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Part I - Asia

Published online by Cambridge University Press:  10 September 2022

Harpreet Kaur
National Law University Delhi
Chao Xi
The Chinese University of Hong Kong
Christoph Van der Elst
Tilburg University, The Netherlands
Anne Lafarre
Tilburg University, The Netherlands


Publisher: Cambridge University Press
Print publication year: 2022

2 Shareholder Voting and Engagement in China

Chao Xi
2.1 Introduction
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 The 1993 Company Law was subsequently repealed and replaced by the current Company Law, which was promulgated in 2005 and has been in effect since 2006, with important amendments in 2013 and 2018.Footnote 1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

The shareholders’ meeting … is the organ of power of a company, and it determines all material matters of the company. The board of directors is the decision-making organ of the company, and it is accountable to the general meeting. Within the power vested by the law and the authority delegated by the shareholders’ meeting, it makes business and managerial decisions, appoints and dismisses senior executives including the manager, and represents the company.

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, 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 Legal Means of Shareholder Engagement
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

The convener of the general meeting is not vested with the formal authority to vet the merit of the shareholder proposal. Where the convener is the board of directors, there is in principle no need for it to hold a meeting to vet the proposal. Where the board receives a proposal, it is obliged to verify the identity of the initiating shareholder, and [ensure] the proposal’s compliance with [the prescribed criteria], subject to which the proposal should be put to vote at the meeting. The board can request further information from the proposing shareholder should it decide that the proposal fails to meet [the prescribed criteria], but should not [unreasonably] delay or reject the proposal.

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 Shareholder Voting and Engagement in Practice
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’.

Table 2.1 Resolutions at the shareholders meetings at the Shanghai Stock Exchange, 2015–18

Resolution TypePercentageApproval Rate
Business polies and investment plans15.61%97.96%
Director/supervisor election and remuneration21.48%N.A.Footnote 117
Work report of the board of directors3.88%99.43%
Work report of the supervisory board3.81%99.38%
Annual budget and accounts4.29%99.45%
Profit distribution and loss coverage3.95%99.26%
Capital increase or decrease14.11%97.56%
Bond issuance4.50%99.43%
Merger, split, dissolution, or liquidation0.64%99.10%
Charter amendments3.30%99.26%
Appointment of accountants4.50%99.11%
Substantial acquisition or disposal of assets2.94%97.50%
Share-option scheme2.01%98.62%

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. Shareholder Voting on Management Resolutions

An overwhelming majority of the resolutions put to the vote at the shareholder’s meetings in Chinese listed companies are initiated either by the board of directors or by the company’s controlling shareholder (which in effect appoints the board). For ease of reference, these resolutions are referred to generally as management resolutions. By contrast, proposals initiated by non-controlling shareholders were rare, and will be dealt with at greater length in the succeeding Section

Company A

Company A is one of the national leaders in its own sector. Its 2016 AGM was otherwise uneventful but for the shareholder disapproval of one resolution. The resolution concerned was a related-party transaction, more specifically, a proposed transaction between Company A and a finance company controlled by Company A’s controlling shareholder, under which the latter was to provide financial services to Company A. By way of background, it has become common for each Chinese central state-owned enterprise (SOE) to set up an in-house finance company, which in many cases takes the place of external banking institutions to provide financial services to its members, including its controlled listed companies.Footnote 120 The resolution had the unanimous support of Company A’s board of directors.

As the interested shareholder, Company A’s controlling shareholder was excluded from voting on the related-party transaction in question, by way of the operation of the MoM rule. The controller owned close to two thirds of Company A’s outstanding shares, giving any large minority shareholder the opportunity to leverage on the MoM rule and swing the voting outcomes. The voting results showed that close to 10 per cent of Company A’s eligible votes were cast, presumably all by minority shareholders, on the resolution concerned, and close to 90 per cent of the shares cast were against it. Among the dissenting shareholders, a non-controlling shareholder owning well over 5 per cent (but less than 10 per cent) of Company A’s outstanding shares was almost single-handedly responsible for the defeat of the resolution concerned.

The activist shareholder concerned is part of one of the world’s largest mutual fund groups (Group), operating primarily outside Mainland China at the time of the AGM. The Group as a whole, and a subsidiary of the Group in particular, have gained the reputation of being active owners in their invested portfolio companies. For over a decade, Company A had been a portfolio company, at different times, of at least six of the Group’s emerging markets or Asian-focused mutual funds, among which one Asian-focused fund (Fund) was at the very centre of the activist situation under discussion. In the Fund’s highly diversified portfolios, Company A was not an insignificant investment. At the time of the 2016 AGM, Company A represented just under 2 per cent of the Fund’s assets under management (with many other portfolio companies weighing less than 1 per cent). The Group, as indicated above, was a significant minority shareholder of Company A. Its funds constantly appeared in Company A’s list of top ten shareholders and were, indeed, collectively the largest shareholder outside of the controlling shareholder at various times. The Group’s holding in Company A climbed, over time, from below the threshold of 5 per cent (which triggers a disclosure obligation on the part of the Group under PRC law) of its outstanding shares to over 5 per cent and, in more recent years, gradually stabilized.

Company A’s management was aware that the resolution was likely to be contentious with minority shareholders. The Group’s significant holding in Company A meant that the Group’s support for the resolution was crucial for its safe passage.Footnote 121 After the AGM notice was released, the management used standard communication methods, such as emails and telephone calls, to reach out to the Fund manager in relation to the resolution in question. The management indeed went the extra mile to engage with the Fund manager prior to the AGM: they enlisted the help of a leading global investment bank that at the time was advising the Company on a separate business matter to arrange a visit for them to an overseas office of the Fund manager.

The positions of the management and the Fund manager were far apart. The management emphasized that the resolution concerned was an arrangement commonly seen among their peers, that is, listed companies controlled by central SOEs. From a pragmatic point of view, it would not be in a position to resist such a top-down, centralized arrangement made by the parent central SOE. The Fund manager counterclaimed that, though they understood the resolution to be a commonality, there was not much they could do either. Their hands were also tied, the Fund manager explained, as their voting decisions were informed, if not dictated, by recommendations from a third-party proxy advisory firm, which advised that the resolution concerned should not be supported. Neither party felt that it was possible to change their prior positions.

Despite the impasse, the resolution proceeded to a vote at the 2016 AGM, only to be rejected, principally because of the Fund’s opposition. The management had to subsequently reduce the aggregate size of the related-party transactions involved to a level that fell below the threshold that triggers the requirement for the approval of the minority shareholders. As a result, only board-level endorsement would be required, and this was successfully secured for what was essentially a toned-down version of the rejected resolution.

This was not the end of the saga. The management made a second attempt to push through the proposed related-party transaction voted down at the 2016 AGM at an EGM in 2018. Neither the management nor the Fund was prepared to move from the positions which they had held in 2016, and in the run-up to the EGM did little more than restate these positions. Unsurprisingly, therefore the second resolution met the same fate as the first, with the Fund, once again, casting votes decisively against it.

Company B

Company B is one of the many listed companies controlled by its parent conglomerate. At its 2016 AGM, two resolutions received less than 50 per cent of the votes cast to pass. Both resolutions were concerned with related-party transactions with other firms under the control of Company B’s parent firm. One of these resolutions sought an en bloc ratification of a number of related-party transactions which had taken place earlier in the year, while the other sought blanket shareholder approval of a related-party transaction planned for 2017. While transactions of this nature may seem dubious to outside observers, they are far from uncommon in the A-share market. They both had the support of all independent members of the board (non-independent directors excused themselves from the board deliberation on the resolutions concerned, as required under PRC law).

Company B’s parent company controlled just over 50 per cent of its outstanding shares at the time of its 2016 AGM. When it comes to holdings of minority shareholders, Company B differed from Company A in an important way: it did not count institutional investors as its large minority shareholders; nor did it have individual shareholders who had significant holdings. Perhaps as a result of Company B’s dispersed minority shareholder base, attendance by non-controlling shareholders of its AGMs and EGMs was historically low (in many cases, lower than 0.2 per cent of the shares)

For related-party resolutions, the low attendance rate of non-controlling shareholders poses a significant risk that the resolution will fail because of opposition from relatively insignificant shareholders. This was indeed what happened with the two resolutions in question. Minority shareholders holding just less than 0.9 per cent of Company B’s outstanding shares took part in its 2016 AGM. Among their number, shareholders holding just over 0.5 per cent of outstanding shares voted against the resolutions, sealing their fate. None of these dissenting shareholders were among Company B’s list of top ten shareholders, and many of them were retail, individual shareholders, disgruntled at their personal financial losses because of the sharp drop in Company B’s shares.

The voting outcomes delivered a severe shock to the management, which promptly entered negotiations with around a dozen activist shareholders, mostly individual shareholders with relatively large holdings. The management’s position was that the related-party transactions involved were indispensable for the company’s conduct of business. Shareholder disapproval would only thrust the transactions into a state of legal uncertainty and hamper the company’s operations, thereby threatening to reduce the company’s share price even further. The shareholders’ discontent, on the other hand, was apparently more with Company B’s sub-par share price performance than with the shareholder wealth effect of the resolutions concerned. As a result, an improvement in Company B’s share price performance took the sting out of the issue and enabled a consensus to be reached. A number of dissenting shareholders were approached by the management, and agreed not to oppose the resolutions concerned if they were again put to the vote at a further EGM.

The following EGM was attended by minority shareholders holding 2.5 per cent of Company B’s outstanding shares (compared to 0.9 per cent at the 2016 AGM). On this occasion, the shareholders who voted against the resolutions represented slightly less than 0.2 per cent of the shares (compared to just over 0.5 per cent at the 2016 AGM). With over 90 per cent approval rates, both resolutions passed without further ado. Shareholder-Initiated Proposals

As noted in the previous Section, resolutions of A-share listed companies are predominantly management or controlling-shareholder initiated. There were, however, cases where minority shareholders proposed resolutions (‘shareholder proposals’) of their own, resulting in proxy contests in certain circumstances. It remains a technically daunting task to discern with any precision the frequency and level of shareholder proposals in the Chinese securities markets. It is safe to state, however, that shareholder proposals are far from common.

Shareholder proposals were submitted in both of the following activist cases, succeeding in one case and largely failing in the other. Both of the companies involved were household names in Mainland China. Activist interventions in both cases unfolded in dramatic ways and drew considerable media attention.

Company C

Company C used to be a leading player in its own market, but in recent years its financial performance has been in decline. The parent SOE’s holding in Company C was unusually low; by the time the activists intervened, it held just over 20 per cent of Company C’s outstanding shares. On the other hand, there was a strong presence of large minority shareholders, each owning not insignificant percentages (over 2 per cent) of its shares.

Minority shareholders were dissatisfied with Company C’ s financial performance. They attributed it to what they perceived as the parent company’s predatory behaviour. Among the most dramatic was the parent company’s claim for title over a valuable piece of land that had been thought to belong solely to Company C, a disagreement resulting dramatically in an arbitration initiated by Company C against its parent company.

The tension between the controlling shareholder and minority shareholders culminated in confrontations during board elections at Company C’s 2014 AGM. Both of Company C’s dual boards were subject to elections. Our focus here is, however, on the election of the board of directors, since it was the key to the contest for corporate control. Company C’s seven-member board reserves four seats for non-independent directors and three for independent directors. Rather than holding one single election for all seven seats, two ‘tranche’ elections were held separately, one for independent directors and the other for non-independent directors. The practical effect of the arrangement was to blunt the full force of cumulative voting, from the controlling shareholder’s point of view.

For the four board seats reserved for non-independent directors, seven candidates stood for election, of whom four were nominees of the controlling shareholders and three were proposed by minority shareholders. In this unusually contested election, the importance of an effective voting strategy loomed large. The controlling shareholder spread its votes evenly and cast the same number of votes for each of its four candidates. By contrast, the dissenting minority shareholders voted more strategically. In what appeared to be a coordinated effort, they pooled their multiplied votes between two of the three candidates they nominated. The voting strategy turned out to be a success. The two minority-shareholder nominees were both elected, receiving far more votes than the candidates nominated by the controlling shareholder. Hence, two out of the four management nominees were defeated.

The elections to the three board seats earmarked for independent directors were equally dramatic. Once again, the controlling shareholders nominated three candidates,Footnote 122 and cast their votes evenly among their three nominees.Footnote 123 The minority shareholders, on the other hands, concentrated their votes on the two candidates they nominated. As a result, the two minority-shareholder nominees defeated two of the three management nominees.

The voting outcomes dealt a heavy blow to the controlling parent SOE. It lost its control over Company C’s board to a coalition of effectively organized minority shareholders that strategically used cumulative voting to their advantage. Out of the seven board seats, four seats went to the nominees representing the minority shareholders. Even more worrying for the controlling shareholder was the election at a subsequent board meeting of one of the minority-shareholder nominees to the board chairmanship.

The activist shareholders’ success in winning a contest for corporate control over a central SOE-controlled listed company was unprecedented, and thrust Company C into media spotlight. The controlling shareholder came under considerable pressure, and was forced to negotiate with the dissenting minority shareholders with a view to regaining control over the board. The shareholder activists, on the other hand, seemed to be more interested in changing the direction of the company’s businesses in ways that better aligned with their interests than in taking the control of Company C into their own hands. After all, their victory was precarious. The controlling shareholder could call a re-election, use the same strategic voting tactics previously used by the activists, and win back board control. The parent SOE also enhanced its position by significantly increasing its shareholding in Company C to just below 30 per cent, presumably to avoid triggering the mandatory bid rule.

Negotiations soon resolved the disagreements between the parent SOE and shareholder activists. Within a few months, two activist-shareholder nominees resigned from the board and were replaced by two directors nominated by the controlling shareholder, resulting in a resumption of control by the parent company.

Company D

Company D’s parent company has been a national champion. It controlled Company D and another listed company. It owned over 50 per cent of Company D’s outstanding shares. Company D was popular among institutional investors, with many mutual funds and hedge funds reportedly building not insignificant stakes in Company D.

The issue at the centre of Company D’s shareholder discontent was a corporate governance problem that has long plagued the Chinese listed sector, that is, the parent company putting itself in direct competition with its own controlled subsidiaries. This represents a typical instance of a majority-minority conflict and, in the case of Company D, its parent company was perceived have exploited the conflict at the expense of the minority shareholders. The Chinese regulatory authorities had taken active steps to push the controlling shareholders in conflict to mitigate the corporate governance concern. As with many other SOE groups, Company D’s parent company promised in the early 2010s to resolve within a five-year period the parent-subsidiary competition, widely speculated to be by way of a listing of the whole SOE group that promised to eradicate the conflict and boost Company D’s performance.

Just before the five-year period elapsed in mid-2016, however, Company D’s controlling company announced its intention to extend this period by three years. The announcement resulted in a plunge in Company D’s share price (which fell by a stunning 13.5 per cent in the two trading days immediately following the announcement), triggering an unprecedented public campaign levelled by activist investors against Company D.

At the centre of the campaign was a medium-sized, activist investment fund manager (hereafter ‘the Fund’). Its investment portfolios in Company D were relatively modest and below the 3 per cent threshold necessary for it to submit a shareholder proposal on its own. Thus, soon after Company D’s announcement was made, the Fund released a series of widely reported public letters on its official website, seeking proxies to vote against the parent company’s proposal and to back the Fund’s own proposals. In very little time, proxies from over 100 shareholders, mostly individual shareholders and some institutional investors, had been acquired by the Fund, allowing it to meet the 3 per cent eligibility requirement for shareholder proposals. The Fund brought forward three proposals, all contesting the controlling shareholder’s period extension proposal. One of these proposals was particularly noteworthy, namely that Company D’s parent company should fulfil its pledge as originally scheduled, failing which it should be held liable for compensating investors for any losses arising from their reliance on the company’s earlier promise.

The Fund’s many attempts to table its proposals, however, met considerable resistance from Company D’s management. It was only with the securities regulatory agency’s intervention that the proposals were successfully delivered to Company D. Subsequently, it took the intervention of the stock exchange on which Company D is listed and traded for the company to acknowledge the deposit of the proposals. However, the management went on to reject the Fund’s proposals on narrow procedural grounds (the signed authorisation forms were not original copies), and excluded its supporters from the 2015 AGM altogether.

Having failed to have its proposals included in the AGM agenda, the Fund proceeded to intensify its efforts to level a proxy contest. About one week ahead of the 2015 AGM, the Fund issued another public letter, which again attracted keen media interest, calling for institutional investors to join forces. It also publicized its own proxy form, opposing most of the management proposals, particularly the period-extension proposal.

The dispute had been widely and enthusiastically reported in the media, with the result that the company’s 2015 AGM attracted unprecedented shareholder interest. Over 4,000 minority shareholders cast votes, representing over 15 per cent of Company D’s outstanding shares. As it was categorized as a related-party proposal, the parent company was excluded from voting on its own period-extension proposal. Over 97 per cent of the minority shareholders casting votes opposed the proposal, and it was decisively defeated.

2.4 Concluding Remarks

Empowerment of minority shareholders has been a central theme of China’s corporate governance movements in the past two decades. Cumulative voting and the majority of the minority rule are exemplary of Chinese reformers’ efforts to strengthen shareholders’ rights to vote. Other shareholders’ rights, such as the right to call a meeting, the right to propose and the right to information, are also in place and, at least in theory, enable public shareholders to engage the controlling shareholders of their investee companies. The practical effect of these legal rights needs to be evaluated in the context of China’s path-dependent conditions, notably the prevalence of concentrated share ownership, the relatively weaker presence of institutional investors and the approach to allocating corporate power which centres on the shareholders’ meeting.

The shareholder turnouts at shareholders’ meetings stood at around 50 per cent during the 2015–19 period at the Shanghai Stock Exchange, placing China among the jurisdictions with the lowest levels of shareholder participation in the nineteen jurisdictions surveyed in the Handbook. Overall, shareholder dissent was infrequent, with a large percentage (over 20 per cent) of the resolutions winning the unanimous support of the shareholders who attended. Shareholders seem to have differentiated among different resolution types when casting their votes, lending some support to an observation made elsewhere that Chinese shareholders are not invariably passive and indifferent.Footnote 124 Anecdotes of institutional (and individual) shareholders opposing management proposals and initiating shareholder proposals, sometimes with success, highlight the potential of shareholder activism and engagement in China.Footnote 125

3 Shareholder Engagement and Voting in Hong Kong

Lauren Yu-Hsin Lin
3.1 Overview of Corporate Governance in Hong Kong

Hong Kong has a mature capital market and well-developed corporate governance system. The Hong Kong Stock Exchange (HKSE) is the fourth-largest exchange in Asia and the seventh largest in the world.Footnote 1 As of December 2021, the HKSE had 2,572 listed companies with a combined market capitalization of US$5.4 trillion.Footnote 2 According to the corporate governance ranking published by the Asian Corporate Governance Association in 2020, Hong Kong ranked second amongst the twelve jurisdictions in the Asia-Pacific region.Footnote 3 Hong Kong is a common law jurisdiction, and the source of company law in Hong Kong comprises both statutory and common law.Footnote 4 Hong Kong has been improving its corporate law and corporate governance standards; the main statutory law, the Companies Ordinance (Cap. 622), underwent a major rewrite in 2014 to enhance Hong Kong’s competitiveness and attractiveness as a major international financial centre.Footnote 5 With the rewrite, new sets of model articles of association were implemented as the default rules for companies that do not write their own articles.Footnote 6 The Companies (Model Articles) Notice (Cap. 622 H) stipulates various sets of model articles for both public and private companies. For companies listed on the main board of HKSE, the Main Board Listing Rules (Listing Rules) and the Appendix 14, ‘Corporate Governance Code and Corporate Governance Report’ (the ‘Corporate Governance Code’ hereafter), also govern the corporate governance of listed companies. The Corporate Governance Code sets out the principles of good corporate governance, and issuers must state whether they have complied with its provisions and supply reasons for any deviations from them in their interim and annual reports.

