item, including the number of ‘agree’ and ‘disagree’ votes and number of abstentions, if the decision-making was performed by voting;

8. (8) the GMS decision; and

9. (9) the implementation of cash dividend payments to entitled shareholders, if applicable.

In the event that the GMS minutes are drawn up in a notarial deed, then the signatures of the GMS chair and shareholder representative are not required.Footnote ⁵¹ Because the minutes are presented in the form of a notarial deed, they are considered to constitute an authentic deed and, as a result, are regarded as a conclusive document regarding the content therein, as stipulated in article 1875 of the Indonesian Civil Code.

Public companies must submit their GMS minutes no more than thirty days after the GMS has taken place, and the deadline for publishing a summary of the minutes in a national newspaper is no more than two working days after the GMS date. There is no requirement to disseminate the full meeting minutes to the public, but they must be submitted to OJK together with the company’s annual report.

5.3.1 Ownership Structure and Control

The growing interest in Indonesia in buying shares and investing in the capital market needs to be understood in the context of the historical background of the country’s capital market, which is thus the subject of Section 5.3.1.1 below. The discussion then turns to the free float shares of LQ45 companies to consider whether Indonesian publicly listed companies are genuinely moving towards public-driven profiles or whether public ownership is still of minor importance owing to the immense control exhibited by certain corporate groups. Finally, the protection of minority shareholders in practice is also examined to determine whether there has been any shift away from Indonesia’s tradition of concentrated corporate ownership to offer a better balance of non-controlling shareholders.

5.3.2 Voting in Practice

Agenda voting is the essence of the GMS, and voting is one mechanism whereby shareholders can pilot the company’s future development and express opinions on BoD and BoC actions. The validity of decisions made through voting depends on several factors, one of which is the GMS quorum. The number of shareholders who participate in a GMS may affect the validity of a decision. This subsection thus begins with analysis of GMS participation in relation to total attendance and the questions asked by shareholders. It also elaborates on the percentage of votes cast per agenda item and the availability of e-voting and e-proxy mechanisms.

5.3.3 Shareholder Engagement in Practice

This section draws on the results of the aforementioned survey questionnaire to elucidate the common perspectives on engagement and voting of Indonesian individual shareholders. Shareholder engagement in SOEs is then discussed as a contrast, as the Indonesian government exerts considerable influence on shareholder engagement and voting procedures in these firms. Finally, the section concludes with a look at other means of shareholder engagement such as decision-making through circular resolutions.

5.3.3.1 Individual Shareholder Engagement

No empirical study of shareholder engagement in Indonesia has yet been carried out. To inform this subsection on Indonesian shareholder engagement in practice, we thus distributed online questionnaires on shareholder motives for ownership and engagement to illustrate the general perspective of individual shareholders on these issues.

Questionnaire distribution adhered to the purposive sampling method, with the criterion that the individual shareholder respondents invest through securities companies rather than being mutual fund investors. We received 312 responses, 310 of which were valid. Nearly half (47.7 per cent) of the respondents resided in the greater Jakarta area, and most were between the ages of eighteen and thirty.Footnote ⁶⁶ The responses revealed the majority of respondents to hold an investor point of view, displaying a lack of willingness or desire to participate in companies’ decision-making processes as shareholders. Figure 5.1 illustrates the respondents’ answers to a question concerning the purpose of their share ownership.

Figure 5.1 Purpose of share ownership by individual shareholders in Indonesia

The majority of respondents cited a financial motive for their share purchase,Footnote ⁶⁷ with 92.5 per cent (288) stating that their purpose for buying shares had been to make a profit from the margin between the purchase price and sale price, whilst 63.7 per cent (198) claimed that their purpose had been to periodically attain additional income through dividend distribution. A small percentage (5.5 per cent or seventeen) acknowledged a company control purpose, and 4.2 per cent (thirteen) said their purpose had been to act in accordance with the latest shareholding trend.

Further, 223 respondents (71.9 per cent) were absolutely certain that share purchases constitute an investment method, but only 60 (19.4 per cent) expressed certainty about a share purchase being a method of owning and controlling a company. Sixty respondents (19.4 per cent) were long-term investors who had held their shares for more than five years, 88 (28.4 per cent) were medium-term investors who had held their shares for between one and five years and 162 (52.3 per cent) were short-term investors who had held their shares for less than a year.

On the question of whether they had ever attended and/or participated in a GMS, 242 respondents (78.1 per cent) said they had not been able to attend a GMS,Footnote ⁶⁸ and 51 (16.5 per cent) said that they had attended a GMS either directly or through a proxy. Seventeen respondents (5.5 per cent) answered that they were not even aware of the existence of GMS.

With regard to the source of GMS invitations and information,Footnote ⁶⁹ 225 respondents (72.3 per cent) said they received an invitation directly from securities companies, and 116 (37.3 per cent) that they had received it directly from the issuers. Thirty (9.6 per cent) reported that they found information concerning a GMS through the announcement made in national newspapers, and seven (2.3 per cent) that they received such information from emails sent by KSEI. Other sources of GMS information included shareholder forums, social media and financial and news apps.

With respect to raising questions during a GMA, only seven respondents (4.2 per cent) said they had done so, whilst sixteen (9.6 per cent) indicated that they would have liked to ask a question but were hesitant about doing so. Such passivity is in line with the respondents’ answers to the question of what motivated them to attend a GMS, as indicated in Figure 5.2.

Figure 5.2 Motivations for Indonesian shareholders’ GMS attendance

The purpose of this question was to identify the factors motivating individual shareholders to attend and participate in a GMS.Footnote ⁷⁰ One hundred and eighty respondents (58.1 per cent) cited an opportunity to monitor the company’s progress as the greatest motivation for GMS attendance. One hundred and forty-one (45.5 per cent) stated that GMS attendance informs their future investment decisions. Other GMS attendance benefits cited included the receipt of souvenirs or goodie bags (the response of 123 respondent (39.7 per cent)), the enjoyment of banquet facilities (92/29.7 per cent) and an opportunity to network with fellow shareholders and/or board members (172/55.5 per cent). Thirty-eight respondents (12.3 per cent) mentioned shareholders acting as proxies for other shareholders, and twenty-three (7.4 per cent) viewed attending a GMS as an opportunity to bring about change in the company. In conclusion, it seems that GMS attendance is seen by individual shareholders in Indonesia not as an opportunity to speak up and provide input to the company, but rather as an opportunity to listen and enjoy the festivities.

6.2.1 Japanese Corporate Governance in Transition

The legal framework for shareholder engagement and voting is set by the Companies Act,Footnote ⁵ which is the corporate law in Japan applicable to all types of companies,Footnote ⁶ and by the Financial Instruments and Exchange Act,Footnote ⁷ which provides securities regulation, including rules on disclosure by listed companies, tender offers, the solicitation of proxies and insider trading. Of the four types of companies covered by the Companies Act, listed companies must take the form of a stock corporation (kabushiki kaisha).Footnote ⁸ Whilst this chapter focuses on shareholder engagement and corporate governance in listed companies, it is noteworthy that the stock corporation form is often used by non-listed, closely held companies in Japan.Footnote ⁹

Although the Japanese Companies Act itself, which grants strong powers to shareholders, as described in detail in subsections 6.3.1, 6.3.2 and 6.3.3, follows the shareholder-primacy model as it does not mandate co-determination and makes no explicit reference to the interests of employees, the environment or society,Footnote ¹⁰ Japanese companies after World War II established a unique system of corporate governance focusing on the interests of employees and other stakeholders, which are often referred to as the ‘corporate community’ or ‘company as a family’.Footnote ¹¹ First, under the so-called ‘lifetime employment system’, Japanese companies refrained from layoffs as much as possible, semi-guaranteeing a job at the company to employees until their retirement age. Second, directors were predominantly selected from employees of the company as an extension of the internal promotion system. The number of directors was often large, sometimes more than thirty, to accommodate the promotion of senior employees. Third, a large proportion of shares, often the majority, was held by the company’s banks and friendly business partners.Footnote ¹² The incumbent management teams of listed companies relied upon these shareholders as ‘stable shareholders’ (antei kabunushi), as they tended to support the incumbents and not sell their shares even at a premium in order to maintain their business relationships.Footnote ¹³ In addition, because each ‘stable shareholder’ held only a very small percentage of shares, sometimes as little as 1 per cent, there was no single controlling shareholder.Footnote ¹⁴ This ownership structure effectively insulated managers from shareholder pressure, and especially from the capital market. Fourth, companies were financed mostly by bank loans, and the main bank, that is, the bank that lent the largest amount to the company, played an important role in the borrower’s governance. This traditional system seems to have worked quite well until the mid-1980s, supporting Japan’s rapid economic recovery after World War II, as it arguably enabled management to focus on growth in the long term and incentivized employees to make firm-specific human capital investments.

With the bursting of the so-called Bubble Economy in 1991, however, Japan’s high-growth period finally came to an end, and some aspects of the traditional model were forced to change. Most notably, the share-ownership structure has changed dramatically, as shown in Figure 6.1 below.

Figure 6.1 Transition of share-ownership of Japanese listed companies (1986–2018)

Note to figure: Data are from the Tokyo Stock Exchange, ‘2019 Share-ownership Survey: Transition in Share Holding Ratio at Market Value by Investor Category’.

