The Lee Kong Chian School of Business

Academic Year 2022-2023

Loo Khee Sheng

Form and Nature of Business

PART A: INTRODUCTION

To understand the way business is conducted today, we need to understand the business
forms in which business is conducted. The diversity in business forms is due to the varied
purposes that the business forms serve. The nature and characteristics of these business
forms affect the way the owners, managers and other parties behave, which in turn affect
the society they operate in.

We will look at some business forms below, followed by some non-business forms. We
will then focus on the company or corporation, whose impact on society has been larger
than the other business forms. We will then examine the problems that the corporate form
has given rise to.

PART B: BUSINESS FORMS

In this part, we will discuss the following:-

● Business forms in Singapore

● A few foreign business forms not available locally
● How foreign businesses can operate in Singapore.

PART B1: Business Forms Available in Singapore

We will begin by discussing some of the main types of business forms in Singapore.
 Form and Nature of Business (Academic Year 2022-2023)

Some of these forms have mixed business and non-business objectives.

A Sole Proprietorship

The most basic business form is the sole proprietorship. As the name suggests, a sole
proprietorship is a business owned by a single person, the sole proprietor. The sole
proprietor can be a natural person (for example, Mr Tan or Miss Lee) or a legal person
(for example, a company). Although a sole proprietorship can have a business name
different from the sole proprietor (for example, a sole proprietorship known as
Scrumptious Sotong owned by its sole proprietor, Valentino Lee), the sole proprietorship
does not exist separately from the sole proprietor. Instead, it is considered a part of the
sole proprietor. As the sole proprietorship does not exist by itself, separate and apart from
the sole proprietor, the sole proprietorship is considered “unincorporated”, meaning that it
is not a separate legal entity or a legal personality separate from the sole proprietor. This
means that the sole proprietor, as owner, owns all the assets of the sole proprietorship and
has the final say over the business. On the flip side, the sole proprietor is also liable for all
the debts and liabilities of the business. Accordingly, the liabilities of the sole proprietor
can potentially be unlimited. As the sole proprietor’s responsibility for the liabilities and
business of the sole proprietorship is unlimited, the regulations governing sole
proprietorships are relatively lesser than the regulations governing other types of business
entities, where the owners’ liabilities may be limited.

Sole proprietorships are usually used by natural persons when the risks and liabilities are
manageable and the lighter touch of regulation is preferred. Examples of sole
proprietorships are hawkers, traders, lawyers, accountants and book keepers operating
alone. Sometimes the sole proprietor is a company and not a natural person, which can
lead to the mistaken impression that a natural person is behind a sole proprietorship when
a company actually is.

A sole proprietorship is commonly called a “firm”. The word "firm" is commonly used to
refer to any business entity generally but this usage has to be distinguished from its more
technical legal meaning of a business of 2 or more persons1. When we call a sole
proprietorship a firm we are using its common meaning.

1
Section 2 of the Business Registration Act (Cap 32) defines a firm as “an unincorporated body of 2 or
more individuals, or one or more individuals and one or more corporations, or 2 or more corporations,
who have entered into partnership with one another with a view to carrying on business for profit.”
Section 4 of the Partnership Act (Cap 391) is also consistent with section 2 of the Business Registration
Act. Section 4 provides as follows: “Persons who have entered into partnership with one another are for
the purposes of this Act called collectively a firm, and the name under which their business is carried
on is called the firm-name”. Similarly, section 2 of the Limited Liability Partnerships Act (Cap 163A)
adopts the Business Registration Act’s definition of the “firm”.

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A Partnership

A partnership is a business firm owned by two or more partners. The partners can be
natural persons or legal persons. Like a sole proprietorship, a partnership is an
unincorporated association as it is not a separate legal entity separate from the partners.

There are 2 types of partnerships in Singapore, the general partnership and the limited
partnership.

In a general partnership, every partner in the partnership is liable jointly with the other
partners for all the debts and obligations of the partnership incurred while he or she is a
partner. The liability applies regardless of the arrangements between or among the
partners themselves over their partnership contributions, rights, responsibilities, liabilities
and interests. Every partner’s liability, therefore, is potentially unlimited. When someone
outside the partnership (say, a customer) deals with the partnership, he or she sees only
one type of partners. As far as the third party is concerned, the partners are all responsible
to him or her in the transaction. In Singapore a general partnership can have a maximum
of 20 partners, except for some professions.

In contrast, a limited partnership has 2 types of partners: the general partner and the
limited partner. A limited partner does not take part in the management of the limited
partnership and registers himself as such. A limited partner is not liable for the debts or
obligations of the limited partnership beyond the amount of his or her agreed
contribution. The general partner, on the other hand, can take part in the management of
the limited partnership but his liability is unlimited. In Singapore there is no limit to the
number of partners in a limited partnership.

As the responsibility of the partners in general partnerships and the general partners in
limited partnerships is unlimited, the regulations governing partnerships are relatively less
than the regulations governing other types of business entities where the owners’
liabilities are limited. However, the regulations governing partnerships are relatively more
than those governing sole proprietorships, as there are more owners involved.

General partnerships are viable for natural persons if the risks and liabilities are
manageable and the lighter touch of regulation is preferred. An example is a partnership
of 2 hawkers.

Sometimes partnerships are formed because they are required by law. Examples are
partnerships of lawyers and accountants. Goldman Sachs was a well known partnership
until it was converted into a corporation in the late 1990s.

Sometimes the partners are companies. Examples are construction companies forming

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partnerships to undertake projects together.

The limited partnership structure is flexible enough to be used for ship financing in
Germany, property investment in the UK and investment and management consultancy
services in Singapore.