In general, minority shareholders in Hong Kong do not actively engage with companies or vote on company affairs. Given the presence of controlling shareholders, individual shareholders in Hong Kong usually support family controllers rather than the company when investing, and they vote with their feet to avoid poor corporate governance. Hedge funds were not active in the past simply because there was little opportunity to profit. Institutional shareholders, such as index funds and mutual funds, have been investing in Hong Kong for some time but are also generally passive.Footnote 7 Activist campaigns, however, have increased steadily in recent years following promulgation of the ‘Principles of Responsible Ownership’ in March 2016. The Principles encourage investors to communicate with companies regularly about their expectations and voting policies. Whilst Asian controlling shareholders are generally hostile to outsiders, the Principles nevertheless provide institutional shareholders with a lever to engage company management, and some asset-management firms have made shareholder engagement part of their regular routines. For example, BlackRock has an investment-stewardship team dedicated to shareholder engagement and communication. There are also signs of change on the company side, with companies increasingly recognizing the virtues of engaging with their key stakeholders and carrying out crisis training and scenario planning to prepare for greater investor scrutiny.Footnote 8

This chapter starts by introducing the basic corporate governance structure of Hong Kong companies in Section 3.1. It then discusses the legal means of shareholder engagement under Hong Kong company law and their pros and cons in Section 3.2. Finally, the practical application of each legal means is discussed and analyzed in Section 3.3. Section 3.4 concludes.

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 Legal Means of Shareholder Engagement and Voting
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 Shareholder Engagement and Voting in Practice

As noted, most of the shares of Hong Kong-listed companies are controlled by families or the state. This concentration of corporate ownership poses a challenge to shareholder engagement and voting. Despite the passage of an investor stewardship code, via the Principles of Responsible Ownership, encouraging investors to communicate and engage with companies, engagement is generally ineffective in the absence of a strong voting position or a legal tool that can leverage the relatively weak voting position of outside shareholders. In situations in which Hong Kong company shares are concentrated in the hands of a few, legal mechanisms that protect minority shareholders could be decisive in campaigns against controlling shareholders. This section discusses shareholder voting in practice and the main legal tools that could be effective in engaging controlled firms in Hong Kong.

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

Table 3.1 Voting items and approval rates in a sample of Hong Kong-listed companies

Share Issuance w/o Pre-emptive RightsEquity Comp.Share Capital IncreaseRPTsBoard-relatedM&ADirector ElectionBylaw amendAuditOtherBoard & Executive Rem.Share RepurchaseStatutory ReportDividendTotal
Source: ISS, ‘China: Investor Stewardship an Examination of Voting and Engagement Activities in China’, Appendix 2. The sample comprised 50 HSI index companies that represent about 60 per cent of HKSE market capitalization.
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. Shareholder Proposals and the Calling of an EGM

Controlling shareholders hold majority shares in listed companies in Hong Kong. Therefore, activist shareholders rarely engage in shareholder meetings. The aforementioned ISS survey on the fifty largest Hong Kong-listed companies from 2010 to 2013 reported that no shareholder proposal emerged in a general meeting during that period.Footnote 94 Similarly, of the twenty-four cases in my study of activist initiatives, only one sought a shareholder proposal. It concerned a US hedge fund, H Partners Management LLC, that was a shareholder in Hong Kong Economic Times Holdings Ltd (HKET). On 16 June 2011, the fund proposed an ordinary resolution in an AGM to increase dividends and later published a letter in various newspapers seeking support. However, the proposal was unsuccessful. As a result, HKET refused to declare special dividends, and H Partners sold its stake.

Similarly, the only case involving the use of an EGM also failed. On 19 March 2012, QVT Financial LP (QVT) sent a letter to China Assets Holdings Ltd (CAHL) calling for an EGM. Beforehand, CAHL had breached the Listing Rules in renewing its investment-management agreement with China Assets Investment Management Ltd (CAIML). QVT called for an EGM to reject the agreement. It also sought to publicly intervene and sent an open letter calling for compliance by CAHL and criticizing CAIML. However, an amended agreement was passed by the controlling shareholder. It seems that shareholders are unlikely to achieve their purpose in shareholder meetings in Hong Kong. Board Representation

Shareholders can seek to appoint a board director to influence a firm’s corporate choices. In most controlled firms, shareholder activists cannot win a full or even a majority slate because of the presence of controlling shareholders. Whilst seeking board representation appears to be a popular form of activism in other jurisdictions, it is rare in Hong Kong.Footnote 95 Hong Kong law does not offer minimum board representation to minority shareholders. Because dual-class shares were not allowed in Hong Kong-listed companies until April 2018, there is no practice of granting outside shareholders the right to nominate and elect minority board representatives, as would be the case in certain US dual-class companies.Footnote 96 In addition, cumulative voting, which favours minority shareholders, is not mandatory under Hong Kong law and is rarely adopted by Hong Kong-listed companies.Footnote 97 Therefore, the odds of obtaining minority seats on the boards of Hong Kong-listed companies are slim. For example, of the twenty-four activist initiatives in my study, only one sought board representation. Seeking board representation is thus a weaker activist strategy than either commencing litigation or exercising minority veto rights given the institutional setting in Hong Kong. Court Proceedings

In Hong Kong, as in other Asian jurisdictions, shareholders can resort to court proceedings as a lever to pressure controlling shareholders. For example, they can apply for a court order to inspect company records or documents.Footnote 98 Such rights can be exercised by shareholders to challenge a specific transaction if a firm does not disclose sufficient information about that transaction to the public, although their exercise must satisfy the good faith and proper purpose tests.Footnote 99 The Companies Ordinance requires plaintiff shareholders to hold at least 2.5 per cent of the voting rights or comprise a group of at least five shareholders in order to apply for an inspection order.Footnote 100 However, a court inspection order cannot stop a transaction, and so it is not as effective as an ‘interim injunction’, which restrains controlling shareholders from engaging in transactions that would harm shareholders’ interests, pending litigation. Under sections 728–30 of the Companies Ordinance, any shareholder can apply for a statutory injunction if any person engages in conduct contravening that ordinance, including a breach of the fiduciary duties of directors or a breach of the company’s AoA.

The timing of inspection orders can also be an issue. As Hong Kong lacks a specialized business court, a transaction may have been completed by the time a court grants an inspection order. The intervention of Elliott Management (Elliott), a US hedge fund, against the Bank of East Asia’s (BEA) private-placement arrangement is a case in point. On 5 September 2014, BEA announced a proposed placement of shares to a substantial shareholder, Sumitomo Mitsui Banking Corporation, which would support the Li family’s control over management.Footnote 101 Elliott applied for an inspection order on 16 January 2015 requesting the disclosure of documents related to the private placement at issue.Footnote 102 Shortly after this activist initiative, BEA held a board meeting, and it approved the placement on 12 February 2015, completing the subscription on 27 March 2015. The court did not issue its order until 5 June 2015.Footnote 103 Elliott, of course, failed to stop the transaction and was thus unsuccessful in its intervention.

An interim injunction, in contrast, proved effective in a private-placement case involving Passport Special Opportunities Master Fund LP (Passport) and eSun Holdings Ltd (eSun). Passport, a US hedge fund and major shareholder holding roughly 28 per cent of eSun’s issued shares, was unhappy about a private-placement transaction with Chung Name Securities Ltd that had been authorized by eSun’s board on 10 December 2008.Footnote 104 After private engagement and communication with the board failed, Passport applied for an ex parte injunction to restrain eSun from proceeding with the placement on 22 December 2008 – shortly before the scheduled completion date.Footnote 105 Passport alleged that eSun’s directors were acting for an improper purpose in entering into the placement agreement, and the injunction was granted by the court, thereby postponing the placement.Footnote 106 Unlike the BEA case, in which Elliott applied only for an inspection order and ultimately failed to stop the transaction, Passport utilized a more effective legal tool – a statutory injunction – to successfully postpone the proposed transaction and eventually force eSun to terminate the agreement.Footnote 107 This example demonstrates that activist minority shareholders can use court orders to stop controlling shareholders from engaging in impugned conduct pending the court’s final verdict. Litigation

An activist can also exert pressure on a controlling shareholder by filing a lawsuit, although this is the most time-consuming and expensive approach amongst the various legal means available. Minority shareholders can bring derivative actions under the Companies Ordinance.Footnote 108 For listed firms incorporated overseas, Hong Kong shareholders who wish to bring derivative actions in Hong Kong still need to meet the substantive requirement for derivative action under the law of the jurisdiction of incorporation. In Wong Ming Bun v. Wang Ming Fan,Footnote 109 the Hong Kong Court of First Instance held that whether shareholders can bring a derivative action depends on the law where the company is incorporated. Alternatively, shareholders can seek relief under the unfair prejudice remedy if the company or its controllers have engaged in oppressive behaviour against them, and the court may make any order it thinks fit.Footnote 110

Although private enforcement is rare in Hong Kong, shareholder litigation was effective in the Passport case.Footnote 111 In addition to the interlocutory injunction, Passport also filed a petition under the unfair prejudice remedy, seeking injunctive and declaratory relief to prevent the completion of the proposed placement and to declare the transaction invalid.Footnote 112 Soon after the interlocutory injunction was granted pursuant to the petition for unfair prejudice, eSun terminated the placement agreement.Footnote 113 Passport thus effectively forced eSun to terminate the placement by resorting to formal legal recourse. In this case, shareholder litigation played only a supplementary role by justifying the interlocutory injunction order, which stopped the transaction immediately. The court eventually dismissed Passport’s claims for relief after two and a half years and decided not to set aside or void the placement agreement on the grounds of protecting third-party placees.Footnote 114 Nevertheless, Passport still succeeded in terminating the placement.

However, litigation and court orders remain rare. Only three of the actions in my 2019 study involved formal court proceedings, and only one succeeded, which is unsurprising given the general reliance in Hong Kong on public rather than private enforcement. Shareholder litigation is rare because class action is not available in Hong Kong and the procedural rules for shareholder derivative actions do not favour plaintiff shareholders.Footnote 115 The SFC is the driving force in the enforcement of corporate and securities law.Footnote 116 Minority Veto Rights

Finally, shareholders can block a transaction if the law requires special approval by independent shareholders. In Hong Kong, RPTs, which fall within the stated definition, must be disclosed and submitted to the general meeting for approval by a majority of the minority shareholders (MoM approval). This minority veto power is designed to protect the interests of minority shareholders in conflict-of-interest transactions, and it could be an effective legal tool for activists seeking to intervene in transactions in which a controlling shareholder is interested. Before submitting a transaction for shareholder approval, listed companies must set up an independent board committee to advise minority shareholders based on the opinion of an independent financial adviser.Footnote 117 Aside from the more stringent rule on RPTs, the HKSE also requires any shareholder who has a material interest in a transaction or arrangement to abstain from voting on a resolution to approve that transaction or arrangement at the general meeting.Footnote 118 As long as the controlling shareholder is a party to the contract or the contract confers a benefit upon the controlling shareholder or a close associate (economic or otherwise) that is not available to the other shareholders, the controlling shareholder cannot vote on the resolution.Footnote 119 In effect, all conflict-of-interest transactions that require shareholder approval under the Listing Rules require MoM approval. This requirement for an independent minority shareholder vote can mitigate expropriation by controlling shareholders.Footnote 120 In this case, controlling shareholders have an incentive to engage with minority shareholders who have a say in the transaction. Another example of MoM approval is mergers proposed by controlling shareholders through schemes of arrangement, which must be approved by at least 75 per cent of disinterested votes, and the votes cast against cannot exceed 10 per cent of disinterested votes.Footnote 121

The Listing Rules provide additional minority protection for the shareholders of listed companies. The specific transactions that require minority shareholder approval under the Listing Rules are (1) connected transactions;Footnote 122 (2) a voluntary withdrawal of listing from the HKSE if the issuer has no alternative listing;Footnote 123 (3) rights issues or open offers that would increase the number of issued shares or the market capitalization of the issuer by more than 50 per cent;Footnote 124 (4) rights issues or open offers within twelve months of the commencement of securities dealings on the HKSE;Footnote 125 (5) refreshment of the general mandate (to allot, issue or grant securities) obtained from shareholders before the next AGM;Footnote 126 (6) any material transaction or substantial disposal or acquisition of assets, as determined by the various ratios set by the HKSE;Footnote 127 (7) a reverse takeover with a change in control resulting from an acquisition or series of acquisitions of assets by a listed issuer used as an attempt to avoid the requirements for new listing applicants;Footnote 128 (8) acquisitions, disposals, transactions or arrangements that would result in material changes within twelve months of the commencement of securities dealings on the HKSE;Footnote 129 and (9) spin-off proposals.Footnote 130

Of all the legal mechanisms discussed, the most effective against controlling shareholders is the use of minority veto rights. Of the twenty-four cases I examined, four required MoM approval, all of which involved transactions with parent companies, including HIL’s asset sale to its parent company (2007), PCPD’s privatization offer by its parent company (2008), Power Assets’ proposed merger with its parent company (2015) and GOME Electrical’s asset purchase from its parent company (2015). In all these events, the activists’ demands were met regardless of whether they had made the demand publicly or privately. The activists forced the controllers to sweeten the offer in an asset sale transaction, reduce the price for an asset purchase transaction and allow them to vote down a privatization or merger proposal. The Power Assets case in 2015 is a good example of proxy advisers, who were not shareholders themselves, persuading minority shareholders to vote down a merger proposal. On 20 October 2015, the company announced a merger proposal by its controlling shareholder, Cheung Kong Infrastructure Holdings Ltd (CKI), which held 38.87 per cent of Power Assets’ shares at the time.Footnote 131 The proxy advisory firms ISS and Glass Lewis considered the offer price too low and advised institutional shareholders to vote against the proposal.Footnote 132 As noted above, the votes cast against such a proposal cannot exceed 10 per cent of the total voting rights attached to all disinterested shares of the company.Footnote 133 In the Power Assets case, 50.8 per cent of the minority shareholders approved the proposal, and 49.2 per cent voted against it.Footnote 134 The merger failed because the opposition from minority shareholders exceeded 10 per cent. Minority veto rights can indeed be powerful.

3.4 Concluding Remarks

This chapter has reviewed the rights of shareholders to participate in corporate affairs and engage with companies in Hong Kong. Because the ownership of most Hong Kong-listed companies is concentrated in the hands of families or the state, it is unlikely that shareholders can change or influence corporate decisions through voting or engagement. In addition, there is no single consolidated voting platform that can facilitate retail shareholder voting in Hong Kong. Retail and minority shareholders rarely vote in general meetings. The promulgation in March 2016 of the Principles of Responsible Ownership, which constitutes the investor stewardship code in Hong Kong, raised awareness of shareholder participation amongst large institutional shareholders. Legal means of protecting minority shareholders can help institutional shareholders to leverage their weak voting position when demanding changes in controlled firms. The foregoing review of past activist initiatives conducted by institutional shareholders in Hong Kong reveals that shareholders can truly be empowered in approving transactions that require a majority of minority votes. Filing a lawsuit or statutory injunction can also be effective in curbing transactions harmful to shareholder welfare, but litigation requires substantial human and financial resources, which only institutional shareholders can afford. Hence, facilitating the online voting of retail shareholders and encouraging participation by institutional shareholders might be the best direction for future shareholder engagement in Hong Kong.

4 Shareholder Engagement and Voting in India

Harpreet Kaur
4.1 Introduction

The history of Indian company law dates to 1850, when India enacted its first Joint Stock Companies Act based on the corresponding English Joint Stock Companies Act.Footnote 1 Being a British colony, India’s company law followed the developments in English law, and the Companies Act 1956 although frequently amended remained in force for more than fifty years. It was only after the enforcement of the English Companies Act 2006 that India, in 2008, initiated discussions on enacting a new company law that would repeal the 1956 Act. Finally, after the proposal of numerous bills, India passed the new Companies Act 2013 (CA 2013 hereafter). Amongst the new Act’s objectives improving transparency, corporate governance, compliance and the protection of minority shareholders were noticeable. CA 2013 is not exhaustive of the whole of company law, as common law still plays an important role in India. The Securities Contracts (Regulation) Act 1956 and Securities and Exchange Board of India Act 1992 are important legislations for dealings in securities and the regulation of the securities market in India.

Concentrated ownership structures and company affiliations with business groups are common features of Asian economies,Footnote 2 with the prevalence of family ownership and relationship-based transactions the most important commonality across economies.Footnote 3 Indian companies are no exception,Footnote 4 with ownership and control aligned traditionally. Five major forms of control were identified by Berle and Means, namely, control through almost complete ownership, majority control, control through a legal device without majority ownership, minority control and management control.Footnote 5 In the case of Indian companies, control through almost complete ownership, although presumed to be applicable to private companies alone, was previously observed in public listed companies too. In 2010, however, such control was regulated through the stipulation that listed companies must maintain 25 per cent mandatory public shareholdings in an amendment to the Securities Contracts (Regulation) Rules 1957.Footnote 6 Accordingly, promoters’ shareholding was mandated to be brought down to 75 per cent by the Securities and Exchange Board of India (SEBI).Footnote 7 Special provisions relating to subsidiary companies were introduced by CA 2013 to reduce vertical cross shareholdings.Footnote 8 With a view to reducing the complexity of cross shareholdings, the Act imposed a restriction beyond two layers of subsidiaries. The relevant rules have been enforced since 2017, meaning that no companies other than banking, insurance, government-owned and non-banking financial companies are permitted to have more than two layers of subsidiaries.Footnote 9

Identification of the real owners of shares has long been an issue in India. To identify individuals holding the beneficial ownership of shares, to elucidate the layering of intermediate entities and to identify the ultimate individual owners, a number of provisions and rules were inserted into CA 2013.Footnote 10 Every significant beneficial owner is required, under section 90 of that Act, to declare his or her beneficial interest, rights and/or any change thereto to the company.Footnote 11

Foreign direct investment (FDI) in Indian companies has increased in recent years owing to the open FDI policy of the Indian government. Manufacturing sector companies received the bulk of such investments in 2018–19.Footnote 12 However, the FDI Policy 2017 has been revised to curb opportunistic takeovers and acquisitions of Indian companies in view of the unpredictable circumstances arising out of the COVID-19 pandemic.Footnote 13

A pilot study of Nifty-50 companies was conducted in support of this country-specific chapter on Indian listed companies.Footnote 14 The study was based on data collected from the annual reports of Nifty-50 companies.Footnote 15 Five companies on the Nifty-50 Index were found to have more than 50 subsidiary companies, and one company had 148.

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. Board Composition

The Indian legislative framework allows for the constitution of a diverse board comprising executive and non-executive directors, including independent directors and female directors.Footnote 18 It is mandatory for one-third of the boards of listed public companies to be made up of independent directors.Footnote 19 CA 2013 allows companies to appoint additional directors, alternate directors, nominee directors and a director appointed by small shareholders to represent their concerns in front of the board.Footnote 20 Adequate parameters for the appointment, removal and resignation of directors, along with the manner in which the board shall function, are laid down in the Act in order to ensure the integrity of board members and their functioning. The decisive responsibility to appoint or remove any director rests with the company through its general meeting. If the directors themselves are legally disqualified from holding directorships, then they have an equal responsibility for disclosing that fact and the reasons for their disqualification.

Under the erstwhile CA 1956, common law duties were imposed on directors. However, CA 2013 codifies the duties of directors and lays down their liability in section 166. Directors are required to act in accordance with the articles of the company. They have to act in good faith to promote the objects of the company for the benefit of its members as a whole and in the best interests of the company, its employees and shareholders, the community and the environment.Footnote 21 Therefore, directors’ scope of duties seems to be broader than that stipulated by the enlightened shareholder value approach under section 172 of the English Companies Act 2006. The other duties of directors include the duty to exercise reasonable care and skill, make independent judgements and avoid conflicts of interest and undue advantage for themselves or their relatives, partners or associates. Directors are also not authorized to delegate their duties. It is interesting to note here that 309,619 directors have been disqualified under section 164(2)(a), read with section 167 of CA 2013, for the non-filing of financial statements or annual returns for a continuous period of the immediately preceding financial years (FYs) (2013–14, 2014–15 and 2015–16). Of these disqualified directors, 210,116 were directors on the boards of struck-off shell companies.Footnote 22 Presence of Independent Directors

The presence and effect of independent directors in listed companies is overemphasized by CA 2013. To ensure the independence of directors, an extensive definition of ‘independent director’ is given in section 149(6) of the Act. An independent director has to make a self-declaration of his or her independence at the first board meeting and at the first meeting of every FY and also declare whether there has been any change in his or her status as an independent director. The liability of independent and non-executive directors is limited to acts of omission or commission by the company that occurred with their knowledge, are attributable to board processes and that took place with their consent or connivance or to instances in which they did not act diligently.