The three categories of investors on the left-hand side of each row in Figure 6.1, namely, non-financial business corporations, banks and insurers, are ‘stable shareholders’ that tend to support the incumbent management. The percentage of shareholdings held by such stable shareholders fell from 61.8 per cent in 1986 to 29 per cent in 2018. The decline was primarily the result of the sale of shares held by banks and insurance companies in the late 1990s when they were in financial distress.Footnote ¹⁵ Correspondingly, trust banksFootnote ¹⁶ and foreign investorsFootnote ¹⁷ increased their holdings during this period, reaching 50.6 per cent in 2018. Because these shareholders, as well as individual investors, often have no business ties with the companies in which they invest, they cannot be relied upon by incumbent management as loyal supporters.Footnote ¹⁸ This change in share-ownership structure, which has occurred most often in larger listed companies,Footnote ¹⁹ means that large Japanese listed companies now face stronger pressure from the capital market.Footnote ²⁰ Also, as the ratio of foreign investors in transaction volumes in the Tokyo market has increased,Footnote ²¹ the Japanese government has become more interested in listening to the voices of foreign investors, as their disappointment could lead to a drop in stock prices.

At the same time, the view that the employee-oriented governance system has been one of the main causes of Japan’s structural stagnation has gained popularity amongst Japanese policymakers. Allegedly, Japanese companies featuring a lifetime-employment system and an insider-dominated board of directors have been risk-averse, accumulating large cash reserves as a hedge against insolvency rather than investing in research and development or mergers and acquisitions, and have also been slow to concentrate on their core competencies, as doing so might lead to the sale of business units and layoff of excess workers.Footnote ²²

These developments resulted in a series of corporate governance reforms in the 2010s that sparked more shareholder-oriented viewpoints in Japanese listed companies.Footnote ²³ In particular, the 2014 revision of the Companies Act and the adoption of the 2015 Japanese Corporate Governance Code were aimed at promoting the appointment of outside/independent directors.Footnote ²⁴ The aim of the 2018 revision of the Corporate Governance Code was also to exert further pressure on cross-shareholdings,Footnote ²⁵ which seem to be still prevalent in small- and medium-sized listed companies,Footnote ²⁶ whereas the Japanese Stewardship Code, introduced in 2014 and revised in 2017 and 2020, sought to encourage engagement by institutional investors.Footnote ²⁷

6.2.2 Board Structures

Before delving into shareholders’ powers, it is worthwhile to take a brief look at boards of directors, with whom shareholders engage.Footnote ²⁸ Currently, the Companies Act provides three types of board structure as alternatives for Japanese listed companies: ‘company with a board of statutory auditors’ (kansayaku-kai secchi kaisha),Footnote ²⁹ which is the traditional structure; ‘company with three committees’ (shimei i’inkai-tō secchi kaisha), which was introduced in 2002 as a modified version of US practice; and ‘company with an audit-plus committee’ (kansa-tō i’inkai secchi kaisha), which was introduced in 2014 as an intermediate alternative to the other two.

Whilst the traditional ‘company with a board of statutory auditors’ has two boards – a board of directors and a board of statutory auditors – it differs sharply from the German vertical two-tier system in that the two boards stand horizontally, as their members are appointed directly and separately by the shareholder meeting,Footnote ³⁰ meaning that the board of statutory auditors does not have the power to appoint directors. The role of statutory auditors and their board is to audit the accounts of the company and to check whether the company is conducting its business without violating laws and regulations.Footnote ³¹ Although half or more of statutory auditors must be outside statutory auditors,Footnote ³² there was traditionally no requirement or recommendation to appoint an outside director. As a consequence, for a long time it was uncommon for Japanese companies to appoint an outside director.

With the intention of strengthening the monitoring function of the board of directors, the Japanese legislature has introduced the second structure, which abolishes the board of statutory auditors and instead requires companies to form an audit committee, a nomination committee and a compensation committee within the board of directors, each consisting of three or more directors.Footnote ³³ To match the reality of Japanese companies then, it has been decided that the majority of each committee – albeit not of the whole board –must be constituted by outside directors.Footnote ³⁴ However, this structure has remained unpopular, presumably because incumbent managers dislike granting too much power to outside directors, as the decisions of the three committees cannot be overruled by the board of directors.Footnote ³⁵

Partly in response to criticism from foreign investors of the Japanese practice of insider-dominated boards of directors, the 2014 revision of the Companies Act introduced a so-called ‘comply or explain’ approach requesting listed companies to either appoint at least one outside director or to explain why doing so would be detrimental to the company. Following the 2014 revision, the Japanese Corporate Governance Code adopted in 2015 introduced another ‘comply or explain’ rule requesting listed companies to appoint two or more independent directors.Footnote ³⁶

The 2014 revision also introduced the ‘company with an audit-plus committee’ as the third alternative structure to offer a modified version of the company with three committees that may be more acceptable to those accustomed to the traditional Japanese governance system. In particular, nomination and compensation committees, the most unpopular of the three committees, are not required. Instead, companies are required to form within the board of directors an audit-plus committee,Footnote ³⁷ which is granted the power to express its opinion on the election, dismissal, resignation and compensation of other directors at shareholder meetings so as to reinforce the bargaining power of the outside directors on the audit-plus committee.Footnote ³⁸

The three board structures also differ in the extent of powers that the board can delegate to management. In a company with a board of statutory auditors, the board of directors is prohibited from delegating decisions on ‘important issues regarding [the] execution of its business’ to any of its directors.Footnote ³⁹ The vagueness of this threshold arguably induces Japanese companies to put up too many agenda items to be decided by the board in order to reduce the legal risk.Footnote ⁴⁰ In contrast, the board of directors of a company with three committees has greater discretion in delegating its decision-making powers to allow the board to focus on its monitoring function.Footnote ⁴¹ The third structure, a company with an audit-plus committee, takes a middle path by adopting the restrictive approach taken for companies with a board of statutory auditors as the default rule but at the same time permitting shareholders to grant more discretion to the board of directors, as in companies with three committees, via articles of incorporation.Footnote ⁴²

These recent reforms have turned out to be effective, at least in terms of the raw number of adoptions. Of the 3,639 companies listed on the Tokyo Stock Exchange as of 12 July 2019, although the first (traditional) structure remains the most popular alternative, being chosen by 2,562 companies (70.4 per cent), the third alternative is doing fairly well, being adopted by 1,001 companies (27.5 per cent), in comparison with the second one, which is chosen by only 76 companies (2.1 per cent).Footnote ⁴³ Also, the ratio of companies listed in the First Section of the Tokyo Stock Exchange (the top-tier market in Japan consisting of about 2,000 companies) appointing two or more independent directors jumped from 21.5 per cent in 2014 to 93.4 per cent in 2019.Footnote ⁴⁴ As it became substantially the norm for listed companies to appoint at least one outside director, the 2019 revision of the Companies Act finally imposed a legal obligation on listed companies to do so.Footnote ⁴⁵

It must be noted, however, that the degree of board independence in Japan is still not as high as that in the United States. As of July 2019, the ratio of companies listed in the First Section of the Tokyo Stock Exchange in which independent directors constitute the majority of the board of directors is only 4.3 per cent, whereas the ratio of companies in which independent directors constitute one-third or more of the board is 43.6 per cent.Footnote ⁴⁶

6.3.1 Decision-Making Power of the Shareholder Meeting

Shareholder engagement is conducted in the shadow of the decision-making power of the shareholder meeting. In this regard, Japanese law mirrors continental European law in its granting of broader power to the shareholder meeting, as compared to that supplied by Delaware law.Footnote ⁴⁷

First, directors and statutory auditors are appointed and can be dismissed without cause by a simple majority at any shareholder meeting.Footnote ⁴⁸ Second, whilst the power of the shareholder meeting of a stock corporation with a board of directors is, as a default rule, limited to matters delegated to it by the Companies Act, it can be expanded via articles of incorporation.Footnote ⁴⁹ Third, articles of incorporation can be amended solely by the shareholder meeting,Footnote ⁵⁰ which means that a provision in the articles of incorporation of a stock corporation granting the meeting the power to make decisions on ordinary business matters can be introduced without the consent of the board. Fourth, the power to decide whether the corporation will pay dividends, and, if so, the dividend amount, is allocated to the shareholder meeting as a default rule.Footnote ⁵¹ By amending the company’s articles of incorporation, however, shareholders can either grant this power to the board as wellFootnote ⁵² or go even further and divest themselves fully of it, making the board solely responsible for any decisions about dividend payments.Footnote ⁵³ Fifth, in companies with a board of statutory auditors and those with an audit-plus committee, the formula for directors’ non-fixed compensation and the content of equity-based or non-monetary compensation must be decided by the shareholder meeting unless they are stipulated in the articles of incorporation.Footnote ⁵⁴

It must be noted, however, that shareholders’ decision-making power is limited in some respects. For example, although the Companies Act stipulates that the fixed compensation of directors shall be determined by resolution of a shareholder meeting,Footnote ⁵⁵ case law has limited the scope of this requirement such that these resolutions create only a ceiling on the maximum aggregate fixed compensation for the company’s directors; the board may then divide that maximum aggregate at its discretion.Footnote ⁵⁶ In the case of the payment of a retirement bonus to a retiring director, case law has upheld the stipulation that a resolution of the shareholder meeting can delegate to the board of directors the determination of the bonus amount based on an internal formula.Footnote ⁵⁷ Also, a listed company can allot newly issued shares or its treasury shares to a third party by a decision of the board of directors, unless the third party becomes a new parent company of the company via such allotment.Footnote ⁵⁸

6.3.2 Convening a Meeting

There are two types of shareholder meetings: annual meetings and extraordinary meetings.Footnote ⁵⁹ Both are normally convened by a director based on a decision of the board of directors.Footnote ⁶⁰ However, a shareholder or shareholders holding 3 per cent or more of the company’s voting rights for six months can demand that directors convene a shareholder meeting.Footnote ⁶¹ If the directors fail to do so in a timely manner, the shareholder(s) can obtain permission from the court to call the meeting him or herself.Footnote ⁶² As the board of directors is not allowed to propose its own agenda items at a meeting called by a shareholder,Footnote ⁶³ directors tend to respond to a shareholder demand to convene a meeting to avoid losing the power to set the meeting agenda.