In the USA, the limited partnership structure has been used by well known investment
funds such as Blackstone, Apollo, Carlyle, and until June 2018 KKR. When the limited
partnership is publicly traded and listed on a national securities exchange, it is known as a
master limited partnership. The general partner manages the partnership while the
investors buy units in the master limited partnership as limited partners. The general
partner is usually incentivised with a profit sharing agreement.

A Limited Liability Partnership (LLP)

A limited liability partnership (LLP) is formed by 2 or more partners, like a partnership.

However, an LLP is different from a partnership in that an LLP is a separate legal entity
or personality, whereas a partnership is not. An LLP is, accordingly, a body corporate
separate from the partners. The LLP has a “personality” of its own. The LLP can sue or
be sued, hold property and operate a business in its name like a person. For example, if a
property is transferred from the partners to the LLP, the property is considered the
property of the LLP and no longer that of the partners. An important advantage of an
LLP, compared to a partnership, is that a partner of an LLP is only liable for his or her
own wrongful act or omissions and is not liable for the obligations of the LLP or for the
wrongful acts or omissions of the other partners of the LLP. Some partnerships have
converted into LLPs because of the protection accorded to the partners. For example,
some law firms are LLPs.

A Company

A company is in law a legal entity with a legal existence. In law, it has a personality and
existence of its own. The company is considered distinct from its owners, members,
shareholders or stockholders. The company is also considered distinct from its board of
directors, CEO, managers and employees. Various terms have been used to describe the
legal existence of the company, such as separate legal personality, separate legal person,
separate legal entity, legal person, artificial person and incorporated person.

The concept of the company as a person is somewhat artificial but it does serve useful
purposes. The company can serve as an embodiment of a group of persons, such as a
group of investors, to facilitate business. The artificial person (ie. the company) can make

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it easier for a large group of investors to own assets. Without the company it would be
cumbersome to reflect the ownership of the assets in the many names of the investors.

This purpose can be seen from the origin of the word “company”, which is derived from 2
Latin words, com (meaning “with”) and panis (meaning “bread”), and refers to persons
having meals together. The name “company” is historically suitable for an organisation
involving a plurality of persons undertaking something together. However, the
requirement for a plurality of members has since been relaxed. Nowadays, it is not
uncommon for a modern company to be formed and directed by one person only.

Another useful purpose of the company is that a company can exist longer and is not
limited to the life span of a natural person. For example, Kongo Gumi Co., Ltd, a
Japanese company, is reported to have been in existence since 578 AD. Examples of older
Singapore companies are Greatearth, Boustead, Haw Par, Eu Yan Sang, Yeo Hiap Seng,
CYC Company and Leung Kai Fook Medicine. The continuity of the company is also
more certain unlike a natural person whose time of death is uncertain.

The existence of a company also makes it easier for contracts to be entered into. All the
employees, suppliers, customers and other parties contract with the company as the nexus
(ie connection) of contract. The managers, employees and shareholders of the company
can change but the company can continue to exist. This facilitates business and gives it
more certainty going forward.

Companies are formed or created when the requirements for incorporation have been
complied with. In earlier days, a company was formed by a charter from the government.
For example, the East India Company received a Royal Charter from Queen Elizabeth on
31 December 1600. Some companies are formed by law. An example is Saint Andrew's
Mission Hospital which was formed by the Saint Andrew’s Mission Hospital Ordinance.
Nowadays, companies are normally formed under enabling laws such as the Companies
Act. The laws specify what needs to be done for a company to be formed. This normally
requires the promoters of the company to submit certain documents to the relevant
authority. In Singapore the documents are submitted to the Accounting and Corporate
Regulatory Authority (ACRA). If the documents are in order and the requirements
complied with, the company is incorporated and registered by ACRA.

The documentation usually includes a document(s) that sets out the basic characteristics
of the company. In Singapore it is called the constitution (previously called the
memorandum and articles of association). Some countries use other names such as
company charter or other names.

There are various types of companies. Some types are common across countries although
there may be differences from country to country. Below we will look at some of the

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common types.

Companies can be divided into 2 types in terms of liability: the limited liability
companies (or limited companies) and the unlimited liability companies (or unlimited
companies). A limited liability company means that the liability of the owners of the
company is limited. For example, the company may owe a creditor S$10 million. An
owner of a limited liability company is only responsible for the amount of money he or
she has agreed to contribute to the company, say S$10. The owner is not responsible for
any amount beyond that. The limited liability of the owners is a main reason why
businessmen prefer to conduct business in the form of limited liability companies. The
law limits their liability to encourage them to invest in the business. If investors must bear
the liability of the companies they invest in, they may be deterred by the liability they
might be exposed to. The investors might not be in a position to determine how the
companies are managed or how the business will turn out. There are, however, exceptions
to the limited liability of the members. The exceptions include cases of fraud or where the
company is a sham or façade.

An unlimited liability company, on the other hand, is one where the owners of the
company have unlimited liability and are fully responsible for the debts of the company.
When the company does not have sufficient money to pay its debts, the owners must
cover the shortfall without limit. They do this by contributing to the assets of the
company. Given this characteristic of the unlimited liability company, businessmen do
not prefer this type of companies. Unlimited liability companies exist, however, usually
because of the law of the place where the company operates. The law may require certain
businesses to be conducted in the form of unlimited liability companies. Sometimes,
unlimited liability companies are given special exemptions under the relevant law, such as
exemption from disclosing its financial statements to the public and tax privileges. For
example, the Irish subsidiary of Apple Computer is an unlimited company and is
exempted from filing its accounts under Irish law.

For both limited and unlimited companies, the company's liability is unlimited. A
company must pay off every cent it owes to its creditors. If the company is not able to pay
its debt, it can be wound up and dissolved.