It was observed in the aforementioned pilot study that in the ten-year period from 2008–18, board compositions have exhibited a trend towards having more independent directors (up to 45 per cent of the board), whereas the percentage of executive and non-executive directors ranged from 25–28 per cent. In FY 2017–18, 51 per cent of directors in Nifty-50 companies were independent directors, with executive and non-executive directors constituting 26 per cent and 20 per cent, respectively.

The role played by independent directors was questioned in India in the wake of a scam by Satyam Computers Services Ltd, as the company had permitted its chairman-promoter to take independent decisions leading to account manipulation and inflated revenues.Footnote 23 The case highlighted the need to re-examine the then existing legal and regulatory framework. In the wake of the Satyam case, the landscape for corporate governance in India underwent a change with the passage of CA 2013 and the more vigilant role played by SEBI.Footnote 24 Also important to mention here is that comparatively more independent directors than non-independent directors reportedly resigned in 2019.Footnote 25 The reduction in numbers of independent directors may have been the result of the increased stringency of liability, accountability and personal conflict-of-interest requirements.

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

it is a very strong thing to indeed to prevent shareholders from holding a meeting of the company, when such a meeting is the only way in which they can interfere if the majority of them think that the course taken by the director, in a matter intra vires of the director, is not for the benefit of the company.Footnote 32

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.

Table 4.1 P&PG shareholdings in Nifty-50 companies

YearNo of CompaniesPercentage of P&PG shareholding

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

Table 4.2 Foreign P&PG holdings in Nifty-50 companies in 2017–18

S. NoName of the companyPercentage of foreign holding in P & PG shares
1.ABB India Ltd75%
2.Siemens Ltd75%
3.Oracle Financial Services Software Ltd74%
4.Proctor and Gamble Hygiene & Health Care Ltd69%
5.Bosch Ltd69%
6.Ambuja Cements Ltd63%
7.United Spirits Ltd55%
8.Colgate Palmolive (India) Ltd51%

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.

Table 4.3 Shareholding pattern in Nifty-50 companies (FY 2017–18)

Public shareholding23.49%
Foreign shareholding (outside P&PG)17.88%
ADR-GDR (American and Global Depository Receipts)0.043%

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.

Table 4.4 Shareholding pattern of FIIs and non-institutional investors in Nifty-50 companies in FY 2017–18

Percentage of FII shareholdingsNo of companiesNo of companiesPercentage of Shareholding- NIIs under P&PG
0%-10%245More than 50%
20%-30%1035Less than 15%

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 Legal Means of Shareholder Engagement

CA 2013 has expanded the rights of shareholders by adding new rights and extending the scope of rights that existed under the erstwhile CA 1956. In addition to the exercise of ownership rights by all shareholders in the form of voting rights and the receipt of dividends, pre-emptive rights are protected in the form of a rights issue under section 62 of CA 2013. Shareholders have the right to participate in and be sufficiently informed of decisions concerning fundamental corporate changes, as well as the right to timely information and equitable treatment.Footnote 56 For a variation in shareholder rights, a three-quarters majority of the class in question is required or a special resolution passed by that class, subject to the existence of a provision in the constitution documents or variation not being prohibited by the terms of issue of shares of that class. If holders of no less than 10 per cent of issued shares of the class do not consent, they can apply to the National Company Law Tribunal (NCLT) for cancellation within twenty-one days of consent being given or a special resolution being passed.Footnote 57 The right to transfer shares, debentures or another interest in the company is subject to the company’s constitution and CA 2013. Shareholders have the right to appoint directors and auditors on the recommendations of the board. Other shareholder rights are discussed in the following paragraphs.

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.

Table 4.5 Virtual AGMs and resolutions

CompanyNumber of ResolutionsVote PercentageDissent Rate
Tech Mahindra5 resolutions82–84% votes polled – e-voting4% dissent in reappointment of a director by public institutions (diluted to 2.4% in total shares polled)
TCS3 resolutions92–93% votes polled – e-votingPublic institution – 10.5% dissent in reappointment of a director (diluted to 2.33% in total shares polled)
SBI5 resolutions99.8% votes polledNegligible dissent in appointment of 4 directors; annual financial statement adoption – 99.9%
RIL8 resolutions83–84.5% votes polled10.9–13.2% dissent in 3 resolutions for reappointment of 3 directors; less than 1% dissent in remaining resolutions
Tata Motors7 resolutions75% votes polledNegligible dissent
Tata Steel6 resolutions70% votes polled18% dissent in commission to non-executive directors of the company
ITC12 Resolutions83% votes polledNegligible dissent
Larsen and Turbo12 Resolutions68% votes polled
  • 4 Resolutions – 18.9% dissent in appointment of whole time director

  • 4 Resolutions – 4.85% dissent in appointment of director

Wipro5 resolutions89.6% votes polled31.5% and 58.3% dissent in appointment of CEO
Bajaj Auto7 resolutions79% votes polled
  • 40% dissent in appointment of company’s managing director and CEO;

  • 41% dissent in reappointment of director;

  • 4.5% dissent in appointment of independent director

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 One Share-One Vote

A company limited by shares can have equity and preference share capital. Equity shares can simply have voting rights or differential voting rights (DVRs) as to dividends, voting or otherwise.Footnote 88 Therefore, the ‘one share-one vote’ rule is subject to the provisions of section 43, CA 2013 relating to DVRs. Every member holding equity share capital has a right to vote on every resolution, whereas preference shareholders have rights to vote only on matters affecting their rights, resolutions for winding up or the repayment or reduction of share capital.Footnote 89 However, if a company defaults on the payment of dividends to preference shareholders for two years or more, such shareholders become entitled to vote on all resolutions.Footnote 90

DVRs are not popular with Indian companies. As of 2012, only three Indian companies had issued such shares, and investors were unwilling to subscribe to them because of the fewer voting rights attached even though they offered higher dividends.Footnote 91 However, start-up companies have begun to exhibit a preference for issuing DVRs with more voting rights to protect the promoter voting powers needed to increase the cap on the maximum that can be raised under DVRs. Doing so is considered necessary to enable the promoters of Indian companies to retain control of their companies in their pursuit of growth and the creation of long-term value for shareholders even as they raise equity capital from global investors. SEBI has permitted the issuance of shares with superior voting rights (SVR) for new technology companies since August 2019.Footnote 92 The holders of such shares are at par with other shareholders in all respects except for voting on resolutions.Footnote 93 The Companies (Share Capital & Debentures) Rules 2014 were amended to raise the existing cap of 26 per cent of total post-issue paid-up equity share capital to a revised cap of 74 per cent of total voting power for DVRs and to remove the earlier requirement of distributable profits for three years for a company to be eligible to issue shares with DVRs.Footnote 94 SVR equity shares are treated as ordinary equity shares with one share-one vote in the appointment or removal of independent directors and/or auditors, a promoter’s wilful transfer of control to another entity, RPTs involving an SVR shareholder, the voluntary winding up of the listed entity, changes to the AoA or memorandum of association of the listed entity, any change affecting the SVR equity share, the initiation of a voluntary resolution process under the Insolvency and Bankruptcy Code, the utilization of funds for purposes other than business, substantial value transactions based on a materially specified threshold, the passing of a special resolution in respect of delisting or the buyback of shares and other circumstances or subject matter to be specified by SEBI.

SVR equity shares convert into ordinary equity shares under the one share-one vote rule after five years of their listing. The conversion period may be extended if a resolution to that effect is passed by shareholders other than SVR equity shareholders. However, they can be converted at any time before the end of the extended period. SVR equity shares compulsorily convert into equity shares having similar voting rights to those of ordinary shares upon the demise of the promoter or founder holding such shares. If an SVR shareholder resigns from an executive position in the listed entity or in the event of a merger or acquisition of a listed entity having an SVR shareholder, where control would no longer remain with the SVR shareholder, the SVR equity shares are sold by an SVR shareholder who continues to hold such shares after the lock-in period but prior to the lapse of the shares’ validity.Footnote 95 Cumulative and Slate Voting

CA 2013 does not specifically define cumulative voting. It defines a voting right as the right of a member of a company to vote in any meeting of the company or by means of a postal ballot.Footnote 96 Voting by postal ballot means voting by post or through an electronic mode.Footnote 97 The Act provides an option to adopt the principle of proportional representation for the appointment of directors under section 163 if the company’s AoA allow for it.Footnote 98 Two-thirds of directors may be appointed by proportional representation by a single transferable vote, cumulative voting or otherwise under section 163. That section begins with the phrase ‘notwithstanding anything contained in this Act’, and thus excludes the appointment of directors to be voted on individually, as provided under section 162, CA 2013.

CA 2013 also does not define or specifically provide for slate voting, which is seen only in the context of the appointment of directors at an AGM. Section 162 provides that the appointment of every director must be put to the vote at the AGM. Each candidate has to be voted for individually because candidates cannot be put to the vote en bloc. If two or more persons are appointed as directors by a single resolution, their appointment would be void unless the meeting had unanimously resolved that more than one person could be elected by a single resolution.Footnote 99 Majority of Minority Approval

It is difficult to say whether the principle of majority of minority rights exists in CA 2013. Analysis suggests that few of its provisions recognize the existence of such rights for minority shareholders. The Act does, however, provide for the compulsory squeeze-out of minority shareholders under a few provisions. In the case of mergers and acquisitions, the transferee company has the power to acquire the shares of dissenting shareholders if the transfer of shares is approved by the majority. The Act also empowers acquirer companies to purchase minority shareholdings if the acquirer and a person acting in concert have already become the registered holders of 90 per cent or more of equity shares in the company.Footnote 100

In the case of RPTs, section 188, CA 2013 provides that contracts or arrangements with related parties by companies with prescribed share capital or transactions exceeding a prescribed turnover require prior approval via a resolution. Minority shareholders get veto power here because related parties are prohibited from voting on such resolutions. If a member of the company is a related party, he or she cannot vote on such a resolution unless 90 per cent or more of the members of that company are relatives of the promoters or related parties. This was an interesting third proviso added to the Act in 2018 in respect of promoter-driven companies to provide a respite from having no voting rights in RPTs.Footnote 101

In the case of the delisting of shares from any stock exchange, a company has to pass a special resolution through a postal ballot with an explanatory statement. Such special resolutions are acted upon if and only if the number of votes cast by public shareholders in favour of the proposal amount to at least two times the number of votes cast against.Footnote 102

Provisions relating to oppression and mismanagement give shareholders the right to file a motion with the NCLT pertaining to such matters. The scope of the term ‘oppression’ has been broadened by CA 2013. The conduct of affairs by a company in a way prejudicial to the public interest also gives shareholders a ground to petition for a finding of oppression. This ground is in addition to prejudice or the oppression of a shareholder or any other member and prejudice to the company.Footnote 103 The right is granted to a minimum of 100 members of the company or not less than one-tenth of the total number of members, whichever is less, or to any member or members holding not less than one-tenth of the issued share capital of the company if the company has share capital. However, it is subject to the condition that the applicant or applicants has/have paid all calls and other sums due on his or her/their shares. In the event that the company has no share capital, the right can be exercised by not less than one-fifth of the total number of members.Footnote 104 The NCLT has the discretion to waive this requirement, discretion that was exercised by the National Company Law Appellate Tribunal in the case of Cyrus Mistry v. Tata Sons.Footnote 105 In the pilot study, effort was made to locate any litigation relating to oppression or mismanagement undertaken by shareholders against Nifty-50 companies, but no such litigation was observed between 2016 and 2020 (as of March 2020) apart from the aforementioned case.Footnote 106

The right to file class action suits was also added to the powers of members and depositors by CA 2013. If they are of the opinion that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interests of the company or its members or depositors, they can file an application with the NCLT on behalf of the members or depositors.Footnote 107

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 Shareholder Engagement and Voting in Practice
4.3.1 Voting in Practice Voting by a Show of Hand or Poll

At a general meeting, a resolution put to a vote is decided based on the result of voting by a show of hands unless a poll is demanded or voting is carried out electronically.Footnote 111 Voting rights on a poll are in proportion to the shares of shareholders in paid-up equity or preference share capital, whereas in voting by a show of hands each member has one vote.Footnote 112 A member may split his or her votes both for and against the same resolution on a poll, which is permissible even if a proxy is voting. As the owner of the specific property in each specific share, a shareholder can distribute his or her votes in any manner on the shares he or she holds. Under no doctrine of inconvenience, convenience or propriety, it has been held that a shareholder can be precluded from voting both ‘yes’ and ‘no’ on the same resolution because the way in which he or she votes cannot take away the legal right on each share carrying the right to vote.Footnote 113 In the case of joint holders, the vote of the senior party who tenders the vote, whether in person or by proxy, is accepted to the exclusion of the votes of the other joint holders.Footnote 114

A member may be prohibited from exercising his or her voting rights only if he or she does not pay calls or any other sum due on his or her shares or the company exercises its right of lien on the shares. However, such a prohibition applies only if it is specified in the company’s AoA.Footnote 115 No rights attached to any shares can be exercised by the beneficial owner of the shares or any person claiming through him or her if a declaration of a beneficial interest in such shares has not been made.Footnote 116 Voting in Person or Proxy

A member may vote either in person or by proxy.Footnote 117 A proxy is not allowed to speak at the meeting and is not entitled to vote except on a poll. The proxy system may not be available in companies specified by the central government. A single proxy may act for fifty members at a time holding no more than 10 per cent of the company’s total share capital carrying voting rights. If a member holding more than 10 per cent of total share capital appoints a single person as his or her proxy, that person is not permitted to act as the proxy of any other person or shareholder.Footnote 118 If a shareholder personally attends and votes in the meeting after issuing a proxy, the proxy stands as cancelled. A proxy can at any time be revoked by a written notice of revocation. A proxy of a member of any section 8 company can only be another member of the same company.Footnote 119 Postal Ballot

The postal ballot system can be used by listed companies to pass resolutions only in respect of businesses notified by the central government. It can be used for special business in respect of which directors or auditors do not have a right of hearing.Footnote 120 Earlier, items specified for a postal ballot could be transacted only through the postal ballot and not at the general meeting.Footnote 121 However, the rule was amended, and such matters may now be transacted at the general meeting of a company required to facilitate the vote by electronic means.Footnote 122 It has been held that all provisions for compulsory voting by postal ballot and by electronic voting to the exclusion of an actual meeting cannot and do not apply to court-convened meetings.Footnote 123 One-person companies and other companies with 200 or fewer members are not required to transact any business through a postal ballot. E-Voting

The central government prescribes the class of companies and the manner of exercising voting by electronic means.Footnote 124 All listed companies with at least 1,000 shareholders have to provide for e-voting.Footnote 125 An e-voting system is a secure system based on the display of electronic ballots. The recording of members’ votes and number of votes polled in favour of or against a proposition, such that the entire voting process is registered and counted in an electronic registry in a centralized server, is deemed to have adequate ‘cyber security’. A resolution proposed to be considered through e-voting is not allowed to be withdrawn.Footnote 126 A member who has e-voted is permitted to attend the general meeting in person, but is not allowed to vote at the meeting. His or her e-vote is treated as final. A show of hands is not allowed in e-voting. In the case of companies having share capital, e-voting takes into account the ‘proportion principle’, that is, one share-one vote, unlike the one person-one vote principle under a show of hands.Footnote 127

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.

Table 4.6 Voting pattern in pilot study

Mode of voting
Resolutions (FY 2016–17)Number of ResolutionsVoting percentagee-votingPollPostal ballot
Remuneration of DirectorsFootnote 142287%85%11%4%
Corporate StructureFootnote 1435012%
Committee and ReportingFootnote 14416539%
Board of DirectorsFootnote 14515136%
MiscellaneousFootnote 146256%
Mode of Voting
Resolutions (FY 2017–18)Number of ResolutionsVoting percentagee-votingPollingPostal Ballot
Remuneration of Directors205%94%05%01%
Corporate Structure5014%
Committee and Reporting14539%
Board of Directors13938%
Mode of Voting
Resolutions (FY 2018–2019)Number of ResolutionsVoting percentagee -votingPollingPostal Ballot
Remuneration of Directors315%88%8%4%
Corporate Structure6911%
Committee and Reporting16727%
Board of Directors27944%
Miscellaneous7512% Observations on Voting Pattern in the Pilot Study

In the pilot study, the number of resolutions passed during AGMs were noted, along with the percentage of votes cast for FYs 2016–17, 2017–18 and 2018–19. Data analysis revealed the maximum number of resolutions to fall into the committee and reporting category, whereas the board of directors’ category had the most tabled resolutions. From 2016–19, the preferred method of voting was e-voting, followed by polling. The results are reported in Table 4.7.

Table 4.7 Voting for adoption of annual financial statement

Types of votingP&PGPublic Institutional ShareholdersPublic Non-institutional shareholders
Postal Ballot203

Table 4.7 reports the voting pattern for annual financial statement adoption in Nifty-50 companies for FY 2018. The voting pattern was divided into three categories of shareholders, namely, P&PG, public institutions and non-public institutions. The following observations are made.

  1. (1) P&PG shareholders voted 100 per cent in favour of adoption.

  2. (2) Public non-institutional shareholders dissented overall as a category, although the rate of dissent was less than 2 per cent.

  3. (3) A case study of Steel Authority of India Ltd revealed a dissent rate of 10.25 per cent amongst public shareholders for the adoption of the 2018 annual financial statement. The maximum rate of dissent in all three categories was 2.96 per cent.

In forty-nine companies, voting by shareholders in person and through proxy for adoption of the annual financial statement in 2018 ranged from 0.01–4.69 per cent. In only four companies did voting take place in person by more than 1 per cent of shareholders present and voting. For forty-nine companies, the three top modes of voting were e-voting, polling and postal ballots. In thirty-six companies, P&PG shareholders utilized the e-voting option, whilst the e-voting trend was more prominent amongst public institutional shareholders and public non-institutional shareholders. The figures for postal ballots for all three categories were meagre, accounting for less than 6 per cent.

4.4 Concluding Remarks

CA 2013 brought about several changes with respect to ownership, shareholder engagement and the remedies in place for minority shareholders, which attests to the fact that CA 2013 operates on the fundamental principles of transparency and compliance. The legal framework has kept abreast of all relevant changes with respect to the corporate governance of companies, and those changes have been observed. The core philosophy underpinning both the Act and legal framework is the need to improve investor protection and enhance shareholder engagement. The duties of directors have been codified and are broadly in line with the duties accepted internationally, whilst the concept of KMP has been identified to ascertain and assign responsibility. New shareholder rights have been introduced and strengthened. The purpose of improving shareholders’ rights is to provide them with more opportunities to engage with companies. Shareholder engagement is a method for shareholders to communicate their views, concerns, ideas and opinions to companies’ boards of directors and managers.Footnote 147 Under the present scheme, shareholders can either voice their concerns or exit the company.

Family-owned companies are common in India, with shareholdings largely concentrated in the hands of promoters and promoter groups. Further, a promoter who is a controlling shareholder can appoint him or herself as a director or control the appointment of other directors. On the one hand, efforts have been made to reduce the shareholdings of promoters. On the other hand, the promoters of start-up companies are allowed to have shares with SVR to protect their control over their companies.