The convenor of a shareholder meeting must dispatch a notice providing information on the meeting, including its date, venue and agenda, to shareholders at least two weeks in advance of the meeting.Footnote ⁶⁴ If a company allows its shareholders to vote by mail, which is mandatory for companies with 1,000 or more shareholders, the company must also send reference materials, including financial statements, and a ballot together with the notice.Footnote ⁶⁵ It is also worth noting that the 2019 revision of the Companies Act introduced a Japanese version of the so-called ‘notice and access’ system, which allows companies to omit reference materials from the package sent to shareholders by uploading relevant information to their websites at least three weeks in advance of the meeting and stating the URL of the website on the notice sent to shareholders.Footnote ⁶⁶ This new system will enter into force on September 1, 2022.

6.3.3 Shareholder Proposals

A shareholder or shareholders of a company holding 1 per cent or more of its voting rights or 300 voting rights, whichever is lower, for six months can demand that a certain issue(s) be added to the agenda of an upcoming shareholder meeting and that a summary of his or her proposal be included in the notice sent by the company to other shareholders.Footnote ⁶⁷ Companies are also required to include information on the grounds of the proposal and other information on it in the reference materials and to provide an opportunity for shareholders to express their approval or disapproval of the proposal.Footnote ⁶⁸ Such shareholder demands must be made at least eight weeks in advance of the meeting to provide enough time for the company to prepare.Footnote ⁶⁹

Traditionally, there has been no limit on the number of proposals that a shareholder or group of shareholders can make at a shareholder meeting. However, the 2019 revision of the Companies Act introduced an upper limit of ten proposals per meeting per shareholder (or group of shareholders) in response to a number of abusive cases wherein a shareholder submitted more than fifty proposals, including some that arguably made no sense and were unworthy of discussion at a shareholder meeting.Footnote ⁷⁰

Restrictions on the content of shareholder proposals are also not as stringent as they are in the USA.Footnote ⁷¹ Companies can exclude proposals that are in violation of the law or provisions in the company’s articles of incorporation, as well as proposals that are virtually identical to those that failed to receive affirmative votes from 10 per cent or more of total voting rights within the previous three years.Footnote ⁷² Aside from these restrictions, access to the corporate ballot is granted to all proposals as long as they comprise matters that can rightfully be decided at a shareholder meeting. For example, a proposal pertaining to specific decisions about a company’s ordinary business operations will be permitted if it is conditioned on the approval of accompanying proposals for amendments to the articles of incorporation to grant the shareholder meeting authority over such matters.Footnote ⁷³

6.3.4 Voting

6.3.5 Shareholders’ Information Right

Shareholders can obtain information from the company in several ways.Footnote ⁹⁰ First, subject to court approval, a shareholder can request to inspect and copy the minutes of board meetings.Footnote ⁹¹ Second, a shareholder with 3 per cent or more of the total voting rights can request to inspect and copy the company’s accounting books.Footnote ⁹² Third, a shareholder can ask a question at a shareholder meeting, and directors have a duty to provide an answer unless there is a justifiable ground for not doing so.Footnote ⁹³

6.3.6 Shareholder Remedy against Unlawful Procedures

If a shareholder meeting has been convened in a manner not in conformity with the legal requirements described above, or in a manner that is not illegal but significantly unfair, shareholders can file a suit to revoke resolutions adopted at that meeting.Footnote ⁹⁴ Similarly, a violation of procedural rules on discussions and voting at a shareholder meeting or significant unfairness with regard to these issues also leads to revocation of the resolutions concerned.Footnote ⁹⁵ However, if the violation in question is not a serious one and did not affect the outcome of the resolution, the court has the power to dismiss the suit.Footnote ⁹⁶

In the case of a shareholder proposal being ignored by the company, with no other agenda item at the shareholder meeting related to the ignored proposal, filing a suit is not effective, as it is considered that there is no resolution to be revoked with regard to the violation.Footnote ⁹⁷ In such a case, the proposing shareholder can file for a preliminary injunction ordering the company not to hold the shareholder meeting unless it includes the ignored proposal in the agenda and repeats the procedure for convening the meeting.Footnote ⁹⁸

6.4.1 Shareholder Meetings and Voting in Practice

Let us now take a look at shareholder meetings and voting in practice amongst Japanese listed companies. Data on shareholder meetings are obtained from the White Paper on Shareholders’ Meetings (Kabunushi Sokai Hakusho), which has been issued annually since 1971 by the private publisher Shojihomu based on a questionnaire sent to all Japanese listed companies (excluding those listed in emerging markets and foreign companies).Footnote ⁹⁹

6.4.2 Private, Behind-the-Scenes Engagement

Although it is difficult to verify the reality of private, behind-the-scenes engagement, institutional investors adopting the Japanese Stewardship Code often summarize their engagement activities in their stewardship reports. For example, Nippon Life Insurance reported that from July 2018 to June 2019, it had discussions with 758 investee companies on various topics, ranging from payout policies to ESG issues.Footnote ¹⁴⁴

In June 2017, the Government Pension Investment Fund of Japan, one of the largest public pension funds in the world, with assets of more than US$1.5 trillion, announced that, as a long-term universal investor, it would require its asset managers to ‘proactively engage with investee companies’ on critical ESG issues.Footnote ¹⁴⁵ Since then, engagement on ESG issues has gained traction amongst Japanese institutional investors.Footnote ¹⁴⁶ Whether such engagement is merely a pose to show that investors are following the prevailing trend or a sign of serious commitment to the pursuit of ESG remains to be seen.Footnote ¹⁴⁷

Collective engagement is also gaining some traction, as the Japanese Stewardship Code acknowledged its benefits in 2017.Footnote ¹⁴⁸ Since then, several private initiatives have been put forward to facilitate coordination amongst institutional investors.Footnote ¹⁴⁹

7.2.1 Background

Singapore is a former British colony, and its legal system is therefore based on the UK system. English common law was received in Singapore via the Second Charter of Justice 1826 and formalized by the Application of English Law Act.Footnote ⁵ The Singapore Companies Act was first enacted in 1967, and was based on the UK Companies Act 1948. Two significant comprehensive reviews of the Singapore Companies Act have taken place since 1967. The first was the review conducted in 1999 that led to publication of the report of the Company Legislation and Framework Committee (CLFRC).Footnote ⁶ Pursuant to the recommendations of the CLFRC review, a number of shareholder protection rights were enhanced, including amending the Companies Act to statutorily impose limits on majority rule in the context of alterations of articles of association and alterations of class rights.Footnote ⁷ Thus, it is possible to have an entrenching provision in a company constitution stipulating that such provision may not be altered except by unanimous approval, or by a majority greater than the 75 per cent needed for a special resolution, or unless other special conditions are met.

The second review, which was far more comprehensive, commenced in 2007Footnote ⁸ and was not completed until 2014 with the enactment of the Companies (Amendment) Act 2014.Footnote ⁹ Owing to its complexity, this legislation came into force over the 2016–17 period. As a result of this second review, the Companies Act was rewritten to ensure that the legislation was conducive to Singapore’s position as a global hub for business and fundraising. With respect to the review’s impact on shareholder rights, the amendments included the removal of the one-share-one-vote restriction for public companies (paving the way for the issuance of shares with multiple voting rights)Footnote ¹⁰ and a provision allowing the shareholders of listed companies to bring derivative actions directly.Footnote ¹¹ In 2018, the SGX listing rules were amended to allow companies with dual-class shares (DCS) to be listed on the SGX.Footnote ¹²

As noted, in addition to the Companies Act, the other relevant regulations in Singapore are the Takeover Code and Corporate Governance Code. The former pertains to voting in mergers and acquisitions transactions. Whilst the Takeover Code does not operate by way of subsidiary legislation,Footnote ¹³ market participants regard it as binding.Footnote ¹⁴ The Corporate Governance Code operates on a ‘comply or explain’ basis; the SGX listing rules require that listed companies comply with the Corporate Governance Code,Footnote ¹⁵ and, if they are unable to do so, to explain the basis of any deviations. Hence the Corporate Governance Code is regarded as ‘soft’ law.

In 2016, Singapore adopted the Stewardship Principles for Responsible Investors (Stewardship Code hereafter), which provide that all institutional investors, including domestic investors, are free to adopt the Stewardship Code, whether in whole or part or not at all. In 2018, the Singapore Family Stewardship Code was adopted, which is a version of the Stewardship Code developed specifically for family companies. Both the Stewardship Code and Family Stewardship Code are strictly voluntary in nature. They also differ from the Corporate Governance Code, as there is no regulatory body that monitors compliance, whereas compliance with the Corporate Governance Code is monitored by the SGX.Footnote ¹⁶ However, as this chapter focuses on the legal framework surrounding shareholder engagement and voting, the Stewardship Code and Family Stewardship Code fall outside its scope.