Most companies issue shares. These companies issue shares to the members on agreed
terms, such as the issue price. Some companies do not issue shares. These companies are
called companies limited by guarantee. The members do not own shares in the company
as the members do not expect to receive any dividends from the company. Instead the
members guarantee to contribute an agreed amount if necessary when the company winds
up. If the company is wound up, a member pays the amount he has agreed to contribute
on winding up. Once the contribution has been fully paid, the member is no longer liable
to contribute further on the winding up of the company. Companies limited by guarantee

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are usually used as corporate vehicles for charitable, scientific, religious or artistic
purposes.

Under Singapore law, companies are divided into private and public companies. A
private company must satisfy 2 requirements. It must limit its members to not more than
50 and there must be restriction on the right of members to transfer their shares. A
company that is not a private company is a public company. Accordingly, a public
company can have more than 50 members or it can have no restriction on the right of its
members to transfer their shares or both.

A private company need not necessarily be small. Temasek Holdings (Pte) Ltd is a private
company but it manages a portfolio of more than S$100 billion. It just means that
Temasek complies with the 2 conditions, namely, it restricts the right of a member to
transfer the member's shares in the company and it has not more than 50 members.

Listed companies are public companies and not private companies because a listed
company normally has more than 50 members and the right of the shareholders to sell
their shares is not restricted. Otherwise, whenever investors wish to sell their shares they
must obtain approval from the company.

Some professional companies can only be used by the professionals in their practice.
Public accountants can practise in Public Accounting Corporations (PACs), while lawyers
can practise in Law Corporations (LLC). There are in form companies but they are
subject to regulations pertaining to their professions.

The Singapore limited liability company is to be distinguished from the United States
limited liability company (LLC). While the member of a USA LLC enjoys limited
liability, the member is treated as a sole proprietor if there is only one member. If the
LLC has more than one member they are treated as partners. One consequence is the tax
treatment of the LLCs. Further, the USA has Anonymous LLCs, whose members'
identities can be kept secret. Consequently, if a property in the USA is owned by an
Anonymous LLC, the public may not be able to find out the identity of its real owner.

Co-operative or Co-operative Societies

A co-operative or co-operative society is a group of persons who join together (called

the members) to pool resources to promote their interests. As the name suggests, a co-
operative is a co-operation of a group of people. By acting together, they can achieve
economies of scale and greater bargaining power.

Below are some examples:-

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● A group of members sets up a co-operative to operate a retail outlet to provide

goods to themselves (consumer co-operatives).
● A group of members sets up a credit co-operative or a loan and thrift co-
operative. The members place deposits with the co-operative and the co-operative
gives loans to its members.
● A group of farmers sets up a co-operative to sell their produce in the market. By
pooling their resources and selling as a group they can market their products more
effectively and obtain better prices for their products (producer or marketing
co-operatives).
● A group of farmer sets up a co-operative to source for equipment from suppliers.
By acting as a group they can obtain better prices from the suppliers (supply co-
operatives).
● A group of workers sets up a co-operative to manufacture and provide goods and
services (workers co-operatives)

A co-operative society can also promote the interests of both members and non members.

Some co-operative societies facilitate the operations of other co-operative societies (apex
organisations). Membership in an apex organisation is limited to co-operative societies.
The Singapore National Co-operative Federation, established in 1980, is an apex co-
operative set up to promote the interests of co-operatives.

Below is the basic structure of a co-operative society:-

Member-Owners

Elect Reports to

Board of Director

Hires Reports to

Management

Hires Reports to

Staff

In Singapore, a co-operative society is a body corporate and has separate legal

personality, like a company. To ensure that a co-operative society promotes the interest of
its members, rather than a particular individual, the rights of its members are regulated. In

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Singapore, an individual member can hold not more than 20% of the share capital of a co-
operative society and has only 1 vote regardless of the number of shares he or she owns.
These rules ensure that no individual member dominates a co-operative society and that
the benefits of a co-operative are spread out more evenly among the members. Further,
membership in a co-operative society is limited to individuals, societies and trade unions.
As a result, a company is prohibited from becoming a member of a co-operative society.
This lessens the profit motive of co-operatives.

The table below sets out some differences between a company limited by shares and a co-
operative.

Company limited by shares Co-operative

Predominantly for profit Promote interest of members
1 share 1 vote 1 member 1 vote
No legal limit to number of shares owned Legal limit to individual ownership of
by an individual shares
Usually cannot return shares to get back the Usually can return shares to get back the
capital invested. The share capital can be capital invested. If members return their
maintained. shares, the capital of the co-operative will
be reduced accordingly.
Can transfer shares to third parties but may Usually cannot transfer shares to third party
be restricted for private companies

In Singapore, the earliest co-operative societies in the 1920s took the form of thrift-and-
loan societies. They encouraged thrift by receiving deposits from members and help
members by extending loans to them. At that time, bank loans were not so readily
available and loan sharks held sway.2 The Singapore Government Staff Credit Co-
Operative Society Ltd., registered on 7 October 1925, is Singapore's first co-operative
society. It is still in operation today. Its members are staff employed in the Civil Service,
Statutory Boards and Government-Linked Companies. NTUC Fairprice Co-operative Ltd,
owner of the supermarket chain, FairPrice, is a well-known co-operative society in
Singapore.

Well known co-operatives overseas include:-

● Spanish football club FC Barcelona.

● Sunkist, the oldest citrus fruit cooperative in USA whose members are fruit
growers.
● Danish butter manufacturer Lurpak.