The right to call an EGM is afforded to shareholders by the Companies Act. However, in Nifty-50 companies, no such meeting has been called by shareholders within the last ten years. Further, with one exception, no case of oppression or mismanagement has been observed in those companies on the NCLT benches of Delhi and Bombay, which are the major commercial hubs of India. Stakeholder engagement through whistle blower activity and grievance redressal ranges from 84–98 per cent. Shareholder engagement has also been encouraged through improved methods of voting, including e-voting. As seen in the pilot study, e-voting was the preferred method of voting for the adoption of companies’ annual financial statements in FY2018. The voting pattern for other resolutions in that year is not available.

The real test lies post-COVID-19. Although companies’ shareholdings have been affected, many important deals have been closed during the COVID period.Footnote 148 It thus remains an open question whether shareholder engagement will be improved by the greater use of audiovisual modes of voting, as well as whether shareholder engagement will increase in India, where retail and institutional shareholders do not have the majority votes to defeat resolutions. Finally, it remains to be seen how corporate governance can be improved to make Indian companies and in turn society more sustainable.

5 Corporate Governance and Shareholder Engagement Practices in Indonesia: A Shifting Paradigm

Ulya Yasmine Prisandani and Kartika Paramita
5.1 Introduction

The origins of Indonesian company history lie in the development of private family businesses. More than 95 per cent of businesses in Indonesia today were created as family firmsFootnote 1 with a small number of shareholders who were acquainted with or related to one another. The family nature of the businesses, however, tends to make it difficult to separate the interests of the family from those of the company.Footnote 2 Research conducted by Carney and Child in 2008 found that 68.1 per cent of the 200 participating Indonesian companies had no second owner holding at least 10 per cent of the company’s stock.Footnote 3 In addition, in 58.2 per cent of the companies, the CEO, board chair or vice chair was a member of the controlling family.Footnote 4 On the whole, Indonesia is known to have a concentrated ownership structure wherein controlling shareholders often assume both supervisory and management roles.Footnote 5

The corporate governance of Indonesian limited liability companies (LLCs) is subject primarily to Law No. 40 of 2007 Concerning Limited Liability Companies as amended by Law No. 11 of 2020 Concerning Job Creation, which is commonly known as the Indonesian Company Law (ICL).Footnote 6 The ICL acknowledges three general company organs: the general meeting of shareholders (GMS), the board of directors (BoD) and the board of commissioners (BoC). Indonesia’s corporate board structure is a dual-board system with distinct authorities given to the BoC and BoD. The BoD is authorized to conduct and is fully responsible for the overall management of day-to-day operations and is required to serve the company’s interests in accordance with the company’s purpose and objectives, whereas the BoC is tasked with supervising and advising the BoD on management policy in accordance with laws and regulations and the company’s articles of association (AoA).

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. Private Companies

Private companies are entities that have a rather small number of shares and whose shareholders are acquainted with one another and whose roles are explicitly outlined in the company’s AoA. In most private companies, registered shares (aandelen op naam shares) are assigned to each shareholder and are difficult to transfer to another party.

The ICL provides no explicit rules on the share composition within a company. However, it does stipulate that an LLC be founded by at least two persons.Footnote 7 It was previously the case that to establish a private company, the authorized capital had to be at least fifty million rupiah,Footnote 8 25 per cent of which had to be issued and paid up.Footnote 9 However, this stipulation was changed in 2016 to give small- and medium-sized enterprises a boost. Accordingly, the minimum amount of authorized capital is now based solely on the agreement amongst the founders,Footnote 10 although, in practice, public notaries still refer to the requirement in the ICL with respect to company establishment. Public Companies

Both non-listed public companies and publicly listed companies deal with a larger number of shareholders than private companies. To be a public company, a company’s shares must be owned by at least 300 shareholders, and the company must have at least 3 billion rupiahFootnote 11 of paid-up capital. Both types of companies are identified by the suffix terbuka, abbreviated as Tbk, and they have an obligation to disclose information on their financial position, operations and governance to the public. Publicly listed companies are companies that conduct a public offering in the stock exchange market.Footnote 12 They are bound to comply with the laws and regulations of the capital market, OJK regulations and the listing rules of the Indonesia Stock Exchange (IDX) and other capital market self-regulatory organizations such as the Indonesian Central Securities Depository, or Kustodian Sentral Efek Indonesia (KSEI), and the Indonesian Clearing and Guarantee Corporation.Footnote 13 When a company intends to list on the IDX, it must first register itself with OJK. To change its status from a private to a public entity, or vice versa, a company must follow the procedures set out under Indonesia’s Capital Market Law, which include amending the company’s AoA and business registration certificate. Such conversions do not affect the company’s legal identity.

There are no restrictions on the transferability of shares (with the exception of voting preference shares and the shares held by founding shareholders) for either public or publicly listed companies,Footnote 14 although a company’s AoA may contain specific requirements for share transfers. However, as a general rule, the consent of neither other shareholders nor the company is needed during the process of transferring shares. A specific percentage of shares is assigned to the public at the initial public offering (IPO), whereas non-public shareholders usually retain their shares in the event of IPO. State-Owned Enterprises

In addition to the aforementioned company categorizations, SOEs in Indonesia are subject to additional regulations under Law No. 19 of 2003 Concerning State-Owned Enterprises (SOEL) as amended by Law No. 11 of 2020 Concerning Job Creation. SOEs are companies whose shares are wholly or dominantlyFootnote 15 owned by the state. Although the majority of SOEs in Indonesia are formed as LLCs, and are hence subject to the provisions of the ICL, the SOEL further distinguishes between limited liability SOEs and public SOEs. As a result of this arrangement, the state’s asset ownership in SOEs is limited proportional to its ownership of shares, and thus a company’s assets cannot be automatically regarded as state assets. The state’s shares in an SOE can be obtained only through direct investment, not through the market.Footnote 16

In a company whose shares are wholly owned by the state, the GMS function is carried out by an appointed minister, whilst in companies whose shares are partially owned by the state the appointed minister merely acts as a shareholder.Footnote 17 Special authority, such as the authority to appoint and dismiss members of the BoD and BoC, is granted to the minister in the event that he or she serves the GMS function.Footnote 18 In general, the appointed minister in a public SOE serves as one of the company organs together with the BoD and a supervisory council.Footnote 19

The state plays a major role in the operation of SOEs, for example, in determining increases and decreases in its equity participation. State plans to increase the state’s capital participation must be proposed by the Minister of Finance to the President of Republic of Indonesia based on a prior study or research conducted by ministers in relevant fields.Footnote 20 Although a decrease in the state’s equity participation requires the approval of the GMS, it must also be finalized through a government regulation based on the appointed minister’s decision in relation to the shareholder role in limited liability SOEs.Footnote 21

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. Types of Shares under ICL

The ICL gives Indonesian companies the facility to determine one or more share classifications to be written into their AoA. As provided for in the elucidationFootnote 32 of article 53 paragraph (4) of the ICL, in the event that there is more than one class of shares, those classes do not necessarily stand alone, but may be combined. However, one class must be designated as common shares, and the other as preferred shares.Footnote 33

Common shares give rise to the right to vote at the GMS for the adoption of resolutions on points related to the company’s management, the right to receive dividends and the right to receive the company’s remaining assets in the event of liquidation. In addition to common shares, the ICL also allows companies in Indonesia to issue various classes of preferred shares according to the rights they confer, including shares without voting rights, shares with a special right to nominate members of the BoD and/or members of the BoC and shares with certain priority rights. All shares within the same class, however, must contain the same shareholder rights and obligations. The GMS of a publicly listed company must approve the rights and obligations attached to each class of preferred shares and disclose that information to all of its shareholders. The implementation of class share options is further elaborated upon in Section 5.3 of this chapter, which covers shareholder engagement and voting in practice, but current practice denotes that special shares exist only in state-owned public LLCs in the form of golden shares. Shareholder Rights

In addition to collective rights in the form of GMS authority, the ICL also recognizes individual shareholder rights, namely, the right to attend and vote in the GMS;Footnote 34 the right to file a lawsuit against the company in the event of losses resulting from unfair action on the company’s part;Footnote 35 the right to freely transfer and demand the redemption of shares;Footnote 36 the right to receive information on the company;Footnote 37 the right to receive dividends; and the right to receive the company’s remaining assets in the event of liquidation.Footnote 38 Shareholders who individually or jointly represent one-tenth or more of the total shares with voting rights are granted additional rights, including the right to initiate a GMS; the right to file a claim with the district court on behalf of the company against members of the BoD who cause a loss to the company owing to fault or negligence; and the right to submit an application to the district court calling for an inspection of the company to obtain data or an explanation if suspicions arise concerning illegal action by the company, the BoD or the BoC.Footnote 39

Shareholders are permitted to exercise their voting rights by proxy through power of attorney. Listed companiesFootnote 40 must facilitate the ability of all shareholders to participate in the GMS and attach a standard proxy-authorization form/letter in the notice of a GMS. However, members of the BoD and BoC and other company employees are prohibited from acting as proxies.Footnote 41

Furthermore, shareholders can also freely transfer shares subject to exceptions in the company’s AoA, which generally apply to special voting preferred shares or founder shares. This freedom is not always subject to pre-emptive rights, but if the AoA so stipulate, then selling shareholders must first offer the shares in question to other shareholders in the company. The ICL specifies a period of thirty days for this offer to other shareholders, after which the selling shareholder is free to withdraw the offer and offer the shares to external third parties. Shareholders in a public company who own a minimum of 5 per cent of the company’s total shares are required to report any changes in their shareholding in the increment of 0.5 per cent to OJK within ten days.Footnote 42

5.2 GMS and Voting Mechanism

The GMS under Indonesian law comprises the annual GMS and extraordinary GMS. During an annual GMS, the company’s annual report must be submitted, as specified by article 66 of the ICL. The annual GMS usually focuses on a fixed agenda, whereas an extraordinary GMS can involve a discussion of matters outside that agenda. The ICL and OJK regulations applicable to public companies stipulate the GMS mechanism and voting procedure, which are discussed in turn below, followed by a brief explanation of the requirements for GMS minutes.

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

Table 5.1 GMS agenda quorum under Indonesian law

GMS Agenda ItemsGMS SequenceAttendance QuorumDecision Quorum
General GMS decision based on agenda determined by GMSGMS 1More than half of all shares with voting rights present at the GMSMore than half of the votes cast
GMS 2*At least one-third of all shares with voting rights present at the GMS
GMS 3**Determined by OJK based upon the request of a public company
Amendment of AoA, which requires approval from the Minister of Law and Human Rights (an exception applies for the extension of a public company’s establishment period)GMS 1At least two-thirds of all shares with valid voting rights present at the GMSMore than two-thirds of the votes cast
GMS 2*At least three-fifths of all shares with valid voting rights present at the GMSMore than two-thirds of the votes cast
GMS 3**Determined by OJK based upon the request of a public company
  • Transfer of assets > 50% of the company’s net worth

  • Creation of a debt guarantee with assets >50% of the company’s net worth

  • Merger, acquisition, consolidation or spin-off

  • Bankruptcy declaration request

  • Extension of company’s establishment period

GMS 1At least three-quarters of all shares with valid voting rights present at the GMSMore than three-quarters of the votes cast
GMS 2*At least two-thirds of all shares with valid voting rights present at the GMSMore than three-quarters of the votes cast
GMS 3**Determined by OJK based upon the request of a public company
Transaction with a conflict of interestFootnote 48GMS 1More than half of all shares with valid voting rights owned by independent shareholders present at the GMSMore than half of the votes cast by independent shareholders present at GMS
GMS 2*More than half of all shares with valid voting rights owned by independent shareholders present at the GMSMore than half of the votes cast by independent shareholders present at GMS
GMS 3**Determined by OJK based upon the request of a public companyMore than 50% of shares owned by independent shareholders present at GMS
Change of rights attached to a certain share classification in the event that the public company has more than one such classificationFootnote 49GMS 1At least three-quarters of all affected shares present at the GMSMore than three-quarters of the votes cast
GMS 2*At least 2/3 of all affected shares present in the GMS
GMS 3**Determined by OJK based upon the request of a public company

* GMS 2 is held if the quorum requirement is not fulfilled at GMS 1.

** GMS 3 is held if the quorum requirement is not fulfilled at GMS 2.

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 Shareholder Engagement and Voting in Practice

The ownership structure and control practices discussed in this section pertain largely to the non-state-owned public companies listed in the LQ45 index of the IDX. The data presented are for LQ45 companies during the February–July period of 2020. Where applicable, the analysis herein also reflects the general trend amongst all 687 public companies listed on the IDX. Specific references to a listed company in this section use the company’s listing code provided in the IDX database.

Furthermore, the dataset is obtained from analysis of the data in company annual reports, the IDX database and IDX reports, the KSEI (Kustodian Sentral Efek Indonesia) database and KSEI reports, and the summaries of companies’ annual GMS, including the GMS announcements and summaries published in national newspapers. Interviews have also been conducted with representatives of the IDX, KSEI and Capital Market Legal Consultants Association to confirm the patterns and numbers in the data. The analysis of shareholder engagement and voting in practice is conducted specifically with respect to ownership structure and control, voting practices and various means of shareholder engagement.

We first examine the trend towards more dispersed share ownership and changes in the free float share percentage and number of affiliated directors and commissioners in Indonesia. Analysis of the free float share percentage is performed by looking at company annual reports and reports in the IDX database from 2015 to 2019. Analysis of the degree of affiliation amongst shareholders, BoDs and BoCs draws on a 2008 study, but takes into account 2019 data on affiliated directors and commissioners, as well as the regulatory change implemented through the Decree of the Board of Directors of Indonesian Stock Exchange No. Kep-00183/BEI/12–2018, which eliminated the requirement for public companies to have an independent director and independent commissioners.

Finally, a questionnaire survey was administered to collect shareholder perspectives on share ownership and decision-making through a GMS. Purposive sampling took place from 14–31 July 2020. Eligible respondents were individual shareholders in a publicly listed company who had purchased their shares through a securities company, not in the form of mutual funds.Footnote 52 The questionnaires were distributed online in cooperation with several online media outlets.

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 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. Trend towards More Dispersed Ownership

The Indonesian capital market was considered in the past to be relatively small, underdeveloped and illiquid, resulting in weak oversight of corporate management control.Footnote 53 Furthermore, the Indonesian ownership structure tended to be highly concentrated, with most companies managed and owned by members of their founding families, leaving little room for the separation of ownership and control. The majority of companies belonged to or were affiliated with a business group, which was also owned by related families, and thus were considered family business groups. These family business groups controlled the majority of publicly listed companies either through direct control or through a pyramid of share ownership through other companies or firms.

However, a significant increase in IPOs and stock market activity was seen in the 2017–19 period, with IDX data showing Indonesia to have had the largest average number of newly listed companies per year amongst ASEAN members, with thirty-one, fifty-three and fifty-four in 2017, 2018 and 2019, respectively. As of April 2020, there were 687 companies listed on the IDX, 26 of them newly listed between January and March of 2020. If this pattern of increasing IPOs and interest in shareholding continues, it may lead to a move away from the longstanding tradition of conglomerate ownership amongst Indonesian public companies. Free Float Share Percentage

IDX further distinguishes publicly listed companies by three board classifications: Main Board, Development Board and Acceleration Board. The Main Board lists large companies with an established track record, whilst the Development Board lists companies that have not yet fulfilled the listing requirement for the Main Board, including prospective companies that have not yet accrued profits and companies undergoing restructuring. A Main Board listing requires a minimum of 1,000 shareholders, and a Development Board listing at least 500. The Acceleration Board was recently introduced to encourage share listings from small- and medium-scale issuers.

As of March 2020, there were 326 and 362 companies, respectively, listed on the Main Board and Development Board of the IDX. For Main Board companies, the free float minimum share requirement after the IPO but prior to listing is at least 300 million rupiah, with total paid-up capital amounting to at least 20 per cent (if the company’s pre-IPO total equity is 500 billion rupiah), 15 per cent (if the company’s pre-IPO total equity is between 500 and 2,000 billion rupiah) or 10 per cent (if the company’s pre-IPO total equity is more than 2,000 billion rupiah). Companies listed on the Development Board are required to float free shares worth at least 150 million rupiah after the IPO and prior to listing, subject to the same percentage requirements for total paid-up capital proportional to total equity. Finally, the public share requirement for companies on the Acceleration Board is 20 per cent of total shares, with a minimum of 300 shareholders.Footnote 54 After listing, companies are required to maintain a free float percentage of 7.50 per cent and at least fifty million shares circulating in public.

As noted, Indonesian companies in general have a very concentrated ownership and control structure, as evidenced by the fact that the average number of free float shares rarely constitutes a controlling percentage. All companies in the LQ45 are listed on the Main Board, and are thus subject to the aforementioned minimum free float requirement. Table 5.2 shows the shareholding structure of public companies listed on the LQ45 index from February–July 2020.

Table 5.2 Free float data in % for LQ45 companies*

YearMeanMedianMinimumMaximumStandard Deviation

*Excluding the ten SOEs in the LQ45 index.

As of the first quarter of 2020, the LQ45 company with the most dispersed ownership structure and highest public ownership of shares was LPPF, which had a free float percentage of more than 80 per cent. LPPF is the only company in the index with a relatively dispersed ownership structure on paper. It is followed by two real-estate companies: ASRI with a 52.61 per cent free float percentage and LPKR with 52.06 per cent. All other companies in the index have less than 50 per cent free float shares, with the most concentrated shareholder structure exhibited by TPIA with 8.60 per cent and HMSP with 7.50 per cent.

When a public company’s free float share percentage falls lower than the requirement, the company is obliged to submit an action plan and timeline for fulfilling the free float requirements within two trading days of the company becoming aware of the breach. A free float requirement breach can also be subject to the OJK Takeover Rule, in which case the company is given a two-year deadline to comply with the requirement.

In practice, even in the event that public ownership exceeds 51 per cent, control measures are still wielded by controlling shareholders by way of driving or directing certain decisions reached by the majority owners. A common practice is for controlling shareholder to nominate all candidates for the BoD and BoC, meaning that public shareholders can vote only for select candidates. Furthermore, control by certain groups of companies or families can still be observed even when the free float percentage is high, as seen, for example, in the ownership structures of LPPF, which has an 82.52 per cent free float, and LPKR, which has a 52.06 per cent free float. Each public shareholder in LPPF and LPKR holds fewer than 5 per cent of shares. In contrast, the sole non-public shareholder in LPPF is MLPL, which is controlled by PT, and Inti Anugerah Pratama holds the largest shareholding in LPKR. Protection of Independent and/or Minority Shareholders in Practice

The concentrated ownership and control structure in Indonesia results in low levels of disclosure and transparency. Concentrated control by a group of shareholders also results in lax supervision and a high probability of insider trading, as external shareholders often refuse to participate. Given the immense power of controlling shareholders, corporate governance remains an urgent issue in Indonesian corporate law,Footnote 55 with minority shareholder rights a particular concern.

Public participation in the decision-making processes of companies remains low because individual shareholders hold only a small percentage of shares. This pattern has remained constant in the past few years, and the decision-making process is thus still dominated by controlling shareholders. To address the level of power that controlling shareholders wield in most public companies, the government has taken a few measures to afford greater protection to independent and minority shareholders in practice. For example, OJK recently issued OJK Regulation No. 14/POJK.04/2019 Concerning the Increase of Public Company Capital through Rights Issue, which changed the shareholder approval requirement for a capital increase without a rights issue in publicly listed companies that are not in financial distress. The new regulation requires the GMS that approves a capital increase plan that is exempted from the rights issue requirement to be attended by shareholders representing more than 50 per cent of the total shares owned by independent and unaffiliated shareholders,Footnote 56 and the plan must also be approved by independent and unaffiliated shareholders holding more than half of total shares. The regulation thus places a more stringent requirement on the existing GMS quorum and voting requirements imposed by the ICL, which does not distinguish between independent and unaffiliated shareholders.

In addition, if these publicly listed companies want to issue new shares, with or without pre-emptive rights, they must issue a circular disclosing that information to their shareholders and obtain GMS approval. In the event that a given party owns 5 per cent or more of a public company’s issued shares, the company is required to submit a report on such ownership or any change thereto to OJK within ten days of the date on which the transaction takes place. The report should contain the identity of the shareholders concerned, the number of shares acquired or sold, the purchase or sale price per share, and the date and purpose of the transaction. OJK has been observedFootnote 57 in recent years to have taken a position that leans towards favouring minority shareholders, which is in line with its aim to change Indonesia from a ‘saving society’ to an ‘investing society’.