7.2.2 Allocation of Corporate Decision-Making and the Role and Structure of the Board

The Companies Act provides for a one-tier corporate board. Directors are appointed by shareholders.Footnote ¹⁷ There is no provision for boards to represent any sectoral interests, including employees. Under section 157 A Companies Act, managerial decision-making statutorily lies with the board of directors.Footnote ¹⁸ Section 157 A goes on to provide that directors may exercise all powers of the company with the exception of those that the Companies Act or the company’s constitutionFootnote ¹⁹ specify must be exercised by the company in the general meeting. Hence, shareholders prima facie hold only those powers that are granted under the Companies Act and the constitution of the company.Footnote ²⁰ It thus appears that if shareholders want more extensive rights than those conferred under the Companies Act, they have to vary the company constitution under sections 180 and 183 Companies Act. However, several questions remain unanswered as to the scope of section 157A.Footnote ²¹ In particular, notwithstanding the express wording of that section, is it still possible for a company’s constitution to provide that management powers be conferred upon shareholders directly? This issue arose in TYC Investment Pte Ltd v. Tay Yun Chwan Henry,Footnote ²² where the High Court held that section 157 A Companies Act is only a default rule that can be varied by the company’s constitution.

Not all of the directors on the boards of listed companies are involved in day-to-day management. Instead, boards exercise oversight over the management of the company, with day-to-day management left in the hands of the company’s senior executive officers, who may or may not be board members. At least one-third of the boards of listed companies in Singapore comprise independent directors.Footnote ²³ An independent director is defined in the Corporate Governance Code as

However, in certain prescribed circumstances, such as where the board chair is not an independent director, the Corporate Governance Code provides that independent directors must constitute a majority of the board.Footnote ²⁵

Shareholders make corporate decisions through general meetings. Apart from statutory meetings (e.g. the meeting required to be convened under section 210 Companies Act for the rearrangement of shareholder rights), there are two kinds of shareholder meetings: the annual general meeting (AGM) and the extraordinary general meeting (EGM). Listed companies are required to hold their AGM within four months of each financial year end,Footnote ²⁶ although the period can be extended by the Registrar of Companies in special circumstances.Footnote ²⁷ AGMs are held primarily to approve the financial results of the company,Footnote ²⁸ the declaration of dividends,Footnote ²⁹ the appointment or re-appointment of directors,Footnote ³⁰ the payment of directors’ fees,Footnote ³¹ the adoption of share option plans and shareholder mandates for directors to issue new shares,Footnote ³² although other business can be conducted at an AGM. EGMs are meetings other than AGMs that are called for matters that require shareholder approval. The Corporate Governance Code encourages management to update shareholders at the AGM or EGM on the financial position of the company and its prospects and for the relevant materials to be published on SGXNET (the SGX platform for the public disclosure of information) and the company’s website.Footnote ³³ The Corporate Governance Code further provides that resolutions should not be made inter-conditional to enable shareholders to vote separately.Footnote ³⁴ In the event that resolutions have to be made inter-conditional, clear explanations are required.Footnote ³⁵

7.2.3 Overview of Shareholding Structures in Singapore

Empirical evidence demonstrates that the shareholding structures of listed companies in Singapore have been highly concentrated since the 1960sFootnote ³⁶ and remain concentrated. Shareholdings were previously concentrated primarily in the hands of the state and families. Two of the first comprehensive (published) studies in this area were undertaken by La Porta et al.Footnote ³⁷ and Claessens et al.Footnote ³⁸ The former, who investigated the control structure of firms in twenty-seven countries in the early 1990s, found that 45 per cent of large publicly traded firms in Singapore were controlled by the state and 45 per cent by families, with 5 per cent widely held based on data obtained from a sample of the top twenty companies by market capitalization as of 1995. In comparison, the respective averages across the twenty-seven countries as a whole were 20 per cent, 35 per cent and 25 per cent. Claessens et al., in their study of shareholding structures in nine East Asian countries (including Singapore), reported that the corresponding percentages for state, family and widely held firms were 21.8 per cent, 53.3 per cent and 2.5 per cent, respectively, as of 1996 (based on a sample size of 200 firms).Footnote ³⁹

In a more recent, larger-scale empirical study of Singapore, my co-author and I found that shareholdings continue to be concentrated. We examined the shareholding structures and other corporate governance features of listed companies over the 2009–15 period. Looking at the shareholding interests of the largest beneficial owners of 721 companies, which represented 25 per cent of companies listed on the SGX during the period in question, we found them to own an average of 40.72 per cent (median: 39.62 per cent).Footnote ⁴⁰ The other corporate governance features are reported in Table 7.1.

The largest beneficial owners of the shareholdings of listed companies in Singapore fall into the category of either familiesFootnote ⁴¹ or the Singapore Government through Temasek.Footnote ⁴² Temasek does not publicly provide a list of all of its investments in SGX-listed companies, although it discloses some of its key investments.Footnote ⁴³ Institutional investors, whilst important in SGX-listed companies, do not exhibit as significant an ownership stake in listed firms as do families or the state.Footnote ⁴⁴ There are no readily available data on the holdings of retail investors,Footnote ⁴⁵ although the discussion of Magnus Energy and Hyflux in Section 7.4 of this chapter indicates that retail investors are becoming more vocal and important constituents for listed companies to engage with.

7.3.1 Formal Powers: Calling for and Attending Meetings

7.3.2 Shareholder Proposal Rights

Beyond the calling of shareholder meetings by directors, the Companies Act also provides for situations in which shareholders can requisition meetings. Shareholders holding in aggregate 10 per cent of the paid-up capital of the company and shares carrying voting rights can requisition directors to call for an EGM.Footnote ⁶² Alternatively, they can directly call for a meeting themselves.Footnote ⁶³ In requisitioning a meeting, the shareholders must give directors up to twenty-one days to convene the meeting, but it must take place no later than two months after receipt of the requisition notice.Footnote ⁶⁴ Whilst it might be more expedient for shareholders to directly call a meeting, if they do so they bear the costs, even if the resolution turns out to be successful. In addition, shareholders holding no less than 5 per cent of total voting rights or comprising at least 100 shareholders holding shares on which there is an average paid-up sum per member of at least S$500, can requisition the company to circulate, along with the agenda for the next AGM, notice of resolutions concerning matters that the shareholders intend to table at that meeting.Footnote ⁶⁵

The effect of these provisions is that, at least in theory, shareholders have a powerful right to include items on the agendas of shareholder meetings. Whilst it might be argued that the right of minority shareholders to requisition a meeting or place items on the agenda may not be meaningful in the presence of a controlling shareholder, Section 7.4 below details cases in which shareholder requisition rights have in fact been exercised, illustrating that shareholders do indeed exercise these rights, most likely because they want to see directors address public criticism of the manner in which they have conducted their actions.

7.3.3 Voting, Majorities and Special Meetings

Shareholder approval is required for a number of corporate actions, including the appointment of directors, the disposal of substantially all assets,Footnote ⁶⁶ the issuance of new voting shares (including pursuant to share option schemes),Footnote ⁶⁷ the amendment of the company’s constitution,Footnote ⁶⁸ a capital reductionFootnote ⁶⁹ and share buybacks.Footnote ⁷⁰

Unless otherwise specified, resolutions at shareholder meetings take the form of either ordinary or special resolutions. Ordinary resolutions require approval by only a simple majority of votes of shareholders who vote in person or by proxy, whereas special resolutions require a majority of no less than 75 per cent of shareholders voting in person or by proxy. All resolutions are ordinary resolutions unless the Companies Act specifies that the matter concerned requires a special resolution (such as the amendment of the company’s constitution).Footnote ⁷¹ A company constitution may, although it is rare, specify a different majority for resolution approval. All resolutions at the general meetings of listed companies must be voted on by poll (unless such a requirement is waived by the SGX).Footnote ⁷²

Both the appointment of directorsFootnote ⁷³ and the removal of directorsFootnote ⁷⁴ take place by ordinary resolution. Director appointments must be voted on individually.Footnote ⁷⁵ Company constitutions typically specify that one-third of directors will stand for election at the AGM.Footnote ⁷⁶ It is not possible to contract out of the provisions on the removal of directors by the constitution or by way of an agreement.Footnote ⁷⁷ Accordingly, staggered boards are not permitted because any of their directors can be removed by shareholder resolution.

In certain other special decisions that require shareholder approval, the Companies Act specifies a higher threshold. For instance, in a scheme of arrangement under section 210 Companies Act,Footnote ⁷⁸ the approval required is a majority both in terms of the number of shareholders (by headcount) and in representing 75 per cent in value of shares. In a scheme of arrangement whereby shareholders are asked to approve proposals that rearrange or compromise their rights (such as asking shareholders to transfer their shares to an acquirer in return for payment), such an arrangement is binding on all shareholders, including dissenting shareholders, if the requisite approval is obtained and the court sanctions the scheme. For that reason, a higher threshold is required, including one that requires a majority by shareholder number. Schemes of arrangement also contain other safeguards. For example, if the proposal for a scheme is made in the context of a takeover or merger transaction that is subject to the Takeover Code, the Takeover Code specifically requires that the acquirer and the parties acting in concert with the acquirer who hold shares in the target company abstain from voting at the scheme meeting.Footnote ⁷⁹

7.3.4 Controversy over Dual-Class Shares: Investor Choice and Investor Protection

One recent development has been the allowing of DCS to be listed on the SGX. The SGX is widely seen as having difficulty maintaining its edge in the capital markets when it comes to attracting new listings, not only relative to the Stock Exchange of Hong Kong (SEHK), the SGX’s traditional rival, whose market capitalization is considerably deeper than that of the SGX,Footnote ⁸⁰ but also relative to other regional exchanges in Southeast Asia.Footnote ⁸¹ In 2014, the Companies Act was amended to allow public companies to issue shares with multiple voting rights. However, it was only in 2018 that the SGX amended its listing rules to permit listed companies to issue DCS,Footnote ⁸² although as of the date of writing, no company issuing DCS has yet listed on the exchange.