2
Speech by Mr Lim Boon Heng, Minister without Portfolio, at the First Co-operative Leaders’
Conference (Co-operative Strategic Review) at York Hotel on Sunday, 27 February 1994 at 10 am.
https://www.nas.gov.sg/archivesonline/data/pdfdoc/lbh19940227s.pdf (accessed 22 July 2022)

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● Dutch Rabobank (a bank).

In Europe a guarantee society can take the form of a co-operative. Small businesses with
insufficient assets may have difficulty obtaining loans from banks. By pooling resources
to form a guarantee society, the guarantee society can provide guarantees to the banks to
facilitate the financing of smaller businesses.

Some co-operatives have converted to corporations. NTUC Comfort, a taxi co-operative

and then Singapore’s biggest taxi operator, was corporatised and renamed Comfort
Transportation Pte Ltd in 1993. In 2022 NTUC Income Insurance Co-operative Limited
started its corporatisation exercise to convert to a company called Income Insurance
Limited.

Social Enterprises

A social enterprise is a business which aims to strike a balance between the making of
profits and the achievement of social purposes, such as employment for ex-prisoners or
persons with disability. A social enterprise aims to generate revenue to sustain itself and
meet social needs at the same time. The owners of a social enterprise do not expect to
reap much profits or returns from their investments. However, some businesses promote
themselves as social enterprises but they are actually for-profit businesses in disguise.

In Singapore, social enterprises take the form of companies, co-operatives or societies.

Singapore does not have any specialised business form for social enterprises, unlike other
countries with specialised forms such as community interest companies, benefit
corporations, low profit limited liability corporations and the flexible purpose
corporations (which are discussed below).

Examples of organisations that hold themselves out as social enterprises are Eighteen
Chefs (employment of ex-convicts), Pope Jai Thai (employment of the disadvantaged)
and Breakthrough Cafeteria (opened by Reverend Simon Neo, a former drug offender, to
hire reformed drug addicts to help them get back on their feet).

Unit Trusts

A unit trust in Singapore is a trust arrangement involving 3 parties, namely, the trustee,
the manager and the investors.

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A Unit Trust structure

Manager Trustees

Assets and
Liabilities

Unitholders

A trust is an arrangement where a trustee(s) holds property for the real owner called the
beneficiary. The trustee can be the real owner’s family member, a trusted friend or a
professional. Trusts are put in place for various reasons, such as to preserve
confidentiality, for administrative convenience or for legal reasons. Some trusts are secret
and unknown to outsiders while some are public and disclosed. When the trust
relationship is secret, the trustee is reflected as the owner in the public records while the
existence of the trust and identify of the real owner are unknown. The real owner can
obtain signed documentation from the trustee (such as a trust deed) to evidence the trust
and to safeguard his interest.

In the case of a unit trust the investors collectively invest in the unit trust and are issued
units in the unit trust (hence its name). The units reflect their ownership of the unit trust.
The trustee holds the assets and investments of the unit trust for the investors but does not
manage the investment of the unit trust. The investment of the unit trust is handled by a
manager, which must be independent of the trustee. The trustee acts as the custodian of
the invested moneys and assets and ensures that the managers invest the funds according
to the terms of the unit trust. In Singapore a unit trust is also called a collective
investment scheme.

REITS

A REIT is a Real Estate Investment Trust. It takes the form of a unit trust but invests
predominantly in real estate. Singapore REITs are commonly referred to as S-REITs.
There are various REITs listed on the Singapore Stock Exchange. Capitamall Trust is an
S-REIT, with a market capitalisation of more than S$6 billion as at June 2011.

Business Trusts

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A business trust is similar to a unit trust in that the assets and business are held on trust
for the investors. Unlike a unit trust, a business trust does not have separate trustee and
manager. Instead, one entity acts as the trustee-manager of a business trust, as the roles of
trustee and manager are combined in one entity. An example of a business trust is
Hutchison Port Holdings Trust which is listed on the Singapore Stock Exchange.

A Business Trust Structure

Trustee-Manager:

Holds the assets

and manage the
Assets and
business
Liabilities

Unitholder(s):

Holder of the
only unit in the
Business Trust

Chit Fund

In a Chit Fund a group of persons each contribute an equal amount into a pool. On an
agreed day each person can bid to borrow the money in the pool. The pool is lent to the
person who is willing to pay the highest interest. When the borrower repays the loan plus
interest, the money is divided amongst those who contributed towards the pool. In a
notorious Singapore case that took place in the 1960s and early 1970s involving one
Abdul Gaffar Mohamed Ibrahim and the Gemini Chit Fund Corporation Ltd, thousands
lost an estimated S$50 million in a swindle perpetrated by Abdul Gaffar. He was
eventually found guilty and sentenced to life imprisonment.

Variable Capital Company

A variable capital company (“VCC”) is a body corporate having the sole object of being
one or more collective investment schemes (see unit trust above). A VCC can be an
umbrella VCC meaning a VCC which consists of 2 or more collective investment
schemes (called “sub-funds”). The assets of a sub-fund are not affected by the liabilities
of the VCC or any other sub-funds of the VCC. The assets of a sub-fund are only affected

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by the liabilities of the sub-fund itself.

PART B2: Foreign Hybrid Business Forms

Other countries have come up with hybrid business forms for the pursuit of both profits
and wider social or environmental purposes. We will briefly look at a few of them below
which are presently not available in Singapore.

A Community Interest Company (CIC)

Community Interest Companies (CICs) originated from the United Kingdom. A CIC must
register and apply to the CIC regulator for its CIC status. One unique characteristic of a
CIC is that it must meet a “community interest benefit test”, namely, whether its activities
are being carried on for the benefit of the community. The community benefited must be
a genuine section of the community. Hence, the goals of a CIC are not to solely benefit
shareholders. A CIC must submit a report detailing its activities annually to the CIC
regulator.