Publicly listed companies must also perform certain notification procedures before undertaking material corporate actions. Depending on the value of the proposed actions, they must either issue a circular disclosing information on the actions to their shareholders and obtain GMS approval or make a public announcement. In the case of affiliated party transactions, the company must either issue a similar circular disclosing information on the transaction or obtain approval from independent shareholders in the GMS. The requirement to obtain approval from independent shareholders also depends on whether the affiliated party transaction constitutes a conflict of interest.

Shareholder activism remains relatively unknown in Indonesia, and relevant case law is scarce. Article 61 of the ICL stipulates that shareholders have a right to instigate legal proceedings against a company in the district court of the company’s domicile in the event that they suffer losses deemed to have been caused by unjust and unreasonable acts of the company resulting from a GMS resolution or a decision of the BoD or BoC. The most recent implementation of a shareholder derivative action was the legal proceeding initiated by KIJA shareholders in July 2019 that sought the annulment of the 2019 GMS decision on the appointment of BoD and BoC members. The lawsuit was later withdrawn by the shareholders,Footnote 58 which may indicate the existence of an out-of-court dispute settlement mechanism between the company and the disputing shareholders. Another shareholder derivative action was initiated in 2018 against BCICFootnote 59 by a Singaporean shareholder in respect of share pricing measures taken by the Indonesian Deposit Insurance Corporation during the Bank Century bailout process in 2008, as well as the bank’s related corporate actions. In January 2021, the Central Jakarta District Court issued a decision stating that it does not have jurisdiction over the matter. As one of the defendants in the lawsuit is a government agency, the court determined that the matter should be filed with the State Administrative Court.

Furthermore, Indonesia is not yet familiar with the practice of proxy fights. Hence, even changes in control mechanisms that may disadvantage minority shareholders, such as hostile takeovers, are not yet recognized under Indonesian laws and regulations.

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. Total Participation in Annual GMS

In 2015, the Asian Development Bank recommended that engagement with institutional shareholders in Indonesia be improved to promote active shareholder involvement, as shareholder participation has been cited as one of the areas in need of improvement in terms of corporate governance.Footnote 60 To gauge shareholder participation, the percentage of shareholders attending the annual GMS of LQ45 companies from 2017 to 2019 was analyzed, with the results reported in Table 5.3.

Table 5.3 Shareholder attendance (in %) in the annual GMS of LQ45 companies

YearMeanMedianMinimumMaximumStandard Deviation

It can be seen from Table 5.3 that although the vast majority of shareholders in LQ45 companies attended the companies’ annual GMS in the three years in question, the average attendance percentage never reached 100 per cent. The published summaries of the meeting minutes provide no information on the percentage of public and non-public shareholders in attendance. Full notarized GMS minutes are seldom made public, as their disclosure is not required under Indonesian law.

Shareholders can also put forward questions with respect to the reports presented or agenda items discussed during the GMS. Table 5.4 presents data on the total number of questions asked by shareholders during the annual GMS of LQ45 companies from 2017 to 2019.

Table 5.4 Total number of questions asked by shareholders during annual GMS of LQ45 companies


Because independent individual shareholders usually hold only a very small percentage of a company’s shares, they rarely request company information and are generally rather passive throughout the GMS process, as shown by the low average number of questions indicated in Table 5.4 (fewer than two for the 2017–19 period). Most of the few questions asked concerned the annual report presented by the BoD or net profit utilization, which was the case at the annual GMS of INKP in 2017, WSBP in 2018 and 2019 and ADRO in 2018.

The questions asked and comments made by shareholders are usually very technical and specific in nature. For example, the questions raised in the UNVR GMS of 2019 concerned the use of certain accounting standards and their effect on the calculation of the company’s profit and the benchmarking standard for the remuneration percentage in contrast with the annual net profit percentage. Voting Agenda

The percentage of votes cast per agenda item in LQ45 companies from 2017 to 2019 is presented in Table 5.5.

Table 5.5 Voting percentages for GMS agenda items in LQ45 companies (2017–19)

Agenda ItemAgreeDisagreeAbstain
Approval of annual and financial report201799.87%20170.01%20170.12%
Allocation of net profits201799.81%20170.12%20170.07%
Determination of salaries and incentives for BoD and BoC members201798.17%20171.57%20170.26%
Appointment of public accountant201797.41%20172.18%20170.41%
Change in company’s management structure201795.32%20174.25%20170.38%

Companies report the percentage of votes for each agenda item in their summaries of annual GMS minutes. These summaries are available in the IDX database, and also are published by the companies in national newspapers no more than two working days after the GMS date. It can be seen from Table 5.5 that the lowest percentage of approval was obtained for a change in the company’s management structure, followed by the appointment of a public accountant. Interestingly, even though most of the questions raised at the companies’ GMS concerned the annual and financial report or allocation of net profits, these two agenda items attracted the highest approval percentages, at 99.81 per cent and 99.80 per cent, respectively. Implementation of e-Proxy and e-Voting Platforms during COVID-19 Mitigation Period

The majority of GMS sessions in Indonesia are held in Jakarta to accommodate the 78.86 per cent of shareholders who are located on Java Island. The remainder are spread across the country: in Sumatra (12.12 per cent), Sulawesi (2.94 per cent), Kalimantan (3.75 per cent), Bali and Nusa Tenggara (2.32 per cent) and Maluku and Papua (0.61 per cent).Footnote 61 As mandated by OJK, publicly listed companies are obliged to hold their annual GMS and submit their annual report by 30 June at the latest,Footnote 62 which results in a busy GMS season from May to June, when most publicly listed companies hold their annual GMS. During the 2016 GMS season, the average number of GMS held per day was six, with one day recording twenty-six meetings.Footnote 63 The record for the number of meetings held on a single day during the 2018 season was forty. The average number of shareholders invited to concurrent GMS has also increased, rising from 12,660 shareholders per day in 2016 to around 18,000 in 2018.Footnote 64

Despite the potential of e-Proxy and e-Voting platforms to increase shareholder participation, most Indonesian companies prefer in-person GMS, and online GMS remain rare. Nevertheless, electronic GMS mechanisms offer a solution to the geographic and time constraints that arise when a shareholder has to attend simultaneous GMS sessions. KSEI has developed an online e-Voting and e-Proxy system (the e-GMS system) to resolve the concurrent GMS issue, and the system was recently implemented as a COVID-19 mitigation measure in Indonesia to reduce the number of physical meetings and avoid large gatherings of people. OJK Letter No. S-92/D.04/2020 of 2020 Concerning the Relaxation of Obligations for Submission of Reports and Implementation of General Meetings of Shareholders states that the holding of a GMS by a public company can be accomplished by means of an electronic power-of-attorney mechanism using the e-GMS system developed by KSEIFootnote 65 as long as the GMS is conducted as efficiently as possible without affecting its validity in accordance with OJK Regulation No. 32 of 2014 and the ICL.

As of April 2020, seventeen companies (3 per cent) had announced that they would use KSEI’s e-GMS system for their next annual GMS. They include such major companies as ADRO, EXCL, GOOD and HMSP. Two companies, BJTM and EPMT, announced that they would use a live-streaming teleconferencing mechanism for their upcoming annual GMS rather than the KSEI system.

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. 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. Shareholder Engagement in State-Owned Companies

As of March 2020, there were a total of 142 Indonesian SOEs, just 25 of which were publicly listed companies. Because the government is the majority shareholder in SOEs, the shareholder engagement regime for SOEs is significantly different owing to the difference in power between the government and other shareholders. One of the most noteworthy differences is the possibility of the government being a golden shareholder, as regulated in a company’s AoA.Footnote 71 The golden share provision allows the government to control all shareholder votes for the sake of a public interest that may have a significant impact on the company.

Take BMRI as an example. The golden share owned by the government grants special rights to, inter alia, nominate BoD and BoC members who will be appointed by the GMS. As the golden shareholder in BMRI, the government is also granted the right to request a BoD report and/or obtain a BoD explanation at any time in accordance with the prevailing laws and regulations. In the event of BoC positions in BMRI being completely vacant, the government, as the golden shareholder, is authorized to appoint temporary members to carry out the BoC function.

In practice, such significant differences in rights between different classes of shares exists only in SOEs, as non-state-owned publicly listed companies usually grant the same rights to all shares. In the majority of IPO prospectuses, the wording ‘The new shares offered consist of shares issued from portfolio shares which give the holders equal rights and equal degree in all respects to other shares of the Company that have been issued and fully paid’ can be found as a required standard template. Its aim is to assure the public that all shareholders receive the same rights, which can be inferred to be the preferred stance of the Indonesian capital market authorities with regard to maintaining the same rights for all share classes. Further analysis of the practices of shareholder engagement in SOEs reveals that even a small percentage of government-owned shares affects the decision-making processes in a GMS because other shareholders tend to agree with government decisions. Other Means of Shareholder Engagement

The basic terms concerning the interests of shareholders are regulated under shareholder agreements, and the limits of shareholder engagement thus depend on the provisions of such agreements. Shareholders can also resort to circular resolutions to the extent that all shareholders with voting rights have given signed, written approval.Footnote 72 In practice, many decisions in private companies are passed through circular resolutions because holding a GMS requires the fulfilment of certain procedures. Circular resolutions can also replace a GMS, as AirAsia Indonesia demonstrated towards the end of 2019 when it changed the structure of its BoD and BoC by such means. As a side note, circular resolutions also prevail in the decision-making processes of SOEs. For instance, in 2019, shareholders in Pertamina revised the company’s corporate budget and workplan without holding a GMS to speed up the acquisition of Tuban Petro.

In practice, shareholder engagement is also supported by corporate secretaries, especially in terms of keeping the company in line with good corporate governance principles and other corporate governance rules. Publicly listed companies often have a designated corporate secretary who deals with shareholder or investor relations. Corporate secretaries can also be involved in the GMS process, particularly in terms of dealing with communications and publications for all stakeholders, including shareholders, the BoD and the BoC.

In certain cases, public companies have a higher threshold for shareholder approval, for example in a transaction with conflict of interest that may require independent or minority shareholder approval. There is no regulatory limitation on shareholder engagement as long as it is in accordance with the principles of good corporate governance. Nevertheless, the government’s golden shares bestow higher overall control amongst shareholders in SOEs.

5.4 Concluding Remarks

This chapter on shareholder engagement and voting practices in Indonesia provides a detailed account of developments and practices in the capital market, specifically with respect to shareholder engagement, a seldom discussed issue in Indonesia. Public interest in the capital market sector is on the rise, and the country’s highly concentrated shareholding structure is slowly shifting towards a more dispersed shareholder structure with increased participation. Further, the degree of affiliation and control has lessened despite the policy change eliminating the independent director requirement for public companies. State control of publicly listed SOEs remains very much in existence, and such control also applies to certain group corporations that control a number of publicly listed companies through share ownership. Moreover, shareholder participation has been quite high in recent years, although the shareholder profile in Indonesia can be considered amicable and rather passive, as demonstrated by the very low number of questions asked or comments made in the course of a GMS. With the increasing percentage of foreign ownership in the country, it remains to be seen whether there will be any substantial changes in terms of shareholder engagement.

The ICL is a very thorough regulation that provides a comprehensive set of rules on company operations. However, there remains a gap between regulation and practice, a gap that can perhaps be reduced through improved compliance and continuous education for capital market industry actors and the public, particularly with regard to technological innovations. The application of KSEI’s e-GMS system serves as a starting point for better accommodating Indonesia’s shareholder needs, despite companies’ longstanding general hesitation to ‘go digital’.

6 Shareholder Engagement and Voting in Japan

Gen Goto
6.1 Introduction

Japanese companies have long been known for their stakeholder-oriented corporate governance system,Footnote 1 which arguably supported Japan’s rapid recovery from the devastation of World War II. However, after suffering from stagnation of over two decades from 1991 onwards, the Japanese government turned to shareholder-oriented corporate governance in the 2010s as one of the solutions to revive its economy and implemented several reforms.Footnote 2 Most notably, the 2014 Japanese Stewardship Code (revised in 2017 and 2020) emphasizes the role of shareholder engagement by institutional investors in promoting the mid- to long-term growth of listed companies, and the 2015 Japanese Corporate Governance Code (revised in 2018 and 2021) instructs corporate management to take shareholders’ interests seriously.

As a consequence, shareholder engagement and voting have attracted considerable attention in the corporate governance scene in Japan in recent years. For example, it has been reported that domestic institutional investors played a decisive role in the victory of a shareholder group over incumbent management during a proxy fight in June 2019 at LIXIL, the leading housing equipment manufacturer in Japan.Footnote 3 Also, the recent resurgence of hedge fund activism in Japan can be explained, at least in part, by activists’ expectations that they would receive more support from domestic institutional investors than they had in the past.Footnote 4

After describing the transition of the Japanese corporate governance system (Section 6.2) and the legal measures granted to shareholders (Section 6.3), this chapter analyzes the current state of the shareholder meeting and shareholder voting and engagement in Japan (Section 6.4). Section 6.5 offers concluding remarks.

6.2 Basic Structure of Japanese Corporate Law and Governance
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 Legal Means of Shareholder Engagement
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 Allocation of Voting Rights

The Japanese Companies Act allocates one vote to one share, or to one share unit, which consists of a certain number of shares prescribed in the company’s articles of incorporation.Footnote 74 Cumulative voting is available for the appointment of directors as a default rule,Footnote 75 but is excluded in most, if not all, listed companies by their articles of incorporation.Footnote 76

Although the Companies Act does not explicitly permit the issuance of class shares with multiple voting rights,Footnote 77 it is still possible to introduce a dual-class structure by altering between classes the number of shares necessary to compose one share unit.Footnote 78 However, dual-class structures are unpopular in Japan, having been utilized by only one listed company since the Tokyo Stock Exchange permitted their use in 2008.Footnote 79 Quorum Requirement and Resolution Threshold

The quorum requirement for a shareholder meeting, whether annual or extraordinary or called by the board or a shareholder, is the presence of shareholders holding in aggregate more than half of the total voting rights, unless waived or lowered by the company’s articles of incorporation.Footnote 80 Resolutions are adopted with the approval of the majority of voting rights present at the meeting unless a higher threshold is set by the articles of incorporation.Footnote 81 There is also an exclusive list of items, such as an amendment of the articles of incorporation or a merger, that require the higher threshold of two-thirds of the voting rights present at the meeting.Footnote 82 Modes of Voting

There are several ways that shareholders can cast their votes. Apart from physical attendance, voting by proxy through an agent is possible at any company.Footnote 83 In addition, companies that have 1,000 or more shareholders must allow their shareholders to vote by mail.Footnote 84 Electronic voting via the internet is optionalFootnote 85 but is encouraged by the Japanese Corporate Governance Code considering its convenience for overseas investors.Footnote 86 Also, the Tokyo Stock Exchange through its joint venture offers an e-voting platform service designed for institutional investors to listed companies.Footnote 87 As of 8 July 2021, 2,254 of 3,735 listed companies (60.3 per cent) allow their shareholders to vote electronically,Footnote 88 and 1,234 (33.0 per cent) have joined the e-voting platform offered by the Tokyo Stock Exchange.Footnote 89

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 Shareholder Meetings, Voting and Engagement In Practice
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 Dates: The Problem of ‘June Shareholder Meetings’

One peculiarity of Japanese shareholder meetings is their heavy concentration in the latter half of June. In the 2018–19 season, 1,896 of 2,702 companies (70.2 per cent) held their annual meeting in June 2019, and the meetings of 1,272 of them (47.1 per cent) were concentrated on the 25, 26 or 27 June.Footnote 100 This practice is the combined result of the custom of allocating the voting rights at an annual meeting to shareholders at the end of the previous business year, which is 31 March for most Japanese companies, and the requirement of the Companies Act that the annual meeting be held within three months of the threshold date for the allocation of voting rights.Footnote 101

Whilst the degree of concentration is much lower than it was in the 1990s, when more than 90 per cent of shareholder meetings were held on a single day to avoid the physical attendance of Japanese corporate racketeers (sokaiya) as much as possible,Footnote 102 it is still problematic, as it imposes severe time constraints on the ability of institutional investors, index funds in particular, to analyze the agenda/proposals and engage with their investee companies.Footnote 103 Despite strong criticism, however, the practice of June shareholder meetings seems to remain intact.Footnote 104 Possibility of Virtual Meetings

Even before the outbreak of COVID-19, there was widespread interest in applying information communication technology to shareholder meetings to make it easier for institutional investors and retail investors to attend. However, as the Companies Act requires the convenor of a shareholder meeting to decide the meeting venue,Footnote 105 holding a shareholder meeting purely virtually with no physical venue has been considered unlawful.Footnote 106

Accordingly, the Ministry of Economy, Trade and Industry (METI) has focused on promoting ‘hybrid’ measures, such as the live-streaming of a shareholder meeting being physically held, or going a step further and allowing shareholders to participate via the internet in discussions and voting conducted at the physical venue.Footnote 107 Whilst the live-streaming of shareholder meetings has been quite popular amongst Japanese listed companies for some time, real-time online participation has only just taken off.Footnote 108

In April 2020, amidst the COVID-19 outbreak, METI and the Ministry of Justice (MOJ) jointly issued guidance to companies stating that it is legal to request that shareholders do not attend meetings physically but instead exercise their voting rights in advance by mail or by electronic voting.Footnote 109 Even if no shareholder has shown up, a shareholder meeting will still be considered valid, and resolutions can be adopted solely by voting rights exercised by mail or electronically.Footnote 110 Whilst such guidance is a reasonable response to the need to maintain social distancing during a pandemic, it may give rise to a fundamental question about the significance of holding a meeting, be it physical or virtual, if the results are already determined by votes cast in advance.Footnote 111

In June 2021, through a revision of the Industrial Competitiveness Enhancement Act, METI has succeeded in introducing an exception to the requirement of a physical venue for shareholder meetings.Footnote 112 This exception allows a listed company to hold shareholder meetings purely virtually by amending its articles of incorporation, provided that METI and MOJ has confirmed that the company has adopted policies on measures against possible interruption of communication and on protection of the interest of shareholders who do not have connection to the internet.Footnote 113 Whether this new exception becomes widespread remains to be seen. Typical Agenda

The typical items on the agendas of annual shareholder meetings are, in order of popularity, the election of directors, decisions on dividends and the election of statutory auditors.Footnote 114 To a lesser extent, amendments to articles of incorporation and decisions on directors’ compensation, including the payment of retirement bonuses to directors and performance-based compensation, also appear frequently.Footnote 115 It is noteworthy that decisions on the introduction or renewal of a takeover defence have become less common in recent years owing to increased pressure from institutional investors.Footnote 116 Shareholder Proposals

The number of listed companies receiving proposals from shareholders has been steadily increasing since 1986, the year in which the aforementioned White Paper began reporting that number.Footnote 117 The 2018–19 season marked a high point, with sixty-five companies.Footnote 118 Although the raw number is not very high considering that there are nearly 4,000 listed companies in Japan, the value of shareholder proposals as a measure of engagement should not be underestimated, particularly given that some proposals are withdrawn because the proposing shareholder reaches an agreement with management in preliminary discussions using his or her right to propose as leverage. Furthermore, the number of proposals in the 2018–19 season was double that in the 2008–9 season. The marked increase can be attributed in part to the resurgence of hedge fund activists, who made proposals to 16 companies in the 2018–19 season.Footnote 119

Aside from hedge fund activists, proposals are often sponsored by such shareholders as the members of a company’s founding family, retail investors or a group of individuals pursuing an environmental and/or social agenda. The latter two categories benefit from the provision of the Companies Act granting proposal rights to shareholders with 300 or more voting rights.

