John Gardner, From Personal Life to Private Law, Oxford: Oxford University Press, 2018, viii + 242 pp, hb £31.49.
| Published date | 01 July 2020 |
| DOI | http://doi.org/10.1111/1468-2230.12511 |
| Date | 01 July 2020 |
| Author | Sina Akbari |
bs_bs_banner
REVIEWS
Ernest Lim,A Case for Shareholders’ Fiduciary Duties in Common Law
Asia, Cambridge: Cambridge University Press, 2019, xxvi +628 pp, hb £110.00.
This book puts forward the ‘case’ for imposing fiduciary duties on shareholders
in listed companies within ‘common law Asia’ (Hong Kong, Singapore, India
and Malaysia), especially when such shareholders exercise their vote in general
meeting. But the book does much more than this. The argument is multi-
textured and tightly knit. Along the way, Lim queries central assumptions that
have underpinned company law in common law jurisdictions from the days of
Salomon vSalomon & Co Ltd [1897] AC 22 to the present.
Lim begins by identifying two prevailing views on the function of the gen-
eral meeting. One is that, owing no duties, shareholders may vote at a general
meeting as they please. The other is that, votes being property rights, share-
holders can exercise their ownership rights in shares as they see fit at a general
meeting, even if that means harming the company’s interest. Against these
views, both of which he maintains are flawed, Lim makes four fundamental
points and three claims.
The first fundamental point is the separate legal personality doctrine. Since a
company acts in its own name and holds its own property, the company’s assets
do not belong to its shareholders and they are not accountable for the company’s
liabilities. Further, although it has separate legal personality, being an artificial
construct, the company can only act through human agents. The company’s
board of directors and the general meeting are examples of such agents. Since
agents owefiduciar y duties to their principal, then just as directors owefiduciar y
duties to the company, so must the general meeting. The second fundamental
point is that shareholders in common law Asia enjoy significant (but limited)
powers. These powers include appointing or dismissing directors at any time
without cause by ordinary resolution, altering a company’sar ticles of association
by special resolution, and requiring the board to convene a general meeting
upon the request of members holding five per cent to 10 per cent of the
company’s voting capital. Lim asks rhetorically: ‘Given the significant powers
held by the shareholders and the fact that they have the protection of limited
liability . . . [c]an they simply exercise these powers as they please with no
regard for the company’s interests at all . . . ?’ (13). The third fundamental point
is what Lim refers to as ‘the concentrated ownership structure of the majority of
listed companies in the common law jurisdictions in Asia’ (18). By this he means
that, in contrast to the UK situation, listed companies in common law Asia are
largely dominated or controlled by the members of a family or by the state. On
this basis, Lim submits that company law in common law Asia cannot merely
mimic developments in the UK. Instead, the situation in common law Asia will
frequently give rise to conflicts between the interests of controllingshareholders
and those of the company. Left unchecked, those conflicts of interest can lead to
C2020 The Author.The Moder n Law Review C2020 The Modern Law Review Limited. (2020) 83(4) MLR 913–928
Reviews
abuse in the form of related party transactions whereby controlling shareholders
extract private benefits for themselves at the company’s expense. The fourth
fundamental point is the strong presence of institutional shareholders (such as
pension and hedge funds) among the listed companies of common law Asia.
These institutions are ‘expected to play a critical role in the promotion of good
governance and the development of successful global economics through the
exercise of voting powers and informed influence’ (21). To this end, common
law Asia has promulgated Principles of Responsible Ownership (Hong Kong), a
Code for Institutional Investors (Malaysia), and Stewardship Principles for Responsible
Investors (Singapore), as well as codes of conduct for mutual funds and insurance
companies (India). But Lim contends that, being only soft law, these codes are
insufficient to ensure that institutional shareholders do not exercise their voting
power opportunistically for the short-term benefit of their underlying investors,
as opposed to the company’s development and growth in the long run. The
claims said to arise from these four points are that: the general meeting as
agent of the company, controlling shareholders, and institutional shareholders
in common law Asia should all be treated by the law as owing fiduciary duties
to the company. However, Lim qualifies this principle and accepts that ‘the
application of these claims may vary among the four countries [of common
law Asia] given the differences in local conditions’ (26).
The remainder of the book examines the fundamental points and claims
in detail. Chapter 2 is an overview of the company law of the four common
law Asia jurisdictions under study. Chapter 3 considers the role of the general
meeting and the powers of shareholders. It concludes that shareholders should
owe two types of fiduciary duty. They should act in the best interests of the
company and they should not put themselves in a position of conflict. Chapter
4 responds to potential objections to Lim’s thesis, such as that there will be
increased litigation and liability among shareholders and shareholders will
not be sufficiently informed to vote consistently with their duties or will be
deterred from voting at all. Chapter 4 also deals with the related arguments that
Lim’s position will put institutional shareholders in a position of impossible
conflict between their fiduciary duties owed to the company and those
owed to their own shareholders or underlying investors; lead to institutional
shareholders being prevented from diversifying risk by investing in competing
companies at the same time; and cause institutional investors to outsource
voting to expensive service providers. Chapter 5 goes into the mechanics of
the fiduciary duties for which Lim contends. It sets out the content of the two
types of fiduciary duty advocated, submits that such duties should be owed
to the company, considers the precise circumstances in which such duties are
likely to come into play, and analyses by whom and in what manner the duties
should be imposed (whether by the legislature, the courts, the Stock Exchange
or some combination of those three bodies). Chapter 6 looks into how the
fiduciary duties are to be enforced by public enforcement officers and private
citizens respectively. Finally, chapter 7 highlights how the book contributes to
existing law and its likely implications for corporate governance in the future.
The chapter rightly observes that Lim’s study is pioneering as the first work
that critically examines the concept of the company interest, including the
914 C2020 The Author. The Modern Law Review C2020 The Modern Law Review Limited.
(2020) 83(4) MLR 913–928
To continue reading
Request your trial