Another unique characteristic of the CIC is the “assets lock”. The assets of a CIC are
locked up for charitable purposes. The disposal or transfer of the assets is restricted by
regulation. If the CIC is dissolved, the remaining assets, after payment of liabilities, must
be transferred to another CIC or charity.

A third characteristic of the CIC is the restrictions on the payment of dividends. There are
limits on how much dividends are payable to the members, which is presently fixed at
35% of distributable profits.

An example of a successful CIC is NextGenUS, a provider of high-speed internet in the

UK.

A Low-Profit Limited Liability Company (L3C)

A low-profit limited liability company (L3C) is a hybrid between a for-profit company

and a non-profit. It is non-profit in that it must have a primarily charitable purpose with
profit making as a secondary purpose. It is for-profit in that the investors are entitled to
distributions and appreciation in their investment. L3Cs can be incorporated in several

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states in the USA.

A Benefit Corporation

Benefit corporations are a new class of corporations that are intended to "create a material
positive impact on society and the environment, taken as a whole, assessed against a third
party standard." They are required to publicly report on their overall social and
environmental performance against a third party standard annually. However, the report
need not be audited or certified by any third party standards organization. They are also
not required to adopt any particular third party standard in preparing their reports. Benefit
corporations were first introduced in the state of Maryland and have been adopted in
several states in the U.S. Patagonia, Inc., a seller of sustainable outdoor clothing, is an
example of a benefit corporation.

B Corporation

B Corporations are sometimes confused with benefit corporations. B Corporations are

corporations certified by B Labs, a non-profit organisation, to meet certain standards of
social and environmental performance. A B Corporation may or may not be a benefit
corporation.

A benefit corporation may register with B Labs as a B Corporation and hence be both a
benefit corporation and a B Corporation. When a benefit corporation does not register as a
B Corporation, it is just a benefit corporation and not a B Corporation.

On the other hand, a company that is not a benefit corporation may register as a B
Corporation with B Labs. If so, the company, while not a benefit corporation, is a B
Corporation. Bettr Barista Pte Ltd is Singapore’s first certified B Corporation.

A Flexible Purpose Corporation (FPC)

Flexible Purpose Corporations (FPCs) are a new type of corporations introduced in

California, USA. A FPC must specify at least one “special purpose” in its constitutive
document, such as promoting environmental sustainability or minimizing adverse effects
on its employees. The boards and management are allowed to consider the special
purpose(s) against shareholder value. A FPC is required to publish regular reports on the
impact or returns of its social or environmental actions. A FPC is distinguished from a
company in that a FPC is expressly allowed to promote the interest of the community or
the employees rather than the members.

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PART B3: Other types of Foreign Business Forms

One should be aware that the business forms discussed above are not exhaustive. Other
countries have created different types of business forms. The business forms discussed
above can also have different characteristics in other countries. This note will mention
just one which is the Decentralised Autonomous Organisation (DAO).

Decentralised Autonomous Organisation (DAO)

Under Wyoming law, a decentralised autonomous organisation (“DAO”) is a type of LLC

that is governed by a smart contract (basically automated transactions comprised of code,
script or programming language that executes the terms of an agreement). A DAO is
denoted by the word "DAO", "LAO" (standing for limited liability autonomous
organization) or "DAO LLC.” in its name. The management of a DAO can be vested in
its members, if member managed, or the smart contract, if algorithmically managed.

DAOs are “decentralized” organizations because all their members, as opposed to

directors and executives, can make decisions. DAOs are “autonomous” because they can
employ smart contracts that automatically execute actions when certain conditions are
met, without requiring human approval.

Each member can have one vote each or a member can have a number of votes based on
the digital assets contributed by the member (eg different amount of tokens).

Wyoming became the first state in the United States of America to pass legislation into
law recognizing DAO as a distinct form of LLC. All decisions are made by majority vote
by either by members or through a computer algorithm. American CryptoFed Dao is the
first legally recognized DAO in the U.S.3

PART B4: Foreign Businesses in Singapore

A country usually regulates the local activities of foreign businesses. A foreign business
that wishes to engage in business in the host country has a number of options. It can duly

3
Adriana Hamacher, America’s First Legal DAO Approved in Wyoming,
https://decrypt.co/75222/americas-first-dao-approved-in-wyoming (accessed 22 July 2022).

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register itself in the host country as a branch or it can set up a subsidiary company in
the host country. When a company establishes a branch in the host country, the branch
exists as a part of the company and not as a separate entity. A subsidiary, on the other
hand, is an entity separate from the foreign company. For example, Commerzbank AG, a
German bank, operates in Singapore through its Singapore branch instead of a Singapore
subsidiary. On the other hand, AIG, the US insurer, operates in Singapore through its
Singapore subsidiary, AIA Singapore Pte Ltd. An entity with branches may find it easier
to relocate moneys, assets and personnel among its branches as all the branches are part
of the same entity. On the other hand, each branch’s prospects may be dependent on the
other branches of the entity. The Singapore branch may be forced to close down when the
entity as a whole is insolvent even though the Singapore branch is doing well.

A foreign company can also engage in business through a local agent or distributor. In
Singapore if a foreign company does not engage in business in Singapore but merely
wants an outpost for market research, feasibility studies and liaison work, it can set up a
Singapore Representative Office.

PART C: ENTITIES NOT PRIMARILY FOR PROFIT

In contrast to business forms, there are entities or arrangements that do not have profit-
making as their main objective. Some of them engage in business to sustain their
operations but the members do not expect to reap any dividends or financial returns from
their contribution. We will discuss a few of these entities below.