The reason for the delay in the SGX’s introduction of the DCS framework is that the framework is highly controversial. DCS are inimical to shareholder empowerment because they allow a minority of shareholders to have disproportionate voting rights, and they run counter to the idea that voting power should be directly correlated with economic rights. The DCS structure allows insider-minorities to entrench themselves and become takeover-proof. However, DCS are not uncommon in the United States (e.g. for such tech giants as Alibaba and Facebook). The justification for them is that there are successful examples of companies with DCS structures, and investors should be allowed to choose the kinds of companies in which they wish to invest as long as the appropriate disclosures are made. In Singapore, the main concern with DCS is that they represent a race to the bottomFootnote ⁸³ and allow for an insider-minority to engage in tunnelling, with critics thus arguing that they should not be permitted.

Ultimately, after lengthy debate, it was the SEHK’s decision to allow DCS listings, which itself sparked considerable controversy,Footnote ⁸⁴ that prompted the SGX to follow suit. Prior to 2018, the SEHK disallowed DCS amongst its listed companies. However, the stock exchange market for listings is highly competitive. In 2013, Alibaba, which was considering an initial public offering (IPO) and listing on the SEHK, demanded a weighted voting rights structure (similar to the DCS structure). When SEHK denied its application, Alibaba listed on the New York Stock Exchange instead and raised an unprecedented US$25 billion in its IPO. The loss to the Hong Kong market of the Alibaba IPO prompted a review by the SEHK, which, after several rounds of consultation, announced the new DCS listing framework in April 2018.

Singapore quickly followed suit, announcing its DCS framework in June 2018. However, a series of measures were put in place to mitigate some of the disadvantages of DCS.Footnote ⁸⁵ In particular, for investor protection purposes, only new companies listing on the SGX for the first time are permitted to have a DCS structure, and there is a maximum voting differential, that is, a maximum of ten votes per share is permitted.Footnote ⁸⁶ Holders of weighted voting shares are not able to transfer their shares until after a moratorium.Footnote ⁸⁷ Further, non-weighted voting shareholders may requisition a meeting if they hold a minimum of 10 per cent of voting rights on a one-share-one-vote basis,Footnote ⁸⁸ so as not to deprive ordinary shareholders of their right to call management and the board to account at general meetings. For certain resolutions, such as the appointment and removal of independent directors and a variation in class rights, all shares carry one vote per share, irrespective of the DCS structure.Footnote ⁸⁹ There is also a sunset clause requiring weighted voting shares to be converted to ordinary shares in certain instances such as when shares are transferred outside the original group.Footnote ⁹⁰

The move by the SGX to allow DCS listings was driven largely by a desire to keep pace with the global capital market, attract listings from new technology companies and afford investors greater choice. However, these aims had to be balanced against potential erosion of the rights available to protect minority shareholders. That balance was struck by implementing a framework that allows for DCS but attempts to mitigate some of the worst features of DCS outcomes. At the time of writing, only one company, AMTD International Inc, which has a dual class structure, is listed on SGX. However, it is still too early to determine whether the move will in fact attract quality listings given the restrictive framework in place.

7.3.5 Questions and Information Request Rights

Shareholders enjoy only those information rights that are specified in the company constitution or by the Companies Act. Under the Companies Act, shareholders can access the registers of companies, including the registers of directors, CEOs, secretaries and auditors.Footnote ⁹¹ They also have access to the register of charges to afford them information on assets that are being mortgaged or otherwise encumbered.Footnote ⁹² Public companies (including listed companies) are required to keep shareholder registers, which shareholders can access upon request and the payment of a fee.Footnote ⁹³ Shareholders also have access to the minutes of general meetings.Footnote ⁹⁴ However, their access to financial information is limited. Shareholders have access to audited (or consolidated) financial statements and balance sheets, which are required to be tabled before shareholders at the general meeting,Footnote ⁹⁵ and they can obtain unaudited financial statements that are released pursuant to the requirement of a periodic announcement under the SGX listing rules. Shareholders do not, however, have the right to inspect the company’s accounting records or the minutes of board meetings,Footnote ⁹⁶ and generally do not have access to related party transactions (RPTs) entered into unless they are material transactions requiring shareholder approval, as outlined in Section 7.4.1.1.4 below. It should be noted that the Companies Act prohibits Singapore companies from issuing bearer shares and share warrants.Footnote ⁹⁷

7.4.1 Voting in Practice

7.4.2 Use of Other Means of Engagement

Retail shareholders in Singapore have historically relied on SIAS, an investor lobby group that represents retail investors, to engage with the management of companies. SIAS acts as a mediator between retail shareholders and management in resolving disputes, and is often resorted to when such shareholders lack the means to pursue litigation. SIAS prides itself on championing many shareholder rights issues behind the scenes in boardrooms.Footnote ¹⁴⁰ However, there is little empirical evidence demonstrating the effectiveness of such behind-the-scenes activism.

Enforcement by means of litigation is rare amongst shareholders in Singapore. In theory, minority shareholders are entitled to commence derivative actions against directors suspected of wrongdoings in the name of the company under section 216 A Companies Act. In recent research comprehensively reviewing private enforcement actions taken during the 2008–15 period, there was only one reported case, and the action was unsuccessful.Footnote ¹⁴¹ The rarity of litigation is likely attributable to the lack of a formal class-action procedure or contingency fee system in Singapore.

Shareholders can also bring a claim under section 216 Companies Act for minority oppression or unfair prejudice. Shareholders in companies incorporated in other jurisdictions and listed on the SGX can also rely on the functional equivalents of minority oppression or unfair prejudice in that section. In one case, action was brought by a minority shareholder in Kingboard Copper Foil Holdings Ltd., an SGX-listed company incorporated in Bermuda, which succeeded in the High Court in Bermuda but failed on appeal.Footnote ¹⁴² Kingboard had an ultimate majority shareholder, Kingboard Laminates Holdings (Laminates). Kingboard’s main operation was supplying Laminates with copper foil, which was clearly an RPT. Pursuant to the SGX listing rules, Kingboard obtained an annual mandate from its independent shareholders to sell copper foil to Laminates and other companies within the Laminates group. However, in 2011, the petitioner, a hedge fund and minority shareholder in Kingboard, requisitioned a special general meeting to consider a resolution to appoint an independent auditor to investigate the historical transfer pricing. That resolution was defeated, but the minority shareholders refused to renew the mandate.

To address the problem, the company’s wholly owned subsidiary, Hong Kong Copper Foil Limited, entered into a contract with a company called Harvest Resources Management Limited (‘Harvest’), granting Harvest the exclusive right to use Kingboard’s copper foil-producing business in return for a monthly fee. Harvest then sold copper foil to Kingboard Laminates Holdings Limited (‘Laminates’). Harvest’s directors had close ties with Kingboard and Laminates. The petitioner argued that the arrangement was a sham to evade the SGX listing rules. At the first instance, the court found against the petitioner on various grounds, including that the petitioner had not made its case that the pricing was unfair. The Supreme Court then ruled that the licence agreement was oppressive, as it constituted an attempt to get round the petitioner’s right to veto the transaction. However, on appeal it was found that Kingboard’s entry into the licensing fee arrangement was not a sham, but a legitimate way to address the veto and did not constitute oppressive conduct or unfair prejudice.Footnote ¹⁴³

This case illustrates the challenges faced by the minority shareholders of a listed company that is transacting with its parent company. Much of the enforcement against wrongdoing committed by controlling shareholders or directors takes the form of public enforcement, that is, regulatory action taken by the regulators, including the MAS (as the securities regulator) and the SGX, or by prosecution for criminal offences.Footnote ¹⁴⁴ Public enforcement, however, does not result in direct remedies for shareholders, as there may be instances in which the MAS uses its existing powers to incentivize wrongdoers to negotiate a settlement that would benefit shareholders.Footnote ¹⁴⁵

8.1.1 Korean Corporate Law: An Overview

Corporate governance is principally regulated by the Korean Commercial Code (KCC) and the Code’s primary enforcing authority is the Ministry of Justice. Korean listed companies are also regulated by the Financial Investment Services and Capital Markets Act (FISCMA) that is primarily enforced by the Financial Supervisory Commission and the Financial Supervisory Service.

Under the KCC, five types of corporate entities can be set up under Korean law: general partnership (hapmyung hoesa), limited partnership (hapja hoesa), limited liability company (yuhan chaekim hoesa), joint stock company (chusik hoesa) and closed company (yuhan hoesa). Among them, the most commonly established corporate entity is the joint stock company (chusik hoesa). This chapter deals only with joint stock companies, whether privately held or listed.