In the 2018–19 season, thirty-eight companies received proposals concerning an amendment to their articles of incorporation. The topics of the proposed amendments ranged from governance-related issues, such as separation of the CEO and chairperson of the board of directors or disclosure of the CEO’s individual compensation,Footnote 120 to environmental or social issues, such as an objection to nuclear power plants or the promotion of diversity within the board of directors.Footnote 121 It is noteworthy that, as of July 2021, proposals focusing on climate change have just taken off and are not yet so prevalent in Japan.Footnote 122 Other popular subjects for shareholder proposals include the appointment and/or removal of directors (twenty-nine companies in the 2018–19 season), which sometimes involves a serious contest for company control, such as that seen in June 2019 at LIXIL, and an increase in dividends (twenty-two companies in the 2018–19 season), which is a favourite of hedge fund activists.

Although the number of shareholder proposals has been on the rise, the number of adoptions has remained rather low and stable, often totalling fewer than five.Footnote 123 Interestingly, most of the proposals that are adopted concern the appointment and/or dismissal of directors and/or statutory auditors.Footnote 124 A potential reason for the high rate of rejection is that shareholders with a nominal number of shares may be pursuing their own agendas, which are not in line with the interests of shareholders as a whole. In fact, one empirical study found that of the 201 shareholder proposals made to listed companies from July 2012 to June 2016, 88 were proposed by shareholders owning less than one per cent of voting rights. Further, fifty-four of the eighty-eight proposals received less than 10 per cent support, whereas only seven of the seventy-one proposed by shareholders owning 1 per cent or more received such a low level of support.Footnote 125 However, the Japanese government did not take up this academic’s proposal to deny proposal rights to shareholders holding less than 1 per cent of voting rights, as such denial would make environmental, social and governance (ESG)-related proposals more difficult to put forward and would likely invite political criticism.Footnote 126 Turnout Rate

In the 2018–19 season, the ratio of voting rights exercised by shareholders, including those by proxy, mail or e-voting, exceeded 70 per cent in 1,263 out of 1,694 companies.Footnote 127 The ratio of voting rights held by shareholders who physically attended the annual shareholder meeting, in contrast, was 10 per cent or less in almost one-half of the companies (837, or 49.4 per cent).Footnote 128 The implication is that the voting rights exercised by proxy, mail or e-voting up to one day before the meeting determined the outcome in most cases.

Amongst the various types of investors, domestic institutional investors seem to be the most enthusiastic about exercising their voting rights, which is unsurprising as they are expected to do so by the Japanese Stewardship Code.Footnote 129 Overseas investors also tend to vote, but they lag behind domestic institutional investors.Footnote 130 In contrast, the rate of voting in advance is not very high amongst individual retail investors,Footnote 131 which is also not very surprising. Voting Results

In 2010, the Financial Services Agency amended its disclosure ordinance to require listed companies to disclose the percentages of votes for and against every proposal.Footnote 132 The intent of this reform was arguably to strengthen shareholders’ influence even when a management proposal was adopted by bringing their degree of dissatisfaction to light.Footnote 133

Also, in June 2009, a governmental council urged institutional investors to voluntarily disclose how they had voted at the shareholder meetings of their investee companies on an aggregate basis.Footnote 134 Trust banks and investment advisors have been doing so since 2010, and life insurance companies followed suit in 2014 following the adoption of the Japanese Stewardship Code.Footnote 135 Moreover, since 2017, the Japanese Stewardship Code requires institutional investors – on a ‘comply or explain’ basis – to disclose how they have voted on each proposal.Footnote 136 This requirement, which exerts pressure on such investors to vote in a manner that will seem to be free from conflicts of interest, is now complied with by most major Japanese trust banks, insurers and asset management companies.Footnote 137

The most unpopular agenda items amongst institutional investors are the introduction or renewal of a takeover defence and the payment of retirement bonuses to directors.Footnote 138 The appointment of director candidates proposed by the board of directors is also likely to receive a high number of ‘no’ votes, albeit to a lesser extent than the two previous items, as some institutions and major proxy advisors have voting standards requiring them to vote against the re-election of the CEO when return on equity is low or the degree of board independence falls below a certain level.Footnote 139 In contrast, management proposals on the amount of dividends usually receive a high level of support,Footnote 140 as their rejection means no payouts to shareholders unless a shareholder proposal proposing a higher amount is adopted. Using Proxy Advisors

As institutional investors face considerable time constraints owing to the ‘June shareholder meeting’ problem,Footnote 141 it is becoming increasingly popular to consult proxy advisors on how to vote.Footnote 142 Such major global players as Institutional Shareholder Services and Glass Lewis now have a strong presence in Japan.

As of May 2020, there was no regulation on proxy advisors in Japan. However, in response to complaints from investee companies alleging that proxy advisors had issued advice based on an inaccurate understanding of the circumstances of individual companies, the 2020 revision of the Japanese Stewardship Code introduces a separate principle for the providers of services to institutional investors. In particular, it asks proxy advisors to ‘develop appropriate and sufficient human and operational resources’ to provide ‘proxy recommendations based on accurate information on individual companies’; not to rely solely on the information disclosed by companies; to actively exchange views with companies as necessary; and to afford listed companies an opportunity to confirm whether the information upon which proxy advisors have relied is accurate and to provide their clients with the companies’ opinions together with their own recommendations.Footnote 143

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

6.5 Concluding Remarks

Shareholder engagement gained prominence in Japan in the 2010s owing to changes in the share-ownership structure and corporate governance reforms focusing on shareholder interests as the key to overturning two decades of economic stagnation, as well as to the strong shareholder rights already granted by law. A recent empirical study showed that these changes and reforms have made Japanese listed companies more pro-shareholder by increasing payouts, but have not been successful in inducing company management to make more investments,Footnote 150 suggesting that it would be worthwhile to continue pursuing pro-shareholder governance in Japan.Footnote 151 Thus, there is still much to do in the arenas of shareholder engagement and voting.

At the same time, ESG investment is experiencing a gradual rise in Japan, and institutional investors are at least claiming to take ESG issues seriously. However, there could be pushback against the pro-shareholder view, as some Japanese companies have arguably been able to survive the COVID-19 crisis thus far thanks to their rich cash reserves.Footnote 152 Whether these factors change the course of shareholder engagement and voting in Japan remains to be seen.

7 Shareholder Engagement and Voting in Singapore

Wai Yee Wan
7.1 Introduction

Singapore’s legislative and regulatory framework on shareholder engagement and voting are found in the Singapore Companies Act,Footnote 1 as well as in case law. Listed companies have to additionally comply with the Singapore Exchange listing rules (SGX listing rules)Footnote 2 and the Singapore Code on Takeovers and Mergers (Takeover Code hereafter),Footnote 3 which contain provisions on voting in takeover situations. Further, for reasons explained in Section 7.2.1 below, the Singapore Code on Corporate Governance (Corporate Governance Code hereafter)Footnote 4 operates as ‘soft law’. The Companies Act was largely inherited from the UK Companies Act of 1948, although the regulatory framework has undergone significant changes.

In this chapter, I will focus on the shareholder voting and engagement of Singapore-incorporated companies, with particular reference to companies listed on the Singapore Exchange (SGX). In discussing different kinds of shareholder activism, I will extend the study to foreign-incorporated companies listed on the SGX. Other kinds of business vehicles that are listed on the SGX, such as registered business trusts and real estate investment trusts, are beyond the scope of this chapter, as the regulatory framework governing them is quite different from that for corporate vehicles. I will also draw upon empirical evidence in the existing literature in support of my findings.

Section 7.2 first outlines the background of Singapore’s company law and regulatory framework and explains the relationship between directors and shareholders, and then goes on to discuss the ownership structure of Singapore-listed companies. Section 7.3 deals with the legal means of shareholder engagement, shareholder proposal rights, voting, questions and information rights. Section 7.4 discusses the formal and informal scope of shareholder engagement in Singapore, as well as giving examples of contentious and challenging aspects of its company law, namely, the regulation of related-party transactions (RPTs), the delisting of proposals amounting to the expropriation of minority shareholders, dual-class structures and ‘say on pay’. Section 7.5 concludes with the future of shareholder engagement and voting in Singapore.

7.2 General Account of Singapore Company Law and Corporate Governance
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

one who is independent in conduct, character and judgement, and has no relationship with the company, its related corporations, its substantial shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business judgement in the best interests of the company.Footnote 24

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.

Table 7.1 Shareholding structures of listed companies in Singapore

Mean (median) of2009–15
Total number of observations721
Board size7.00 (7)
Number of independent directors3.38 (3)
Proportion of independent directors on the board48.86% (50%)
Size of audit committee3.25 (3)
Shareholding interests of largest beneficial owner (%)40.72% (39.62%)
Source: Data from C. Chen and W. Y. Wan, ‘Transnational Corporate Governance Codes: Lessons from Regulating Related Party Transactions in Hong Kong and Singapore’ (2018) 36 Chinese (Taiwan) Yearbook of International Law and Affairs 56. The numbers in brackets refer to the median.

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 Legal Means of Shareholder Engagement
7.3.1 Formal Powers: Calling for and Attending Meetings How Meetings Are Called

AGMs and EGMs are usually called by boards of directors. Under the SGX listing rules, ordinary resolutions require fourteen clear calendar days’ notice, and special resolutionsFootnote 46 require twenty-one clear calendar days’ notice (clear days exclude the date of notice and the date of the meeting). The Companies Act specifies special notice periods in certain situations such as a proposal to remove the director of a public company, which requires twenty-eight calendar days’ notice.Footnote 47 Practice Guidance 11 of the Corporate Governance Code stipulates that companies should give a longer notice period if the companies concerned have a number of overseas shareholders or if the matters in question are unduly complex.Footnote 48 The Companies Act also provides that shareholders may call for meetings (see Section 7.3.2 below).

Shareholders are entitled to attend a company’s general meetings and to ask questions or speak on any resolution tabled at those meetings.Footnote 49 If they are unable to attend, they can appoint proxies. According to the Companies Act, a proxy need not be a shareholder, and a shareholder can appoint only two proxies (unless he or she is a designated intermediary). If the shareholder is a designated intermediary,Footnote 50 he or she may appoint more than two proxies to attend and vote at the general meeting as long as each proxy is appointed to exercise the rights attached to the different shares held by the shareholder. This provision is important for institutional shareholders, who typically appoint custodian firms to hold their shares, as they can request that the custodians designate them as proxies to attend general meetings.Footnote 51 Remote Meetings

Arising from the COVID-19 pandemic, the COVID 19 (Temporary Measures) 2020 came into force on 7 April 2020.Footnote 52 They allow for subsidiary legislation or orders to be made to provide for alternative meeting arrangements for the conduct of meetings where personal attendance is otherwise required under written law or legal instruments. Pursuant to the COVID 19 (Temporary Measures) (Alternative Arrangements for Meetings for Companies, Variable Capital Companies, Business Trusts, Unit Trusts and Debenture Holders) Order 2020, companies can continue to hold physical meetings as long as they do not breach prevailing safety measures. Alternatively, they can hold meetings remotely for a specified period,Footnote 53 as long as they comply with the checklist issued by the Accounting and Corporate Regulatory Authority (ACRA), which is the regulator for companies, the Monetary Authority of Singapore (MAS, the securities regulator) and the SGX.Footnote 54 The checklist required listed companies to publish notices of general meetings (on SGXNET and the company’s website), specify particulars of the electronic means by which the meeting will be conducted (such as by a live webcast), the arrangements for shareholders to participate in the meeting by electronic means (such as a link to access the audio and/or video feed), whether preregistration is required, how questions are to be submitted ahead of the meeting and how votes are to be cast.Footnote 55 Shareholders must be given an opportunity to ask questions within a reasonable period of time prior to the general meeting.Footnote 56 Unless the listed company’s constitution provides otherwise, shareholders must vote by proxy alone, and only the meeting chair may be appointed as proxy.Footnote 57 If the constitution allows for remote electronic voting, such voting can take place, although the company must ensure that safeguards are incorporated to ensure that only valid votes are counted.Footnote 58 The company must publish the minutes of the meeting, which should record comments or queries relating to the meeting agenda.Footnote 59

At the date of writing, the regulators continue to allow hybrid physical and remote meetings and there is some indication that such arrangements may continue post-COVID 19.Footnote 60 Some corporate governance commentators have expressed concerns, however, that virtual meetings do not permit the free flow of discussion amongst management, advisers and shareholders that occurs in physical meetings,Footnote 61 and it remains to be seen whether such hybrid arrangements will be allowed to continue.

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 below. It should be noted that the Companies Act prohibits Singapore companies from issuing bearer shares and share warrants.Footnote 97

7.4 Shareholder Engagement and Voting in Practice
7.4.1 Voting in Practice Who Votes and What Issues Are Voted on?
How Shareholders Vote in Proposals

Few empirical data is available on the voting records of shareholders at AGMs and EGMs in Singapore. However, a study led by Mak Yuen Teen and Chew Yi Hong on AGMs in 2016 reported that, for the 415 AGMs that had poll results, the average percentage of shares voted was approximately 58 per cent.Footnote 98 For thirty listed companies, less than 20 per cent of shares were voted at the AGM. However, the major limitation of this study was that there was insufficient information to determine whether the shareholders who voted were the existing controlling shareholders or public shareholders, making it difficult to ascertain the level of shareholder engagement in Singapore.

Share Issuance Mandates

The aforementioned studyFootnote 99 found that shareholder proposals relating to a mandate to directors to issue shares received the least shareholder support, with a small number of cases in which shareholder approval of such a mandate was not obtained, which is a rarity in Singapore. Listed companies are permitted under the SGX listing rules to obtain the approval of shareholders for a mandate to issue new shares at directors’ discretion for the period until the next AGM (assuming that the resolution is not revoked before then).Footnote 100 Until 2020, the limit was that the new shares to be issued did not exceed 50 per cent on a pro rata basis and 20 per cent on a non-pro rata basis. This general mandate is very useful for directors in the event that the company needs to raise funds, as they will not need to obtain shareholder approval again.Footnote 101 However, in cases where shares are issued on a non-pro rata basis, existing shareholders are diluted, and thus are likely to be concerned unless good justifications are given. In fact, the influential Institutional Shareholders Services recommends that shareholders vote in favour of a share issuance mandate if the non-pro rata limit is 10 per cent.Footnote 102 Mak and Chew pointed out that five of the issuers in their 2016 study did not manage to get their share issuance mandate approved under the pre-2020 limits. In 2005, three of the issuers did not approve the share issue mandate under those limits. Further, forty-six issuers voluntarily reduced their pro-rata and/or non-pro rata limits. Their study thus suggests that blanket mandates to directors by shareholders in excess of 10 per cent are unlikely to be welcome unless there is engagement by directors, who have to give detailed explanations as to the rationale for seeking such a mandate from shareholders. (In view of COVID-19, and in order to support businesses needing to raise funds on an accelerated basis, the SGX announced on 8 April 2020 that the limit would be temporarily increased to 100 per cent for shares issued on a pro rata basis until 31 December 2021.Footnote 103)

Executive Remuneration

Singapore has not moved towards affording shareholders a ‘say on pay’, although shareholders vote on directors’ fees and employee share option schemes. With respect to the former, section 169 Companies Act requires that ‘emoluments’ in respect of a director’s office, or enhancements thereto, may be provided to directors only if they have been approved by a resolution that is ‘not related to other matters’.Footnote 104 The latter is required under the SGX listing rules.Footnote 105 However, executive renumeration (as distinct from directors’ fees) is not subject to a shareholder vote, and nor is it required to be disclosed mandatorily. Instead, it is subject to voluntary disclosure under the requirements of the Corporate Governance Code. In its review of the Corporate Governance Code, the Corporate Governance Council considered, but ultimately rejected, requiring an advisory vote on ‘say on pay’ on various grounds, including that it was not necessary for Singapore at that point in time and that executive remuneration would be better dealt with via enhanced disclosure on the remuneration structure and its link to value creation at the company.Footnote 106 Such enhancement aimed at improving the disclosure of remuneration to allow shareholders to better engage with directors at AGMs.

Would adopting a ‘say on pay’ policy facilitate more informative disclosures of executive remuneration to shareholders? At first sight, it appears that such a policy would be a blunt tool given that existing controlling shareholders would be incentivized to monitor executive pay and that the evidence on the impact of ‘say on pay’ is mixed. Burns et al. have shown that the overall compensation in a sample of US firms did not change after the implementation of ‘say on pay’, although the components did, with a shift towards incentive payments.Footnote 107 By way of comparison, early evidence in the UK suggests that advisory ‘say on pay’ has limited effects on the excessive remuneration of CEOs.Footnote 108 Changes introduced in the UK in 2013 included a binding vote on remuneration policy.Footnote 109 However, it could be argued that expressly implementing such a policy could at least improve the level of disclosure of executive remuneration and its link to overall value creation at the company.

Shareholder Voting in Conflicted Situations

In situations in which directors have proposed transactions that involve the company and its directors or controlling shareholders, the SGX listing rules intervene specifically. In these RPTs, the concern that regulators have is that directors may engage in tunnelling, and yet such transactions can be beneficial to the company. The principles of the Organisation for Economic Co-operation and Development (OECD) stipulate that ‘[r]elated party transactions should be approved and conducted in a manner that ensures proper management of conflict[s] of interests and protects the interests of the company and the shareholders’.Footnote 110

Singapore’s regulatory framework regulates RPTs using a number of measures, including disclosures and audit committee review and approval (in ensuring that the transactions are at arm’s length and on normal commercial terms). Further, where the transactions concerned exceed 5 per cent of net tangible assets, the SGX listing rules stipulate that they require an opinion from independent financial advisers (IFAs) and are subject to shareholder approval. Only independent shareholders can vote on RPTs, which are classified as ‘interested party transactions’ (IPTs) under the listing rules.Footnote 111 (The definition of IPTs is slightly different from that of RPTs, which is an accounting term.) These measures are similar to those used in the UKFootnote 112 and in Hong Kong.Footnote 113 Transactions with interested persons (including controlling shareholders and directors and their respective associates) are subject to these rules. If there are recurring transactions, companies are permitted to obtain annual mandates from shareholders to approve the transactions, subject to such constraints as an overall cap, and the transactions must take place in the ordinary course of business.Footnote 114 These annual mandates are typically obtained at the company’s AGM.

How significant are RPTs in practice in Singapore? A previous study conducted by myself and others involved a random sample of 25 per cent of the companies listed in Singapore during two periods: 2002–4 and 2009–15. (The difference in the length of the two periods was a result of comparability and data availability. Singapore’s accounting rules underwent significant changes during the 2005–8 period, thus rendering a comparison of RPTs undertaken prior to 2005 and after 2008 meaningless, and annual reports prior to 2002 could not be reliably obtained. Hence, the comparison was made for 2002–4 and the period after 2008.) We found that RPTs continue to be substantial, and that they increased in volume over the two periods.Footnote 115 The mean in 2009–15 (US$111.90 million) was much higher than that in 2002–4 (US$63.31 million), largely owing to some extremely large observations in the later years. However, the data also revealed a large disparity in RPTs, with 19 per cent of the companies reporting no RPTs at all during the 2009–15 period. These results point to the challenges of regulating different types of listed companies. Hence, the solution selected was to mandate that material transactions require the approval of independent shareholders.