Societies

A society is a group of people coming together for a common purpose. In Singapore

societies are associations of 10 or more persons and are not bodies corporate. They are
not to be confused with the Co-operative Societies discussed above. In Singapore, even
though a society is not a body corporate, it can sue and be sued in its registered name.
However, a judgment against a society cannot be enforced against its officers or
members. A society is not a suitable vehicle for the pursuit of profits, as its place of
business and branches must be approved. Examples of Singapore societies are Nature
Society (Singapore), AWARE, Securities Investors Association (Singapore)(SIAS) and
various political parties.

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Trade Unions

Trade unions are associations of workmen or employers, whose principal object is to

promote the interests of the workmen or employers. In Singapore a trade union is not a
body corporate. 2 or more trade unions can form a federation of trade unions. Examples
of workers trade unions are the unions representing SIA pilots and SIA workers. An
example of an employers’ trade union is the Singapore National Employer Federation.
The National Trades Union Congress is the only federation of trade unions in Singapore.

Management Corporations

A management corporation is a body corporate formed when a development is subdivided

into separate units. This allows for each unit to be owned by a separate owner. The
common property, such as the lifts, refuse bin and guard house, is owned by all the unit
owners collectively. Examples of strata title developments are condominiums, office
buildings and factories. The management corporation is constituted by the owners of the
units in the development and manages the common property for the owners.

A development that is not subdivided, on the other hand, is owned as one property.
Consequently, it does not have a management corporation.

Management corporations had been widely reported in the media due to the disputes
among the owners over the sale of their units en-bloc (ie. as a whole), such as those of
Gilman Heights and Horizon Towers.

Singapore used to have HUDC developments (such as Braddell Heights) with

management corporations but HUDC developments had all been converted into private
properties.

Companies Limited By Guarantee

Companies limited by guarantee are discussed above and are not entities for profit.
Examples of companies limited by guarantee are charitable foundations, such as the Lee
Foundation, educational institutions, such as Singapore Management University, and
churches.

Non-Profit Organisations, Charities and Institutions of Public Character

The name “non-profit organisation” suggests an organisation that does not make a

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profit, but it is actually a misnomer because some non-profit organisations do make

profits. The difference between a non-profit organisation and a “for-profit organisation” is
that a non-profit organisation does not have profit as its main objective, even if profit is
actually made, whereas a for-profit organisation is expected to do so. The members of a
non-profit organisation do not expect any financial returns from their investments,
whereas the members of for-profit organisations do. Due to the misnomer, some prefer to
use the term “not-for-profit organisation”. However, the use of the phrase "non-profit
organisation" has become too prevalent to be discontinued altogether. Non-profit
organisations are also known as voluntary welfare organisations. Non-profit organisations
can take the form of a company limited by guarantee, a society or a charitable trust
(where the properties and assets are managed by trustees for charitable purposes).

In Singapore, non-profit organisations that are exclusively charitable can be registered in

Singapore as charities. This gives them tax exempt status and the status of a charity to
help them raise funds from the public. In Singapore, some charities are further registered
as Institutions of Public Character (IPC). Donations to IPCs enjoy tax deductions.
National Kidney Foundation is a well known charity and Institution of Public Character in
Singapore.

Some businessmen and companies engage in charities by setting up charities or

foundations separately from their businesses. The separation helps the charities to operate
as charities thereby gaining them tax exempt status while the businesses continue to
operate on a commercial basis subject to tax. The Shaw Foundation Pte, a company
limited by guarantee, was set up by the Shaw brothers in 1957 and is a registered charity.
It owns the Shaw Centre at Orchard Road and various properties. It donates the income
received to various charities. Another example is Google.org which is the charitable arm
of Google. To fund the organisation, Google granted three million shares to Google.org.
The Walmart family has also set up Walmart Foundation as a charity. Walmart
Foundation had been accused of making donations to reduce local opposition to the
expansion of Walmart, the retailer, into some urban areas. They argue that this violated
the terms of the Foundation's tax-exempt status by directly benefiting the business of
Walmart, the retailer.

Non Governmental Organisations (NGOs)

Non Governmental Organisations are basically organisations that are not part of the
government or are independent of the government. Societies and charities, such as the
Red Cross, are examples of NGOs.

Mutual Benefit Organisations

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Mutual Benefit Organisations are organisations in which their members pool funds to
provide relief in times of need. The following are some examples are mutual benefit
organisations:-
● organisations for the relief or maintenance of the members or their family
members during their sickness or infirmity
● organisations for the relief of members during unemployment or in distressed
circumstances
● organisations for the payment of money on the death of a member
● organisations for the care of orphan children during their minority.

An example is the Funeral Fund Society of the Church of St. Peter & St Paul.

PART D: THE COMPANY

Having looked at various business and non-business forms above, we now focus on the
company or corporation. A company can serves many functions. A company can be:-

● the sole proprietor of a sole proprietorship

● a partner of a partnership
● a partner of an LLP
● a shareholder of another company
● a subsidiary of another company
● a trustee of a unit trust or REIT
● a manager of a unit trust or REIT
● a trustee-manager of a business trust
● a unit holder of a unit trust or a business trust.

A company can operate a profit-making business, a social enterprise or a non-profit

endeavour, such as a charity. Given its utility, it is much used.

We will look at some characteristics of the company, namely, the corporate structure, the
life cycle of the company, and some of the problems associated with the company form.