The Annual General Meeting (AGM) is the supreme body of the joint stock company. Directors to the board that manages the corporation are appointed at the AGM. The board in turn elects the company’s managing director. In addition, auditors are appointed at the AGM. A company may establish an audit committee within its board of directors provided that it has at least two trillion KRW, the official Korean currency, in capital, that outside directors represent at least half the total number of members on the company’s committees and that outside directors account for at least two-thirds of its audit committee.Footnote ⁷

KCC and the Act on Corporate Governance of Financial Companies (CGFC) provide for a shareholder’s right to: (1) request copies of company documents for inspection (e.g., the shareholders’ register (Article 396 of the KCC)), and shareholder and board meeting minutes (Articles 396 and 391–3 of the KCC); (2) propose agendas for the shareholders’ meeting (Articles 363–2(2) and 542–6 of the KCC); (3) call a temporary shareholders’ meeting (Articles 366(1) and 542–6(1) of the KCC and Article 33 of the CGFC); (4) inspect and copy accounting books (Articles 466(1) and 542–6(4) of the KCC and Article 33 of the CGFC); (5) file a derivative lawsuit (Articles 403(1) and 542–6(6) of the KCC and Article 33 of the CGFC); (6) request the court to remove managing directors (Articles 385(2) and 542–6(3) of the KCC and Article 33 of the CGFC); (7) request the court to appoint inspectors (Articles 367(2), 467(1) and 542–6(1) of the KCC and Article 33 of the CGFC); (8) request cumulative voting (Articles 382–2(1) and 547–7(2) of the KCC and Article 33 of the Enforcement Decree of the KCC); and (9) file an injunction suit to stop director misconduct (Articles 402(1) and 542–6(1) of the KCC and Article 33 of the CGFC).

8.1.2 Ownership Structure: Power without Authority

Korean companies, including the Chaebols, are typically controlled by individuals or families.Footnote ¹¹ The line between management and share ownership is not always as clear in Korea as it is in the United States or European Union jurisdictions. The chief executive officer (CEO) and chairman of the board are often representatives of the founding families that have retained control over the companies they founded. It is common for the founding families of Korean companies to assume both shareholder and managerial roles. Even if the founding family owns only a small fraction of the company’s shares, it often uses its position to retain de facto control.

Indeed, controlling shareholders in Korea usually own less than 5 per cent of a business group’s equity stake. However, they often control the voting rights of another 20 per cent to 50 per cent of shares by “circular shareholdings” through affiliates. Circular-ownership is a typical ownership pattern among Chaebols, allowing controlling shareholders to retain control with only minimal actual ownership positions. It is well documented that circular-ownership structures are a source of significant agency costs.Footnote ¹² Therefore, corporate governance issues in Korea are primarily the conflicts between the controlling shareholder and minority public shareholders.

Concentrated and dispersed ownership can each have their own performance advantages and disadvantages.Footnote ¹³ On the positive side, the Korean system – featured with a concentrated ownership structure – promises to improve managerial efficiency and reduce shareholder-manager agency costs. Controlling shareholders either serve in senior managerial positions (CEO or chairman of the board) or have their nominees fill those positions. Controlling shareholders can thus closely and effectively monitor officers and employees, better aligning the interests between shareholders and managers.

The Korean concentrated ownership patterns can also have other important advantages. Compared to other majority shareholders, family owners are more willing to reduce dividends, and they prefer to invest cash flows in long-term projects such as R&D investment.Footnote ¹⁴ Family ownership also places greater importance on reputation, thereby fostering special long-term relationships with and a sense of responsibility toward employees, suppliers and clients, and ultimately improving the well-being of stakeholders. In other words, family owners value the reputation and legitimacy of their firms in the eyes of the public.

However, controlling shareholders can also be keenly aware that they cannot easily be ousted since their control is largely insulated by circular shareholdings. Thus, the misalignment between cash flow rights and voting rights can give controlling shareholders strong incentives to appropriate company assets for private benefits. More recently, there has been a trend of the large Korean corporate groups transforming themselves into holding companies.Footnote ¹⁵ The misalignment between ownership and control seems to have been further exacerbated in these holding companies. In the absence of an effective legal environment reining in opportunism of majority shareholders, the misalignment can lead to expropriations of minority shareholders, by ways of accounting frauds, self-dealings, the misappropriations of corporate opportunities and so on. Recent Korean corporate scandals clearly demonstrate the ineffectiveness of Korea’s internal, external, ex ante and ex post mechanisms of the corporate monitoring system.Footnote ¹⁶

8.2.1 Powers of the AGM

The AGM is empowered to make decisions only on issues stipulated by law or specially provided for in the company’s AOI (Article 361 of the KCC). Fundamental matters such as the appointment of directors or auditors; the remuneration of directors, auditors and liquidators; approval of statements of accountants; and decisions on dividends are among the issues considered at the shareholders’ meetings. A change in AOI, reduction of capital, dissolution, transfer of business and mergers and acquisitions are also within the authority of the AGM. Companies may add other lines of authority to the mandate of the AGM by specifying them in the AOI.

The AGM must be held at least once a year (Article 365(1) of the KCC). A shareholders’ meeting is convened by the board of directors, which determines the date, place and agenda of the meeting. A shareholders meeting convened without the board’s decision is unlawful. In practice, Korean AGMs tend to be concentrated in a short time window. In 2017, 913 (or 47.63 per cent) of Korean listed companiesFootnote ¹⁷ held their AGMs on Friday, 4 March, named the Super AGM Day. After the AGM dispersion policy was implemented in 2018, the Super AGM Day phenomenon considerably lessened. So, the concentration gradually decreased to 542 companies (27.28 per cent) in 2018 and 550 companies (26.35 per cent) in 2019.Footnote ¹⁸ Similarly, 750 AGMs were held in March 2019,Footnote ¹⁹ representing 84.7 per cent of the KOSPI listed companies. Notably, the listed companies (76 per cent) that formed the same conglomerate tended to hold their AGMs on the same date.Footnote ²⁰

8.2.2 Shareholders’ Statutory Rights

The KCC is the principal law governing corporate governance of Korean corporations. It stipulates, among other things, a variety of shareholder rights, which mostly form the basis for the activities of shareholder activists. Under the KCC, the following decisions must be reserved for shareholders and resolved at the AGM by a majority of votes of shareholders who represent more than a quarter of the company’s total outstanding shares: (1) appointment of a director or statutory auditor (Article 382 (1)); (2) approval of annual financial statements (Article 449 (1)); (3) approval of remuneration of directors and statutory auditors (Article 388); and (4) declaration of dividends (Article 462 (2)).

For the following decisions reserved for shareholders, the KCC requires approval of a special resolution by more than two-thirds of the votes of shareholders present at the AGM who represent more than a third of the company’s total outstanding shares: (1) transfer of all or a material portion of the company’s business (Article 374 (1)); (2) removal of directors and statutory auditors (Article 385 (1)); (3) amendments to the AOI of the company (Article 434); (4) capital reduction (Article 438); (5) mergers and spinoffs (Article 522 (3) and Article 530–3 (1)); (6) dissolution or continuance of the company (Article 518 and Article 519); and (7) granting stock options (Article 542–3 (3)).

8.2.3 Important Rights of Minority Shareholders

8.2.4 Stewardship Code Adoption

The Principles on Stewardship Responsibilities of Institutional Investor was published by the Korea Stewardship Code Council on 16 December 2016. It establishes key principles essential for institutional investors to follow in effectively exercising their stewardship responsibilities, and also stipulates concrete details pertaining to these principles.Footnote ²⁶ The Code’s seven principles highlight the importance of disclosing a clear stewardship policy, managing conflicts of interests, monitoring companies targeted for investment, formulating internal stewardship guidelines, establishing a proxy voting policy and disclosing votes cast, reporting to clients and beneficiaries and developing the capabilities and expertise to implement stewardship in an ‘active and effective manner’.Footnote ²⁷ The Code expressly recognizes that successful implementation of stewardship responsibilities not only encourages the mid- to long-term development of companies and contributes to enhancing investor returns, but also supports substantial growth and development of capital markets.Footnote ²⁸ Stewardship activities are not limited to the exercise of voting rights. Engagement activities include a broad spectrum of shareholder activities focused on ‘clear and constructive goal’ in conducting a conversation with investee companies.Footnote ²⁹

The Code’s principles generally apply to domestic and overseas institutional investors holding shares of publicly listed companies in Korea, including asset owners and asset managers. The principles are not legally binding and apply only to institutional investors who voluntarily affirm participation by accepting and implementing the principles. When participating institutional investors cannot comply, they should explain the reason (‘comply or explain’ basis).Footnote ³⁰ According to the 2019 Korea Listed Companies Association (KLCA) Survey, 53 per cent of KOSPI companies responded that institutional investors held company shares and exercised their voting rights.Footnote ³¹ When institutional investors exercised their voting rights, 39.4 per cent of the respondents said that they opposed the agenda items. Among those negative votes, ‘appointment of directors’ was the highest at 25.3 per cent, followed by ‘appointing auditors or audit committee members’ and ‘approval of directors’ compensation limit’.Footnote ³²

8.2.5 Relaxation of the Restrictions on Shareholder Engagement

Under the FSCMA, if a shareholder comes to own at least 5 per cent of a listed company, changes its shareholding ratio thereafter by at least 1 per cent or if there are changes in its purpose of shareholding or any other material matters, the shareholder must report its shareholding status and a detailed account of any changes to the Financial Services Commission (FSC) and the KRX within a prescribed period (Article 147 (1) of the FSCMA). In the past, the FSCMA had classified the purpose of shareholding on a binary basis, depending on whether or not the holder(s) of such shareholding intended to influence corporate management.

Nevertheless, the amendment to the Enforcement Decree of the FSCMA (FSCMA-ED), taking effect from January 2020, has enabled institutional investors including pension funds to carry out shareholder engagement activities more aggressively. The purpose of shareholding is now further divided into: (1) management influence (in cases where its purpose is to influence corporate management as described in the FSCMA-ED); (2) general investment (in cases where its purpose is to implement active shareholder engagement without an intent to influence corporate management); and (3) simple investment (in cases where its purpose is to exercise voting and other rights that are irrespective of the shareholding ratio). Disclosure obligations are imposed on a differentiated basis, depending on purpose of shareholders. This reflects the latest trends toward an increase in shareholder engagement by the NPS and other institutional investors (Article 154 (5) of the FSCMA-ED). The amended FSCMA-ED specifically excludes shareholder activities related to, for example, issuance of dividends, amendment to the AOI to improve corporate governance in line with pre-disclosed principles and exercise of the right to request dismissal against a director’s unlawful conduct from activities ‘to influence corporate management’ (Article 154 (1) of the FSCMA-ED).