However, challenges remain with respect to ensuring that independent shareholders in fact receive relevant information before they vote on proposals to approve RPTs. In theory, IFAs produce a report that is delivered to the independent directors of the company, and then made known to shareholders, which allows the latter to decide how to vote based on both the directors’ recommendations and the IFAs’ opinion. In practice, independent directors adopt IFA recommendations in full when making their own recommendations.Footnote 116 IFAs also face a number of inherent conflicts of interest that tend to favour the issuing of opinions favourable to the existing management. In all but one of the IFA opinions obtained in the aforementioned study (seven in 2002–4 and 123 in 2009–15), independent directors were advised to recommend that shareholders vote in favour of the IPT resolution. In the sole exception, independent directors were advised only to caution shareholders to read and carefully consider the IPT resolution but did not explicitly recommend dissent.Footnote 117

There is little comprehensive empirical evidence available to ascertain how shareholders vote on IPT resolutions. In Mak and Chew’s study, none of the resolutions relating to IPTs was rejected by shareholders in 2016. Whether that outcome indicates that the current situation is satisfactory to investors is unclear. One possible explanation is that directors and audit committees are careful in their explanations to independent shareholders about the rationale for such transactions. However, it should be pointed out that a number of fraud cases in recent years relate to the non-disclosure or inadequate disclosure of RPTs and IPTs, which may indicate that disclosure problems persist.Footnote 118

In addition to IPTs, there is another kind of transaction that does not appear to be an IPT (as it does not involve companies transacting with controlling shareholders) but is regulated as if it were, that is, a transaction in which the company is seeking to delist itself from the SGX. Delisting proposals are carefully scrutinized by the SGX, as they may amount to a de facto compulsory acquisition of shares by controlling shareholders.Footnote 119 Prior to July 2019, controlling shareholders seeking a buyout could choose to first propose that the company be delisted and then make an exit offer thereafter.Footnote 120 The rationale was that once the company had been delisted, shareholders would be motivated to accept the exit offer. In the delisting proposal put to a vote, the approval threshold, as it then applied, was 75 per cent approval, with no more than 10 per cent of shareholders objecting. In practice, delisting proposals generally passed because controlling shareholders could and often did vote in favour. Whilst the SGX required that the exit offer be reasonable, IFAs in practice readily offered the opinion that offers were reasonable even though the price was at a significant discount to the net asset value of the company.Footnote 121 Recent research also suggests that minority shareholders are worse off in terms of the premium that they obtain for their shares compared with other forms of buyout.Footnote 122 In 2019, after lengthy consultation,Footnote 123 the SGX amended the rules to further strengthen the protection of minority shareholders.Footnote 124 Delisting offers are now effectively treated as IPTs, meaning that the delisting proposal must be approved by 75 per cent of the shares held by independent shareholders present and voting. The controlling shareholder making the bid and the parties in concert cannot vote. In addition, the offer must not only be reasonable; it must also be fair. Shareholder Proposals and Proxy Fights

I have outlined the methods that shareholders can use to directly call for directors to convene a shareholder meeting to vote on a proposal. Given the dominance in Singapore of companies with concentrated shareholdings, conventional theory suggests that these methods should be rarely used, as the presence of a controlling shareholder would make it difficult if not impossible for a minority shareholder to succeed. In this section, I present an account of research on shareholder requisitions in practice, which occur despite the largely concentrated shareholdings amongst listed companies. I also argue that extralegal considerations are important in encouraging minority shareholders to act.

In prior work,Footnote 125 my co-authors and I examined a database of shareholder requisition filings made during the 2008–15 period for companies listed on the SGX. My analysis focused on complaints linked to governance failures, that is, shareholder complaints that directors were in breach of their duties or involved in fraud investigations. A total of twenty-five requisitions were filed, of which nine were governance related. Table 7.2 provides further details. In unreported results, it was found that the shareholdings of the requisitioning shareholders ranged from 11.1–25 per cent and that in five of the nine cases, the requisitioning shareholders were not the largest shareholders (suggesting that they would fail). Thus, even though the number is small, there are shareholders who file requisitions even though they are unlikely to succeed, a finding suggesting that shareholders do so in order to criticize the decision-making of directors or highlight their less-than-exemplary behaviour. This finding contrasts with the findings of other scholars suggesting the lack of an activist culture amongst shareholders in Singapore.Footnote 126

Table 7.2 Shareholder requisitions filed with SGX

Number of requisitionsOf which are governance related; i.e. shareholders complained that the directors were in breach of their duties or involved in fraud investigations
Source: W. Y. Wan, C. Chen and S. H. Goo, ‘Public and Private Enforcement of Corporate and Securities Laws: An Empirical Comparison of Hong Kong and Singapore’ (2019) 20 European Business Organization Law Review 319.

A more recent example of a successful shareholder requisition involved the Magnus Energy Group. In 2019, a group of minority shareholders, frustrated with the company’s performance and the depressed share price of the company, had gathered enough votes to reject all of the resolutions tabled before the AGM, including resolutions to adopt the company’s financial statements, to reappoint three of the directors, to grant a share issuance mandate, to pay the directors’ fees and to appoint auditors.Footnote 127 Several minority shareholders holding at least 10 per cent of shares in aggregate then proceeded to requisition the shareholder meeting relating to the appointment of their own nominated directors, and they were successful in obtaining enough votes to pass their own resolutions.Footnote 128 Who Is Involved in Shareholder Activism?

In this section, I detail several recent cases of high-profile shareholder activism in Singapore. In addition to the foregoing case involving the Magnus Energy Group, two further examples are given here. The first is Noble Group Ltd. Noble was a Bermuda-incorporated company that was listed on the SGX. It was a blue-chip commodity giant in Asia in its heyday. In 2015, a report was issued questioning the company’s financial reporting and highlighting a number of irregularities.Footnote 129 Shortly thereafter, Noble ran into severe financial difficulties. In 2018, the company entered into a debt restructuring plan that would dilute the existing shareholders to just 10 per cent while management would receive 20 per cent of the restructured enterprise. In the event that shareholders voted against the plan, Noble would complete the restructuring by selling its assets to a new company, and the shareholders who voted in favour would receive shares in the new restructured enterprise, whereas those who voted against would receive none. Shareholders were outraged, particularly given that management was alleged to have caused the company’s failure. The unfairness of the provision that only supportive shareholders would receive shares was singled out for particular criticism.Footnote 130

One of the minority shareholders, Goldilocks Investments Co., filed an application for a declaration that it was entitled to propose directors for election to Noble’s board and an injunction to stop the company from holding its AGM.Footnote 131 However, at the time of the injunction, Goldilocks held 8.1 per cent of its shares through a nominee company, which in turn held the shares through the Central Depository (CDP).Footnote 132 A dispute arose as to whether Goldilocks had standing to file such an application as it did not hold the shares directly with the CDP. The court granted the interim injunction, giving Goldilocks time to register the shares directly.Footnote 133 Ultimately, in June 2018, a revised restructuring arrangement was proposed that gave shareholders 20 per cent of the restructured enterprise, with management receiving 10 per cent.Footnote 134 In addition, Goldilocks was to have a board seat in the restructured entity.Footnote 135 The arrangement was approved, and the restructuring was completed at the end of 2018.Footnote 136

The second example is the case of Hyflux Ltd., a Singapore company which operated water treatment plants around the world. Hyflux ran into severe financial difficulties and entered into a restructuring agreement with Salim Medco, which would have resulted in a deep haircut for preference shareholders and the holders of perpetual capital securities. Accordingly, these two groups protested against the arrangement, prompting Singapore’s leading investor group, the Securities Investors Association (Singapore) (SIAS) to become involved. Amongst other things, SIAS questioned the board on its accountabilityFootnote 137 and submitted an alternative proposal. Hyflux responded by agreeing to change the terms to ‘balance the competing legal and commercial interests’,Footnote 138 and eventually declared that it would not go ahead with the agreement with Salim Medco.Footnote 139 At the time of writing, the restructuring did not proceed and the company is now in liquidation.

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

7.5 Concluding Remarks

In reviewing the extent of shareholder voting and empowerment in the Companies Act, we can see that shareholders have been granted considerable formal powers, including the power to appoint and remove a company’s directors and requisition meetings. Whilst Singapore has not adopted a ‘say on pay’ advisory or binding vote, which is probably unnecessary in controlled companies, an advisory vote (rather than a binding vote) has the merits of improving the disclosure of executive remuneration and allowing shareholders to assess the performance of management relative to its remuneration. The SGX listing rules also ensure that a company can enter into (material) conflicted transactions with its directors or controlling shareholders only with the approval of independent shareholders. Similarly, the Takeover Code ensures that only independent shareholders can vote at the scheme meeting concerning conflicted transactions where the acquirer or parties in concert with it hold shares in the company.

Owing to concentrated voting structures, there are limits to how effectively these rights can be exercised in practice given the presence of controlling shareholders. However, this chapter demonstrates that in the exercise of both formal and informal powers, there are limited pockets of shareholder activism that occur despite the presence of controlling shareholders, some of which has resulted in positive outcomes for minority shareholders. Nevertheless, litigation as a means to enforce shareholder rights is rare.

There are two developments that are likely to prove important in the near future. First, following the introduction of the DCS framework, largely in response to the perceived market need to remain competitive, it remains to be seen whether that framework will weaken the framework for shareholder engagement and voting in practice. Second, the COVID-19 pandemic has resulted in changes to the regulatory framework to permit remote meetings, and it remains to be seen whether these changes will be made permanent and how remote meetings will affect the level of shareholder voting and engagement.

8 Shareholder Engagement and Voting in South Korea

Seung Young Yoon
8.1 Introduction: Brief History of Shareholder Engagement in Korea

Shareholder engagement in Korea began in the late 1990s with minority shareholder engagement campaigns driven by non-governmental organizations (NGOs), such as the People’s Solidarity for Participatory Democracy (PSPD).Footnote 1 The PSPD filed a suit to revoke a shareholder resolution against Cheil Bank in 1997, and a shareholder derivative lawsuit against Samsung Electronics in 1998. Since then, the PSPD has initiated several shareholder campaigns, which included shareholder movements against Samsung Electronics and SK Telecom.Footnote 2 These constituted the first generation of shareholder engagement, which was the result of a growing number of activist shareholders in Korea. These efforts of shareholder engagement helped to improve corporate governance and maximize shareholder value.Footnote 3

The second generation of shareholder engagement in Korea was driven by foreign funds. Shareholder engagement became more active, starting with the Tiger Fund against SK Telecom in 1999,Footnote 4 followed by the Sovereign Asset Management against SK in 2003, Hermes Investment Management against Samsung C&T in 2004 and Carl Icahn and Steel Partners against Korea Tobacco & Ginseng Corporation (KT&G) in 2006. In 2015, US hedge fund activist Elliott Management opposed the merger of Samsung C&T and Cheil Industries and filed a preliminary lawsuit (Samsung C&T v. Elliot).Footnote 5

Domestic activist funds and institutional investors have recently been creating cases of shareholder engagement in Korea. The National Pension Service (NPS), one of Korea’s largest institutional investors, has played a particularly important role in shareholder engagement in Korea. Following the adoption of its own stewardship code, the Principles on Stewardship of the NPS, in July 2018, the NPS created a set of guidelines aimed at promoting active shareholder engagement to ensure responsible corporate management. According to these guidelines, the NPS allows itself to exercise shareholder rights against its investee companies more actively, pushing them to increase dividends and improve their corporate governance. Other domestic private equity funds are also becoming more active in practicing their rights as shareholders. This trend is expected to continue, as private equity funds are deregulated. For instance, domestic activist fund Korea Corporate Governance Improvement Fund (KCGI) acquired 16 per cent shares in Hanjin Kal Corp (the holding company of Hanjin Group) and 10 per cent shares in Hanjin (an affiliate company). KCGI subsequently called for Hanjin Kal to improve corporate governance, by highlighting well-publicized wrongdoings by the Cho family – the largest shareholder of Hanjin Group – including alleged criminal activities and workplace harassment cases.

Currently, the Korean government has been reinforcing laws and regulations to improve transparency in the investment structures of large business groups as well as their corporate management, in an effort to strengthen shareholders’ rights in individual companies. Shareholder engagement has been on the rise, demanding improved corporate governance, financial structures, corporate social responsibilities and shareholder returns. In this changing landscape of the regulatory environment and capital market, the notion of maintaining effective communication and constructive relationships with domestic and foreign shareholders, including institutional and private investors in the capital market, is gaining importance.Footnote 6

This chapter aims to review the engagement and voting behaviour of shareholders in Korea and their position in Korean corporate law. Section 8.1 provides general information on the Korean corporate law framework and the role of the board and shareholders. Section 8.2 reviews the legal means of shareholder engagement in Korea. Further, this research focuses on shareholder engagement in the general meeting of shareholders. Section 8.3 reviews the practice of shareholder engagement and voting in Korea on the basis of recent statistics. Finally, Section 8.4 concludes with some closing remarks.

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). Korean Corporate Board

Companies must have a board of directors. However, a company with a total capital of less than one billion KRW (a small-scale company) can elect to have one or two directors if there is no board. Although there is no legal limit on the maximum number of seats on a board, the size can be fixed in the company’s articles of incorporation (AOI). Vacancies or newly created seats must be filled at the general meeting of shareholders. In the event of a vacancy, the director who previously held the vacant seat continues to have the rights and obligations of a director until a replacement has been elected.

The board’s primary legal responsibilities comprise the making of key decisions on issues of corporate governance and company business. These include transactions involving any disposition or transfer of material assets, borrowing of significant amounts of money, appointment or dismissal of managers and the establishment, change or closure of branch offices (Article 392 of the KCC). In addition, the KCC vests certain powers with the board, including calling general meetings of shareholders,Footnote 8 approving competition with the company by directors, dealing with unethical or self-dealing transactions, approving transactions between listed companies and their largest shareholders, issuing bonds and paying interim dividends (e.g., Articles 362, 397 and 398 of the KCC) Although company shareholders elect members of the board, the board (and each of its members) represent and owe legal duties solely to the company.

It is mandatory for listed companies whose total assets are more than two trillion KRW at the end of the fiscal year to establish an audit committee led by outside directors who make up at least two-thirds of the audit committee with at least one member who is an accountant or financial professional (Article 542–11 (1) of the KCC). Listed companies are also required to set up a committee responsible for recommending candidates for outside directors with outside directors representing a majority of this committee (Article 542–8 (4) of the KCC). Only candidates who have been recommended by the recommendation committee may be appointed by shareholders at a general meeting of shareholders (Article 542–8 (5) of the KCC).

As for the audit committee, its function is similar to that of a statutory auditor (i.e., supervision of directors and company accounting). Apart from the committees discussed above, a company may (but is not obliged to) establish other board committees consisting of at least two directors varying in terms of their role, authority and function as contemplated in the AOI or any resolution of the board of directors.

The board must appoint one or more of its members to be representative directors unless the AOI gives this right to shareholders. Representative directors execute board decisions and have the authority to represent the company. Boards can appoint one or more executive officers in lieu of chief inside directors if those companies adopt an executive director system. Directors can serve concurrently as executive officers. Subject to board supervision, executive officers are authorized to manage the company’s affairs and make decisions on matters mandated by the AOI or the board. If there are two or more executive officers, the board must also appoint a chief executive officer to represent the company.

Auditors must attend board meetings and present their opinions. Executive officers are required to report to the board at least once every quarter or when requested by the board. When deemed necessary, an executive officer may submit a document requesting a board meeting to a director authorized to convene board meetings. The document should state the reason for the meeting, as well as the meeting agenda. Outside Directors

The outside director system was introduced in 1998 in Korea. It was part of the government’s broader Corporate Debt Restructuring (a.k.a. ‘Work-Out’) and corporate governance improvement programmes that aimed at restoring the competitiveness of the Korean corporate sector in the immediate aftermath of the 1997 Asian financial crisis.Footnote 9 Because the companies targeted by the mandatory outside director system were initially limited to those listed on the Korean Composite Stock Price Index (KOSPI) market, mandatory requirements for outside directors were originally added to the KOSPI listing rules. In 2001, this mandatory scheme was further expanded to include Korea Securities Dealers Automated Quotations (KOSDAQ) companies and, subsequently, the relevant rules were codified into Korea’s securities exchange law. Eventually, the mandatory outside director programme was written into the Commercial Act of 2009. Outside directors are tasked with raising independent voices based on their expertise in the required areas of business operation.

Except for the requirement for outside directors, there are no additional legal requirements relating to the independence of directors unless otherwise provided for in the AOI.Footnote 10 For listed companies, a person can be disqualified from acting as an outside director in prescribed circumstances. Such person includes the shareholder who can exercise actual influence over the company’s major business affairs. The recently revised enforcement decrees of the KCC and FISCMA have limited the term of an outside director in a listed company to be six years, or nine years when a subsidiary is included (for instance, Article 34 (5)(7) of the Enforcement Decree of the KCC).

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 Legal Means of Shareholder Engagement
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)).

Table 8.1 Concentration of 2019 AGMs in Korea: number of AGMs (ratio %)

February4th-1 (0.1%)---1 (0.1%)
5th-1 (0.1%)-4 (0.5%)-5 (0.7%)
March2nd----2 (0.3%)2 (0.3%)
3rd-1 (0.1%)4 (0.5%)7 (0.9%)71 (9.4%)83 (11%)
4th7 (0.9%)2 (0.3%)11 (1.5%)35 (4.6%)189 (25%)244 (32.3%)
5th24 (3.2%)56 (7.4%)115 (15.2%)55 (7.3%)171 (22.6%)421 (55.7%)
Total31 (4.1%)61 (8.1%)130 (17.2%)101 (13.4%)433 (57.3%)756 (100%)
Source: Korean Listed Companies Association 2019 KOSPI AGM White Book (2019).

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 Reform of the Provisions on Minority Shareholders’ Rights

To empower minority public shareholders in listed companies, the KCC has provided for lower shareholding ratio requirements for shareholder rights in the companies listed on the Korea Exchange (the KRX) (‘general provisions’), relative to non-listed companies. To prevent abuse of these enabling provisions, the KCC generally attaches to them a minimum holding period requirement (e.g., six months) (‘special provisions’). Until recently, ambiguity existed as to whether minority shareholders of a KRX-listed company may exercise their right when they satisfy KCC’s general requirements for shareholder rights (particularly in respect of shareholding ratios) but not the special provisions (particularly the holding period) applicable to listed companies. There was a debate as to the proper interpretation of the law and there was also a divergence among the lower courts’ decisions on this very issue.Footnote 21

The recent amendment to the KCC, which became effective on 29 December 2020, with respect to minority shareholder rights resolved such ambiguity. The amendment has allowed the minority shareholders’ rights to be exercised as long as the requirements of either the general provisions or the special provisions are met, subject to each of such requirements (Article 542–6 (10) of the KCC).Footnote 22  The amendment affirmed that one may choose between minority shareholder rights under the special provisions for listed companies and those under the general provisions.  In other words, if minority shareholders of listed companies meet the requirements under the general provisions, they may exercise their minority shareholder rights even if they do not satisfy the six-month shareholding period requirement, and vice versa, making it easier for them to exercise their rights.Footnote 23

Table 8.2 2018–19 AGMs and EGMs: by month

Source: KLCA 2019 KOSPI AGM White Book (2019). Shareholder Right to Call a Meeting

An extraordinary general meeting (EGM) may be convened whenever necessary (Article 365 (3) of the KCC). A minority shareholder holding at least 1.5 per cent of the total number of issued and outstanding shares of a listed company for at least six months (3 per cent or more without a six-month holding period for non-listed companies) may exercise its right to request convocation of a general meeting of shareholders by submitting a written statement or electronic document (Article 542–6 (1) of the KCC). The shareholder(s) must specify in writing the reason for convening the EGM and its purpose. If procedures to convene an EGM are not taken promptly after the request, the shareholder(s) may convene such meetings with the permission of law courts. In such cases, the chairperson of the EGM may be appointed by the court upon request of any interested person or ex officio member (Article 366 (2) of the KCC). Shareholder Proposal Rights

A shareholder holding at least 1 per cent of the total number of issued and outstanding voting shares of a listed company (0.5 per cent if the company’s paid-in capital is no less than 100 billion won, and 3 per cent or more without a six-month holding period for non-listed companies) for at least six months may propose agendas for an AGM by submitting a written statement or electronic document at least six weeks prior to the meeting (Article 542–6 (2) of the KCC). When a shareholder proposes an agenda, the board of directors cannot refuse and must present it at the general meeting of shareholders, unless presenting the proposed agenda would violate any applicable laws (including certain cases described in the presidential decrees of the KCC) or the AOI of the company (Article 363–2(3) of the KCC). Furthermore, where an agenda proposed by a shareholder is presented at a general meeting of shareholders, the shareholder must be given an opportunity to explain the agenda during the meeting, if so requested by the shareholder (Article 363–2(3) of the KCC). Right to File a Derivative Suit

If a director violates any applicable laws or the company’s AOI, or neglects his or her duties by willful misconduct or negligence, a shareholder holding 0.01 per cent or more of the total outstanding shares of a listed company for at least six months (1 per cent or more without a six-month holding period for non-listed companies) may request, in writing, that the company file a lawsuit against the director for damages caused (Article 542–6 (1) of the KCC). If the company does not file the lawsuit within thirty days of the date of the shareholders’ request, the shareholder can file the lawsuit on behalf of the company (Article 403 (2) of the KCC).