PART D1: The Corporate Structure

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When a company is formed, it becomes a legal or artificial person, with different “limbs”,
“organs” or “parts”. The principal parts of the company are:-
● The directors or board of directors;
● The board committees;
● The management and employees;
● The secretary of the company;
● The auditors of the company;
● The members or shareholders

The Board of Directors

The law usually prescribes the number of directors that a company must have. Previously,
Singapore companies must have at least 2 directors. Now a Singapore company need only
have one director as long as he or she satisfies the requirements, such as residency.
Normally the directors of the company are appointed and removed by the members of the
company. Directors are sometimes paid director's fees for acting as directors.

The head of the board of directors is commonly called the Chairman of the Board. The
Chairman usually chairs and controls the meetings of the board of directors. The power of
the Chairman is usually specified in the constitution of the company.

The Responsibility of the Directors

The directors' responsibility is to manage the business of the company. They can manage
the company themselves or they can do so through managers, who actually manage the
company. Whether the directors manage the business themselves or direct the
management, the directors have overall responsibility for the business of the company.

The directors of a company are fiduciaries of the company. The word "fiduciary" is
derived from the Latin root "fidere" meaning "to trust". A fiduciary is a person entrusted
with property or power for the benefit of another person, called the principal or
beneficiary. A fiduciary relationship is based on a relationship of confidence and trust
between the fiduciary and the principal. In the case of a director, the company entrusts
property and power to the director to further the interest of the company. The director
owes fiduciary duties to the company and act in the interest of the company.

Generally, the directors must perform their duties in accordance with the law, the
constitution and the binding resolutions of the shareholders. The scope of a director's
duties changes over time and their application can be unclear at times but there are 3
major fiduciary duties of directors:-

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● the duty to exercise due skill, care and diligence in performing his or her duties.
● the duty to act in the best interest of the company
● the duty to disclose and act transparently.

The duty to act with due skill, care and diligence means that the directors must not be
careless, reckless or absent minded.

The duty to act in the best interest of the company means that the director cannot act in
the director's own interest or the interest of other persons other than the company. The
director should not place himself or herself in a situation where his or her duty to the
company conflicts with his or her personal interest or the interest of other persons (such
as the director's family members or friends). The director must employ the powers and
assets of the company for the proper purposes of the company and not for any collateral
purposes.

The duty to disclose and act transparently is to ensure that the director is indeed acting
properly and discharging his duties to the company.

On the flip side of the director’s duties and responsibilities are the director’s rights and
protection. The directors are accorded protection under the business judgment rule.
Under the rule the court defers to the business judgment of directors and corporate
executives as long as certain requirements are fulfilled. The requirements differ from
country to country. Singapore adopts a more informal version of the business judgment
rule while other countries adopt a more formal version. The rule usually requires the
directors to act in good faith and in the honest belief that their actions are in the
company's best interest and not to act in direct self-interest or self-dealing. Courts defer to
the judgment of directors because business is inherently uncertain and directors cannot
ensure corporate success. Under the business judgment rule, the directors may be free
from liability from a bad decision taken honestly and in good faith. For example, the
directors may approve a new project but it may turn out to be a loss. The business
judgment rule protects the directors if they act in good faith and in the honest belief that
the project is in the company's interest even if it eventually turns out to be a loss.

Types of Directors

4 types of descriptions are commonly used to describe directors:-

● an executive director
● a non-executive director
● an independent director

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● a non-independent director.

An executive director is a director who is also an executive of the company. Examples

of executives of the company are the chief executive officer, chief financial officer,
manager or other persons in management. The executive of a company may or may not be
a director of the company. If the executive is a director of the company as well, the
executive is an executive director of the company.

A non-executive director is a director who is not an executive of the Company.

An independent director is a director who can exercise independent business judgment.

An executive director is usually considered to be not an independent director because the
executive director is involved in the management of the company. A non-executive
director, on the other hand, may or may not be an independent director. If a non-executive
director has a relationship with the management of the company which may interfere with
the exercise of the director's independent business judgment, he or she is not considered
independent of the management. In other words, not all non-executive directors are
independent directors. For example, the wife of the Chief Executive Officer of the
company may be a non-executive director of the company (ie she is a director of the
company but does not work for the company). However, if her relationship with her
husband-CEO interferes with her independent business judgment she is not considered an
independent director. Sometimes the rules go further. To be independent the director must
also be independent of the major shareholders of the company as well as the executive.

Different countries have different definitions of who an independent director is. In

Singapore, paragraph 2.3 of the Code of Corporate Governance 2018 defines an
independent director 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".

Some have argued that an "independent director" is not truly independent when the
director is elected by a major or majority shareholder. The director will be expected to act
in favour of the shareholder who elected him into office. Should the director act against
the wishes of the shareholder, the director can be removed by the shareholder. However,
it is possible that a director may act impartially out of conviction even at the risk of being
removed later.

A non-independent director is the opposite of an independent director. An executive

director is, therefore, a non-independent director. A non-executive director who does not
exercise independent business judgment is also a non-independent director.

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Some companies have only executive directors. Small companies usually have only
executive directors. An example of a large company without independent directors is
Jardine Matheson. Some companies have a combination of independent and non-
independent directors, such as most listed companies.

Nominee Directors and Real Directors

A director on record may not be the real person directing the company in the sense that
the director acts according to the instructions of someone else. If so, the director acts as a
nominee director. The real director acts behind the scene telling the nominee director
what to do. The real director may not even appear on the company records.

The Board Committees

Some companies, such as listed and larger companies, have board committees to assist the
board of directors. Smaller companies usually do not have board committees.

In Singapore a listed company is required to have an audit committee. The audit

committee is appointed by the directors from among their number. It must have at least 3
members, a majority of whom must be independent directors. The functions of an audit
committee include the review of the audit plan, internal accounting controls, internal audit
procedures and the financial statements.