Since the 2020 amendment to the FSCMA-ED, some institutional investors have changed their investment purpose from ‘simple investment’ to ‘general investment’. More specifically, out of the thirty-five domestic institutional investors which filed summary reports of large equity ownership during the period from 1 February 2020 to 31 March 2020, the NPS, KB Asset Management and Korea Investment Value Asset Management changed their purpose of investing in some of their portfolio firms.Footnote ³³ The NPS has changed its purpose of shareholding from ‘simple investment’ to ‘general investment’ with respect to 56 out of the 113 listed companies constituting its investment portfolio. These included, notably, Samsung Electronics, SK Hynix and Hyundai Motor Company.Footnote ³⁴

8.3.1 Voting in Practice

8.3.2 What Issues Are Voted on?

Table 8.5 shows that ‘approval of director’s compensation’ was the most common agenda item (99 per cent) at the 2019 KOSPI AGMs, followed by ‘approval of financial statements’ (92.9 per cent) and ‘article of incorporations amendments’ (91.2 per cent).

Except for the appointment of auditors, fifteen resolution agenda items were rejected at 2018 AGMs in Korea because a quorum had not been reached.Footnote ⁴⁶ In these cases, the average majority shareholder holding ratio was approximately 10.73 per cent. The average majority shareholder holding ratio of the seventeen companies requiring special resolutions that were rejected over the most recent three years was 15.33 per cent (Table 8.6).Footnote ⁴⁷

8.3.3 Influence of the National Pension Service

Since the Korean government introduced guidelines to enhance the participatory role of shareholders in December 2016,Footnote ⁵⁸ the number of institutional investors adopting the Korea Stewardship Code has reached 123. The NPS, Korea’s largest institutional investor, actively monitors and engages with companies that it has invested in with reference to the Code.Footnote ⁵⁹ The most notable change is that the Code allows the NPS to actively exercise its voting rights.Footnote ⁶⁰ According to a KLCA survey, 44.9 per cent of the respondent companies reported the NPS held shares in them and exercised voting rights at their 2019 AGMs. Prior to the adoption of the Code, the NPS was passive in exercising its voting rights and routinely agreed to proposed agenda items. The proxy vote dissent rate of local institutions has also increased significantly. According to the KCGS data from September 2018, the votes against domestic institutional investor signatories rose from 1.72 per cent in 2015 to 5.72 per cent in 2018.Footnote ⁶¹ Table 8.10 presents further details of NPS voting records 2015–19 (April).

Critics of the NPS’s showing of activism contest that the NPS risks intervening excessively in the day-to-day management of their investee companies and that other asset managers will blindly apply the NPS voting policies to all of their portfolio firms in Korea.Footnote ⁶² However, empirical evidence shows that the adoption of the Stewardship Code has had a positive impact on the NPS’s returns. In respect of portfolio firms in which the NPS holds more than 5 per cent ownership, the effect of the engagement was statistically and significantly positive.Footnote ⁶³ The effect is stronger when the NPS ownership stake is higher than 10 per cent.Footnote ⁶⁴ To be sure, it remains to be seen if the enhancement in shareholder value is sustainable as the Stewardship Code adoption is at a nascent stage. Nevertheless, many Korean stakeholders, including the government, have anticipated an improvement in corporate governance and shareholder value as a consequence of the NPS’s active shareholder engagement.

8.3.4 Recent Shareholder Activism Campaigns

9.1.1 Allocation of Corporate Decision-Making: From Two-Tier to One-Tier Corporate Structure

Taiwan’s civil law is firmly based on that of Japan. Since the enactment of the CA in 1929, as summarized in Table 9.1, Taiwan has adopted the traditional binary or dual board model (also known as the ‘two-tier system’) in which both directors and supervisors are elected by shareholders.Footnote ⁵ Typically composed of executives and a few outside directors, the board of directors is generally tasked with the management of corporate affairs, while supervisors are responsible for monitoring the performance of managers and the board of directors.Footnote ⁶ However, under the two-tier corporate structure, supervisors have often been criticized for their inability to successfully monitor boards, due to their passivity and close ties with the directors and controlling shareholders, who usually determine the elections of both directors and supervisors.Footnote ⁷

In the first decade of the twenty-first century, Taiwan formally began to transplant a unitary Anglo-American style of board of directors and independent directors (also known as the ‘one-tier system’) into its corporate governance structures, with audit committees replacing supervisors.Footnote ⁸ According to the FSC,Footnote ⁹ all publicly traded companies listing shares on the Taiwan Stock Exchange (TWSE) and Taipei Exchange are required to establish audit committees consisting of all independent directors (at least three of whom should sit on an audit committee) to replace all supervisors by the end of 2022.Footnote ¹⁰ This exemplifies a typical regulatory strategy of the FSC based on the widespread belief that independent directors ensure good corporate governance.Footnote ¹¹

9.1.2 Power Demarcation between Shareholders and Boards

As far as the demarcation of powers between the board of directors and shareholders in corporations is concerned, the Taiwanese board of directors has the right to decide on general affairs of the corporation – referred to as director primacy.Footnote ¹² Therefore, in the execution of general business, shareholder opinions are merely recommendations to the board of directors, with which the board is not obliged to comply.Footnote ¹³ Nevertheless, if the matter is specified – by law or regulation – to be decided by shareholders, the board of directors shall, under Article 193 of the CA, act in accordance with the Articles of Incorporation and the resolutions of the shareholders’ meetings. Specifically, the demarcation of authority between shareholders’ general meetings and board of directors can be reduced to the following three broad categories under the CA:Footnote ¹⁴ (1) matters exclusively for shareholders’ meetings;Footnote ¹⁵ (2) matters exclusively for the board of directors;Footnote ¹⁶ and (3) matters in which general meetings and the board of directors share resolution power.Footnote ¹⁷ Given the concept of director primacy illustrated under Article 202 of the CA, the issues reserved for a general meeting vote are fewer than those reserved for the board of the directors, to whom residual power belongs.

Under Taiwanese law, there are two main types of shareholder resolutions: ordinary resolutions and special resolutions. Ordinary resolutions are those adopted by a majority of the shareholders present at general meetings representing a majority of the shares issued by the company, provided that these shareholders have the right to vote at the general meeting.Footnote ¹⁸ Unless it is explicitly provided that a special resolution is required, an ordinary resolution is sufficient for the matters reserved for the shareholder meeting to decide under the CA.

Special resolutions refer to those passed by a majority of the votes cast by the shareholders voting either in person or by proxy at a general meeting attended by holders of two-thirds or more of the total outstanding shares of the company or their representatives. For public companies, the CA also allows a special resolution to be adopted via approval by two-thirds or more of the shareholders present at a shareholder meeting, if the total number of shares represented by those present at such a meeting is less than two-thirds but more than half of the total outstanding shares of the company. In general, a special resolution is passed regarding matters that would significantly affect the company’s operations or its shareholders’ interests, such as mergers and acquisitions,Footnote ¹⁹ dismissal of directorsFootnote ²⁰ or amendments to the Articles of Incorporation.Footnote ²¹

Based on these policies, the board of directors is the core decision-maker for Taiwanese companies.Footnote ²² It is therefore important to know in whose interests the board should make decisions. Following the thoroughgoing revision of Taiwan’s CA in 2018, the answer to this question has likely changed with the altered ideology and conception of corporate governance in Taiwan. The newly added Article 1, Paragraph 2 of the CA encourages companies to fulfil their corporate social responsibility (CSR) when management makes business decisions. This means that CSR becomes incorporated into internal corporate governance and operational activities through the adoption of so-called constituency statutesFootnote ²³ and the transformation of the shareholder primacy model into a stakeholder or CSR model.Footnote ²⁴ In this way, the board – in its decision-making – will no longer consider the interest of shareholders alone, but also the potential impact of a proposal on other stakeholders (e.g. suppliers, consumers, employees).