It is worth noting that, prior to the recent amendment to the KCC in 2020, the KCC did not provide for legal means by which the parent company’s shareholders could hold the subsidiary’s director accountable for causing harm to the parent company or its shareholders.Footnote 24 The amended KCC establishes a legal means for shareholders of a parent company who own more than a certain percentage of shares to file a shareholder derivative claim against a director of the subsidiary for causing damage to the subsidiary by neglecting his or her duties (Articles 406–2 and 542–6 of the KCC). With the codification of multistep derivative actions, the directors of a subsidiary may be sued by the shareholders of the parent company. It has been suggested that such threat of a multilevel derivative claim in itself could significantly hinder the subsidiary’s directors from performing their duties, potentially causing them to become passive or intimidated in performing their duties.Footnote 25

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 Shareholder Engagement and Voting In Practice
8.3.1 Voting in Practice How to Vote

Shareholders have the right to attend general meetings, ask questions, express their opinions and vote. Shareholders have one vote for each share (Article 369 (1) of the KCC). The company does not have a vote for its own shares. Shareholders with more than one share may vote differently for each share (Article 368–2 (1) of the KCC). Shareholders may exercise their rights either by attending the general meeting in person or through an agent. The KCC has no requirement as to who may be an agent. The company may, however, stipulate certain requirements in the AOI (for instance, only company shareholders may act as agents).Footnote 35

Resolutions are adopted if they are supported by a majority of votes of shareholders present at the general meeting who represent more than a quarter of the company’s total outstanding shares (Article 368 (1) of the KCC). In cases such as the transfer of all or a material portion of the company’s business, removal of directors and statutory auditors, amendments to the AOI, capital reduction, mergers and spinoffs, dissolution or continuance of the company and granting of stock options, more than two-thirds of the votes of the shareholders present representing more than a third of the total outstanding shares are needed.Footnote 36 The requirement is mandatory and may not be altered by the AOI. The consent of all shareholders is needed to discharge the liability of directors in cases other than a conflict of interest (Article 400 (1)). Vote by Indirect Means

Under the KCC, shareholders may cast votes in writing or electronically in lieu of attending in person the AGM so as to meet the minimum requirements needed to pass AGM resolutions or to prevent a large number of resignations (Articles 368–3 and 368–4 of the KCC). Write-in voting is permitted provided that it is stipulated in the AOI, and electronic voting may be adopted only by way of a resolution of the board of directors. According to a KLCA report, 80 of the 742 KOSPI-indexed companies had write-in voting rights stipulated in their AOIs in 2017.Footnote 37 An analysis of 321 respondents further revealed that 21 KOSPI companies had shareholders exercise their write-in voting rights in 2019.Footnote 38 Electronic Voting

Electronic voting is one area of corporate governance reforms that Korea has undertaken successfully in recent years. Electronic voting has been allowed since the amendment to the KCC in 2011. The 2011 legislative reform was intended to address the concentration of AGMs in Korean listed companies, as discussed above. As Korean listed companies are required by law to submit their annual reports ninety days after the end of the fiscal year for approval by the shareholders’ meeting, companies whose fiscal year ends on 31 December usually hold their meetings in late March, typically in a brief time window of one to two weeks, if not on the same day. Electronic voting allows shareholders to vote in respect of multiple investee companies holding the AGMs on the same day or within a short time span. Few companies, however, voluntarily adopted electronic voting as it could threaten to dilute the voting power of the controlling shareholders and they would potentially have their proposals rejected at the shareholders’ meeting. Indeed, by 2014, no Korean listed companies had adopted electronic voting, with the exception of the companies headquartered overseas and special purpose companies.

Interestingly, the Korea Securities Depository (KSD), a public agency, developed an e-voting platform in 2010. The platform was initially intended to enable low-cost exercise of voting rights by domestic retail shareholders, and to incentivize the exercise of their rights. The e-voting platform had, however, a perhaps unintended effect of enabling a voting practice known as ‘shadow voting’,Footnote 39 under which the KSD by default voted on behalf of absent shareholders. The practice had the effect of ensuring a quorum for the meeting, making it easier for management to obtain a majority vote.

In order to curtail the practice of shadow voting, the FSC amended in December 2014 the presidential Decree of Capital Markets Act, granting listed firms a three-year grace period to phase out shadow voting.Footnote 40 This led to 101 KOSPI-listed companies to adopt electronic voting in 2015. The growth trend has continued. By February 2018, 57 per cent of all 2,240 companies listed on the KOSPI and KOSDAQ had embraced electronic voting.Footnote 41 Interestingly, larger cap companies tended to participate less – only 16 per cent of the top 100 firms by market cap had e-voting systems compared to an average of 45 per cent for all 789 KOSPI companies. The number of companies using electronic voting in 2018 dropped to 483 from 688 in 2017, while the number of shareholders using the electronic voting system increased to 22,569 from 10,938 in 2017 (see Table 8.3).Footnote 42 According to an analysis of 321 respondents among KOSPI companies, 89 companies adopted and conducted electronic voting in 2019.Footnote 43 However, the share of electronic voting for fifty-two companies was more than 1 per cent but less than 10 per cent, indicating a very low proportion.Footnote 44

Table 8.3 The use of electronic voting at shareholders’ meetings (2017–18)

Annual shareholder meeting of firms whose fiscal year end is December
ContentNo. of companiesNo. of shareholdersNo. of companiesNo. of shareholders
Source: KSD Press Release, ‘The Number of E-Voting Shareholders Increased’ (22 March 2018).

On the other hand, Korean listed companies seemed to have been keen to make use of the three-year grace period before shadow voting was formally abolished in 2018. In practice, requests could be made for a continuation of shadow voting practice prior to 2018. Such requests from KOSPI and KOSDAQ listed companies increased from 455 to 641 (40.9 per cent) during the grace period (2015 to 2016) (Table 8.4).Footnote 45

Table 8.4 The use of shadow voting (2015–16)

Fiscal YearRequesting CompaniesCompared to the previous yearRequesting CompaniesCompared to the previous yearRequesting CompaniesCompared to the previous year
Source: KSD, 2016 (December Fiscal Year End) Listed Companies’ Shadow Voting Requesting Status, Press Release (April 2017).

The 2020 amendment to the KCC relaxed requirements by allowing a resolution of general meeting of shareholders via electronic voting by doing away with the requirement of affirmative votes representing a quarter of the total number of issued and outstanding shares and by simply providing that a resolution to appoint auditors and audit committee members can be adopted with a majority of the voting rights of the shareholders present at the general meeting of shareholders (Articles 409 (3) and 542–12 (8) of the KCC).

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).

Table 8.5 Agenda items of the general meetings in 2019

AgendaNo. of CompaniesRatioNo. of CompaniesRatioNo. of CompaniesRatio
Director Compensation7629932.676586.4
Appointing Director662868271.374484.1
Amendments to AOI70291.23631.373883.4
  • Financial Statement

  • Approval

Auditor Compensation38850.4--38843.8
  • Appointing Audit

  • Committee

Appointing Auditor13918.1119.615016.9
  • Executive Retirement

  • Package

Stock Option425.532.6455.1
Stock Split8121.7101.1
Reduction of Capital70.910.980.9
Decrease of Reserves50.621.770.8
  • Approving Merger

  • Agreement

  • Approval for Agreement

  • for Merger after Division

  • Approval for Transfer of

  • Business

Removal of Director--10.910.1
# of Companies770100115100885100
Source: KLCA 2019 KOSPI AGM White Book (2019).

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

Table 8.6 Rejected agenda items according to shareholding levels

Largest Shareholder Holding Ratio0~10%10~20%20~30%30~40%40~50%50~60%60~70%Total
‘General Resolution (For Auditor/Audit Committee)’
Combine 3%111163213156
Individual 3%00001102
Sub Total111163224158
‘Special Resolution (Ex- Auditor/ Audit Committee)’
Financial Statements Approval40000004
Appointing Directors33000006
Appointing Directors931000013
Appointing Directors731000011
Sub Total2493000036
Special Resolution
AOI Amendments563100015
Stock Option01100002
Sub Total574100017
Source: KCGS Report, ‘Analysis of Listed Companies’ AGM Agenda in the Most Recent 3 Years’ (2018) vol. 8. Shareholder Proposals

In terms of the 2019 AGMs, eleven companies (3.4 per cent) responded that they had a shareholder proposal on the agenda, among which eight proposals were for appointing directors and three proposals for dividend-related items.Footnote 48 In terms of the proponents of the shareholder proposals, eight out of the eleven were initiated by individual investors, while the rest (three) were proposed by domestic and foreign institutional investors.Footnote 49 The number of agenda items rejected at AGMs has been increasingFootnote 50 with shareholder proposals experiencing a high rate of rejection. Dividend agenda items are all shareholder proposals and have the highest rejection rate.Footnote 51

According to a recent KCGS report, the number of shareholder proposals put forward for voting has risen during the 2018–21 period, while the number of the targeted companies has remained stable (Table 8.7).Footnote 52 During this period, there were shareholder proposals that were put forward for four years in a row at two companies, accounting for 1.7 per cent of the total.Footnote 53 The same shareholder proposals were submitted three times at three corporations (around 2.5 per cent) and twice at seventeen firms (about 14.4 per cent).Footnote 54

Table 8.7 Number of companies receiving shareholder proposals and number of agenda items: AGMs and EGMs combined

Number of Companies Involved30313334118
KOSPI Companies17816849
KOSDAQ Companies1323171669
Number of Agenda Items10712010789423
Source: KCGS, 2021 AGM Review: Shareholder Proposals and Company Reponses (May 2021).

The same KCGS report suggests that the majority of the proposals aimed at protecting the rights and interests of shareholders or at enhancing shareholder value (Table 8.8). It was uncommon, however, that the agendas were actually supported at the shareholders’ meeting.Footnote 55 About 10.9 per cent of shareholder proposals were approved. Only twenty-three agenda items have actually led to meaningful changes except in special cases where voting agendas are passed at once due to management disputes.Footnote 56

Table 8.8 Agenda items in shareholder proposals (2018–21)

Types of agenda items (number)Total
  • Dividend and

  • treasury shares

Expanded cash dividend (48), higher payout ratio (1), stock dividend (4), unequal dividend (3), dividend in treasury shares (1), repurchase or cancellation of treasury shares (12)69
Amendment of AOIsAdoption of interim or quarterly dividend (6), stock split (11), creation of board committees (11), repeal of golden parachute clause (3), deletion of supermajority system (4), reinforcing director qualifications (5), adoption of cumulative voting (6), adoption of electronic voting (4), etc.78
Election of directorsElection of inside directors (81), election of outside directors (92), election of non-independent non-executive directors (7), election of auditors (audit committee members) (67), dismissal of directors (auditors) (6)253
  • Director

  • Remuneration Cap

Reduction in director remuneration cap (10), increasing auditor remuneration ceiling (5), reduction in auditor remuneration cap (1)16
OthersCapital reduction (4), reduced liability of directors (1), capital reduction with consideration (1), etc.7
Source: KCGS, 2021 AGM Review: Shareholder Proposals and Company Reponses (May 2021). Proxy Solicitation

A person who intends to solicit a shareholder to exercise voting rights by proxy must deliver the proxy form and reference documents to that shareholder (Article 152 of the FSCMA). Since the abolition of shadow voting, companies have used the proxy solicitation to secure votes. According to a KLCA report, 459 KOSPI companies exercised proxy solicitations during the surveyed period (1 April 2018–31 March 2019)Footnote 57 and only 12.5 per cent used proxy agencies. In terms of the scope, 86.3 per cent of the companies solicited all of its shareholders and 98 per cent of solicitations were initiated to secure management decisions. See Table 8.9.

Table 8.9 Proxy solicitations (2017–18)

FY 2018FY 2017
TypesNo. of CompaniesRatioNo. of CompaniesRatio
Companies reporting proxy solicitations15247.415846.3
Companies not reporting proxy solicitations16952.618353.7
No Answer14
Source: KCGS Report, ‘Analysis of Listed Companies’ AGM Agenda Items in the Most Recent 3 Years’ (2018) vol. 8.
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).

Table 8.10 NPS voting records (2015–April 2019)

YearNo. of Investee CompaniesNo. of AGMsNo. of Agenda itemsForAgainstN/A
2019 (January – April)9976362,9872,374 (79.5%)610 (20.4%)3 (0.1%)
20187647682,8642,309 (80.6%)539 (18.8%)16 (0.6%)
20177727082,8992,519 (86.9%)373 (12.9%)7 (0.2%)
20167537963,0102,692 (89.4%)303 (10.1%)15 (0.5%)
20157917492,8362,542 (89.6%)287 (10.1%)7 (0.3%)
Source: NPS Official Website.

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 Foreign Activist Funds

In March 2018, Hyundai Mobis and Hyundai Glovis, both companies affiliated to the Hyundai Motor Group, announced their plan for a spin-off merger. Elliott Management Corporation (‘Elliott’) publicly objected to such plan on the basis that the spin-off merger ratio was not fair for the shareholders of Hyundai Mobis. Elliott proposed an alternative plan to establish a holding company through a different spin-off merger among Hyundai Mobis, Hyundai Motor and Kia Motors. Following the objection from Elliott and a number of proxy advisors (including KCGS, ISS and Glass Lewis), Hyundai Mobis and Hyundai Glovis voluntarily withdrew their planned spin-off merger.

In February 2019, Elliott further submitted a shareholder proposal. The proposal requested (1) an increase in dividend payouts; (2) the establishment of a compensation committee and a transparent management committee under the board; and (3) the appointment of three outside directors and audit committee members with a multinational background.Footnote 65 The activist fund also filed a similar proposal targeting the annual meeting of Hyundai Mobis in the same year. On 29 March 2019, except for the establishment of compensation and management transparency committees, which was not opposed by Hyundai Motor Company and Hyundai Mobis, all of these agenda items were voted down at the shareholders’ meetings of the two companies.Footnote 66 However, in what appears to be a response to this shareholder activism campaign, Hyundai Motor Company adopted a series of shareholder-friendly measures. These included: (1) to allow domestic and foreign public shareholders to nominate an outside director responsible for shareholder rights protection with effect from 2019; (2) to expand the size of the board and to increase diversity and competence in the board; and (3) to reallocate the position of the outside director nomination committee chair to an outside director from an insider director.Footnote 67 Domestic Activist Funds

At the end of 2018, KCGI, a Korean activist fund, became the second largest shareholder of Hanjin KAL, a holding company of Hanjin Group which owns Korean Air Lines. The KCGI subsequently called for improved corporate governance of Hanjin KAL, highlighting well-publicized wrongdoings by the Cho family, the largest shareholder of Hanjin Group.Footnote 68 At the AGM of Hanjin Kal held in March 2019, the KCGI submitted a shareholder proposal to appoint new outside directors and an auditor and to reduce the ceiling for director remuneration, among others.Footnote 69 The NPS also sent a public letter and asked for private dialogue, citing the controlling shareholder family’s ethics issues and consequent degradation of the firm value. For the March 2019 annual meeting, the NPS proposed that the company amend its AOI and introduce stricter qualifications for directors.Footnote 70

Such proposals, however, were not put forward for consideration at the AGM because the court cited Hanjin Kal’s petition for opposition to the provisional injunction request for an AGM proposal filed by the KCGI. Although the NPS’s proposal was also voted down, it remained a successful engagement campaign, as it supposedly motivated active shareholder voting, which removed then-chairman of Hanjin Group Yang-Ho Cho from inside directorship at Korea Air amid mounting negative public sentiment.

In the next AGM held in March 2020, a bitterly contested proxy fight was waged between the board and the three-party alliance participated in by the KCGI, Bando E&C and former VP Hyun-Ah Cho over the appointment of directors and a professional manager, the amendment of the AOI and so on.Footnote 71 In February 2020, the KCGI proposed to appoint eight inside and outside directors and to amend the AOI, which included the adoption of the electronic voting system and strengthened directorial qualification requirements. In its board of directors’ meeting held in March 2020, Hanjin KAL decided to present the agenda items proposed by the KCGI at the 2020 AGM, but they were all voted down.Footnote 72

8.4 Concluding Remarks

Shareholder engagement has gained traction in Korea. Institutional investors have become more active, and listed companies have started to proactively adopt shareholder-friendly policies, seeking to improve corporate governance. The Korea Stewardship Code seems to have played an important part. Institutional investors adopting the Code have demonstrated greater willingness to communicate and engage with their investee companies and to bring about changes in corporate governance. This has in turn helped to enhance shareholder value, as some empirical evidence suggests.

It remains to be seen how shareholder engagement in Korea will continue to evolve in the future. Recently, there has been a rise in the environmental, social and governance (ESG)-related engagement in Korean capital markets. Korean listed companies are expected to face increasing shareholder activism concerning ESG matters, in the long-term and sustainable interests of both the company, shareholders, stakeholders and the like.

9 Shareholder Voting and Engagement in Taiwan

Chang-Hsien Tsai and Chao-Tsung Huang

Taiwan, along with its East Asian counterparts like China and South Korea, has enthusiastically transplanted legal institutions from legally advanced countries such as the United States to improve its legal infrastructure for corporate governance. After transplanting certain Japanese institutions initially, Taiwan has more recently shifted its focus towards US law, which now significantly influences modern Taiwanese corporate and securities laws.Footnote 1

Taiwan has long struggled with the problem of controlling shareholders retaining their control through corporate pyramids. This issue became particularly problematic after the last Asian economic crisis more than two decades ago.Footnote 2 Given the conflicts or agency problems arising between the controlling and minority shareholders due to cross-shareholding corporate pyramids, regulations must be implemented in Taiwan. When it comes to regulatory solutions to the aforementioned problems, independent directors have been presented as corporate governance gatekeepersFootnote 3 – the magic bullet for minority shareholders – while amendments to the Company Act (CA) and the Securities and Exchange Act (SEA) for more than a decade have been intended to empower shareholders by balancing the power of minority shareholders and management or controlling shareholders. Accordingly, this chapter will discuss the legal toolkit furnished under the CA and SEA regarding shareholder engagement and voting in Taiwan, as well as its related policy implications.

Section 9.1 provides a general overview of Taiwan’s corporate law and governance model. Section 9.2 analyzes the legal means of shareholder engagement in Taiwan from a more doctrinal perspective. Section 9.3 illustrates shareholder voting and engagement in practice, highlighting the role played by the Securities and Futures Investors Protection Center (SFIPC)Footnote 4 – a quasi-public foundation established and controlled by the securities authority, that is, the Financial Supervisory Commission (FSC) – in safeguarding the interests of minority shareholders via shareholder litigation and engagement. It also discusses the policy approach taken by the FSC in shaping and enhancing shareholder activism, focusing on the role performed by institutional investors in Taiwan. Section 9.4 concludes.

9.1 Introduction: Taiwan’s Corporate Law and Corporate Governance
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

Table 9.1 Simplified classification of corporate governance structure

Type of structureOne-tier system (Anglo-American style): Taiwan’s reform trendTwo-tier system (Japanese/Taiwanese traditional style)
Task of the board of directorsMonitoring managerial performancePerforming management function
Internal oversightIndependent directors/audit committeesSupervisors (Kansayaku in Japanese)
Source: Tsai (n. 5) 471.

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

Table 9.2 Source of capital invested in listing companies on the TWSE (as of December 2019)

IndividualNon-financial InstitutionFinancial InstitutionSecurities Investment TrustGov’t AgencyShare Buy-backs
Source: TWSE.

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 Legal Means of Shareholder Engagement
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