9.1.3 Ownership Structure: Dominance by Controlling Minority Shareholders

A ‘controlling minority structure’ (CMS) refers to a situation in which controlling shareholders possess an excessive extent of control power over a firm larger than that of their cash-flow rights – or the shares they own.Footnote ²⁵ It is common in Taiwan for the controlling shareholders of a company to exercise control via a pyramid structure or circular/cross shareholding, as discussed later in this section, while not necessarily holding a majority of shares; a large portion of Taiwanese companies are controlled by families as well.Footnote ²⁶

Table 9.2 illustrates how shares of Taiwanese public companies listed on the TWSE are held among individuals, non-financial institutions and financial institutions. According to the statistics furnished by the TWSE, as of December 2019, 35.99 per cent of the capital of the TWSE-listed companies was invested by individuals (35.55 per cent by domestic individuals and 0.44 per cent by foreign individuals); 35.85 per cent by non-financial institutions (25.33 per cent by domestic ones and 10.52 per cent by foreign ones); 6.75 per cent by financial institutions; 16.49 per cent by securities investment trust companies (i.e. mutual funds);Footnote ²⁷ 4.79 per cent by government agencies;Footnote ²⁸ and 0.13 per cent bought back by the listed companies themselves.Footnote ²⁹

Regarding the data in Table 9.2, although 35.85 per cent of the capital of the TWSE-listed companies is invested by non-financial institutions, commentators have previously maintained that these institutional investors probably included special-purpose investment legal entities established by controlling shareholders to acquire and retain shareholding in their listed companies. These commentators also noted that the more these legal entities invested into a company’s capital, the more extensive the control power exerted by these controlling shareholders over the company in excess of their cash-flow rights, and the greater the probability that these controlling shareholders served as directors or supervisors.Footnote ³⁰

CMS-related issues typically involve a vertical cross-shareholding or a circular shareholding, meaning that a subordinate company also holds shares of its controlling company. The percentage of such shareholdings by a subordinate company might or might not cross the threshold of control defined under the CA.Footnote ³¹ Commentators illustrate that a vertical cross-shareholding structure is very common in Taiwan.Footnote ³² This structure would possibly allow the controlling shareholder to avoid rules regulating control under Taiwan’s CA, especially those which placed restrictions on purchasing and even holding shares by subordinate companies or affiliated enterprises.Footnote ³³

As far as the ownership structure in Taiwan is concerned, the statistics in 1997 and 1998 showed that 72 per cent of Taiwanese firms had controlling shareholders and about 83 per cent of companies were controlled by families.Footnote ³⁴ One study further demonstrated that according to the data collected from 2003 to 2015 on voting rights and cash-flow rights in Taiwan, even in 2015, CMS and family control are characteristics of Taiwanese public firms – similar to the pattern of ownership in 1997.Footnote ³⁵ This fact is highly relevant to the issue of CMS and circular/cross-shareholding, since circular/cross-shareholding contributes to the control power of the controlling minority shareholders or families. The controlling shareholders (or controlling families) often retain their control by establishing a pyramidal structure, circular/cross-shareholding or personal participation in the board of directors, so that a separation of ownership and cash-flow rights is common.Footnote ³⁶ This phenomenon has led to numerous issues such as tunnelling, which exemplifies an agency problem between a ‘controlling-minority’ shareholder and other minority shareholders.Footnote ³⁷ If we examine the Rebar Group corporate scandal of 2006–7 as a classic and representative example, the family patriarch Mr Wang siphoned funds from group companies for years by using shell companies to enter into related party transactions (RPTs)Footnote ³⁸ approved by seemingly unrelated juridical directors who were actually controlled by the Wang family.Footnote ³⁹ Accordingly, strengthening corporate governance and protecting shareholders’ rights have emerged as urgent issues.

9.1.4 Government: A Regulator, a Player, or Both?

Like its peers in East Asia, Taiwan’s government is actively involved in market development and reform.Footnote ⁴⁰ From time to time, the Taiwanese government, typically through the Ministry of Finance (MoF), even participates in the market aggressively as a player, while doubling as a market regulator.Footnote ⁴¹ The dual role of the government in the context of the contest over corporate control in Taiwan is well illustrated by the Taishin–CH Bank merger saga, discussed later in this section. This case, by no means untypical, exemplifies the government’s involvement in the affairs of private business organizations.

In recent years, efforts to reform the Taiwanese financial markets have resulted in a number of mergers between state-controlled banks (either completely or partially owned by the government).Footnote ⁴² In a proposed merger in 2013 between two listed financial institutions, Taishin Financial Holding Co., Ltd. (Taishin) and Chang-hua Bank (CH Bank), the MoF (the second largest shareholder of CH Bank) strongly opposed the merger initiated by Taishin (CH Bank’s largest shareholder), and also requested that TaishinFootnote ⁴³ recuse itself from the relevant deliberations in the resolution of the general meeting.Footnote ⁴⁴ Interestingly, the MoF initially supported Taishin’s merger proposal,Footnote ⁴⁵ but later changed its mind. This shift of position was due largely to public opinion. Interest groups, including CH Bank employees and its labour union, persuaded the MoF to oppose the merger.Footnote ⁴⁶ Specifically, the MoF’s opposition to the merger, according to its claims, reflected the need to retain the jobs of CH Bank employees.Footnote ⁴⁷ In Taiwan, labour unions in state-owned entities (SOEs) usually oppose privatisation or mergers by private entities, viewing such mergers as being tantamount to a cheap sale to private businesses.Footnote ⁴⁸ In the 2000s, labour unions pressured politicians and government agencies against full privatization when the government was promoting mergers between banks.Footnote ⁴⁹ However, because the labour unions are strong enough to defeat privatization plans,Footnote ⁵⁰ they have sometimes supported attempts by government agencies, including the MoF, to maintain control over CH Bank and other banks partially owned by the government, especially during relevant deliberations in the resolution of M&A transactions in the general meeting. Therefore, as seen in the Taishin–CH Bank merger, the result of a government agency like the MoF holding voting equity in a private bank may be costly in particular where labour ‘is the primary constituent of the corporation that seeks influence over the corporation’.Footnote ⁵¹ This representative case in Taiwan illustrates that even in a private bank with a government agency as the second largest majority shareholder,Footnote ⁵² pressure from non-shareholder constituencies as interested groups can effectively influence the government agency’s decisions,Footnote ⁵³ despite the fact that the benefit of other minority shareholders might be sacrificed.Footnote ⁵⁴

9.2.1 Shareholders’ Right to Call a Meeting

According to paragraph 1 of Article 170 under the CA, companies in Taiwan hold two types of shareholders’ meeting – annual general meetings (AGMs), which are held at least once every year, and extraordinary general meetings (EGMs), which are held when necessary. There are a number of purposes for which EGMs are held. As discussed in this section, EGMs can be held voluntarily by those with statutory authority, such as shareholders that cross ownership thresholds and procedural ones illustrated under Articles 173 and 173-1 of the CA. In addition, EGMs can sometimes be a statutory requirement.Footnote ⁵⁵

Furthermore, Article 171 states that ‘[a] shareholders meeting shall, unless otherwise provided for in this Act, be convened by the Board of Directors’. Therefore, as a rule, the board of directors has the right to call both AGMs and EGMs. Shareholders have the right to hold a general meeting under circumstances provided by Articles 173 and 173-1 of the CA as well as Article 43-5 of the SEA. Before the amendment to the CA in 2018, shareholders who intended to call a general meeting were required to ask the board of the directors to call it in the first instance and then obtain approval from the competent authority – that is, the Ministry of Economic Affairs (MoEA) – before convening an EGM or AGM on their own.Footnote ⁵⁶ To strengthen shareholder activism, Article 173-1 was added to the CA in 2018. It gives shareholders who possess 50 per cent or more of the total number of outstanding shares of a company for a period of three months or longer the right to hold an EGM on their own, without having to ask the board of directors to facilitate the convening process and without having to obtain approval from the competent authorities beforehand, as required under Article 173 of the CA.Footnote ⁵⁷ This amendment illustrates the long-standing difficulties facing insurgent shareholders when calling general meetings under Article 173 of the CA. For example, the MoEA and the Supreme Court used to have conflicting views on whether outside insurgents might, after obtaining approval from the competent authority, call an EGM to re-elect directors and supervisors in a contest over control.Footnote ⁵⁸ In practice, however, the MoEA rarely grants approval for insurgents to call an AGM or EGM, due to its philosophy of refraining from intervening in a company’s internal governance unless there is a complete functional breakdown. Due to the difficulties mentioned above, the invocation of Article 173 of the CA would often fail, and the inclusion of Article 173-1 helped address this issue. Moreover, to protect the interests of an acquiring company during the restructuring of a target company after a tender offer,Footnote ⁵⁹ paragraph 4 of Article 43-5 of the SEA allows insurgent shareholders that possess more than 50 per cent of the total number of shares to ask the board of directors to convene a special meeting of shareholders without meeting other procedural requirements set out in paragraph 1 of Article 173-1 of the CA. Under this provision, however, outside insurgents are still faced with existing hurdles for making such requests of the board of directors or obtaining approval from competent authorities before successfully seizing control of a given listed company from its incumbent management.

As for the regular term for calling a general meeting, under paragraph 3 of Article 172 of the CA, in any public company, a notice to convene an AGM shall be given to each shareholder no later than thirty days prior to the scheduled meeting date. In the event that a public company intends to convene an EGM, a notice shall be given to each shareholder no later than fifteen days prior to the scheduled meeting date. Furthermore, Article 172, paragraph 4 of the CA states that causes or subjects of a general meeting to be convened shall be indicated in the individual notice to be given to shareholders.

9.2.2 Shareholders’ Proposal Right

Given the concept of director primacy illustrated by Article 202, the agenda in general meetings is normally set by the board of directors.Footnote ⁶⁰ However, in 2005 and 2018, Article 172-1 was added and amended to the CA, giving shareholders the right to add proposals to the agenda of an AGM.

Under Article 172-1 of the CA, eligibility to add shareholder proposals – that is, the ownership requirement – is limited to shareholders ‘holding one percent (1%) or more of the total number of outstanding shares of a company’. This provision has been interpreted to include cases of both shareholding by a single shareholder and joint shareholding by multiple shareholders.Footnote ⁶¹ Although Taiwan’s legislation gives shareholders the right to add proposals in AGMs, this right is limited, as only one matter – which must be described in 300 words or less – is permitted in each single shareholder proposal.Footnote ⁶² These procedural requirements are significant. While the Taiwanese government has transplanted the shareholders’ proposal right from the United States, it realizes that this right encourages shareholder activism, and has prudently hedged it around with requirements that tend to blunt its effect.Footnote ⁶³

Significantly, the 2018 amendment to Article 172-1 of the CA pr