Other common board committees are:-

● the executive committee (overseeing the management of the business)

● the nominating committee (recommending appointments and promotions)
● the remuneration or compensation committee (recommending remuneration).

The Management

The management comprises the executives who manage the business of the company. The
management is usually headed by one person, but there are companies that have 2 or
more co-heads. The common titles of the head of the executive are the Chief Executive
Officer, Managing Director or General Manager. Other senior personnel in management
are sometimes referred to as “C-level executives” because their titles usually start with
“Chief”. Some of the more common titles are "Chief Financial Officer" (who manages the
finances of the company), "Chief Operating Officer" (who manages the operations and

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activities of the company), "Chief Technology Officer" (who manages the technological
and scientific matters of the company) and "Chief Compliance Officer" (who manages the
legal and regulatory compliance matters of the company). Some companies have a "Chief
Ethics Officer" (who manages the ethical issues faced by the company). Assisting them
are the managers, employees and staff of the company.

The management may, but need not, be directors of the company. Sometimes, the
managers and the directors are the same people, especially in smaller companies. In some
companies the Chairman of the Board of Directors and the Chief Executive Officer is the
same person. One example is Jamie Dimon of JP Morgan Chase.

The Secretary

The secretary is in charge of preparing the documents for the company and for calling and
recording the meetings of directors and members. In some countries there is no formal
requirement for the appointment of a secretary but the company will still need someone
who can attend to the company documents, such as preparing and filing company
documents with the authorities.

The Auditor

The auditor is in charge of auditing the financial statements of the company and reporting
on the financial statements to the members of the company. Although auditors are
appointed by the members of the company, they are usually chosen by the directors. An
auditor acts as a gatekeeper to try to sniff out any incorrectness in the financial statements
or to detect fraud but there have been many cases where auditors have failed to discharge
their roles properly. One contributing factor is the need to maintain goodwill with the
management of the company, given that auditors are usually selected by the management.

In Singapore some companies are exempted from appointing auditors and audit
requirements, in particular small private limited companies.

The Members, Shareholders or Stockholders

The members of the company, also referred to as the shareholders or stockholders, are
the owners of the company, owning shares, stocks or other securities in the company. The
members usually control the appointment and removal of directors in Singapore.

There can be more than one type or class of members. The most common are the ordinary

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members. Some companies have different types of members such as but not limited to the
following:-

● preferred members with certain preferences such as priority to dividend payments

or more votes as opposed to members with lower priority to dividend payments or
less votes;
● members with voting rights as opposed to members with no voting rights;
● class A and class B members, owning shares with different rights, etc.

The constitution of the company usually specifies the rights of the different types of
members.

When there are many members, a company may appoint a Share Registrar to manage the
records and the transactions involving the members.

Recently, in Singapore the rules have been changed to identify the person(s) who actually
controls the company. Take the case of a company with only one member owing all the
shares in the company. The sole member may or may not be the real person controlling
the company. For example, the sole member may be the son of the real businessman
behind the company. The son merely holds the shares for his businessman-father who is
the real owner of the shares and controls the company. In this case, the son, although he is
the sole member of the company, is not the real controller of the company. Instead, the
businessman-father, although not a member of the company (as he does not appear on the
record as a member), is the controller of the company. If the sole member owns the shares
for himself or herself and not for any other person, then the sole member is also the
controller of the company. A member who owns very few shares in the company will not
be a controller as the member owns too few shares to control the company. How much
control or ownership of shares in the company is considered to qualify a person as a
controller of a company will depend on the relevant rules.

Companies can distribute its profits to its members by way of dividends. Dividends can
be distributed by way of cash or in specie (Latin phrase meaning "in its actual form"). An
example of a distribution in specie is a distribution by a company of its property to its 2
shareholders rather than in cash.

Variations in Company Structure

Companies range in size from a small standalone company to a multinational. A small

company may have only one owner who also acts as its sole director and manager without
any other director, employee, auditor or board committee. A big company, on the other
hand, may have a large number of directors, various board committees, a large group of

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executives and employees, a big firm of auditors, several secretaries, a large number of
shareholders and owns a large number of subsidiary companies.

A global company can operate as one company with branches in various countries or it
can operate through subsidiaries in the countries concerned. Where a company operates
branches, there is only one company in existence. The branches form a part of the
company and do not exist as separate companies.

Foreign Differences

Foreign companies can have different company structures. Below are a few examples.

Two-Tier Boards

Some countries have companies with 2-tier boards.

In Germany, all public companies must have a supervisory board and a management
board. The supervisory board is comprised of members elected by the shareholders and
members who are employee representatives. The supervisory board oversees and appoints
the members of the management board and must approve major business decisions.

In China, a limited liability company must have a board of directors and a board of
supervisors.

Communist Party Committees

In China Chinese state owned companies have communist party committees that have a
strong say over operational and management matters. The Boards of Directors of these
companies must comply with the decisions of the communist party committees.

PART D2: The Life Cycle of a Company

Below we look at how a company starts and how it ends.

Incorporation

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As discussed above, a company is incorporated when the legal requirements have been
satisfied.

Operations

To operate, a company needs funds, which it can obtain from various sources:-

● the members of the company. A company’s seed money is usually contributed

by the founding members of the company. In return the company issues shares to
them. From time to time the company can raise additional funds from the existing
members or from new members, such as private equity funds or other investors.
● lenders, such as banks, financial institution and individuals. Sometimes, a
company borrows a substantial sum of money from a big group of lenders by way
of bonds or debentures. If the number of lenders is large, a trustee can be
appointed to represent and protect their interest on the terms of the bonds or
debentures. Some loans are secured by giving the creditors rights over the assets
of the company. If the company does not pay, the lender can sell away the assets
to recover what is due the lender. Some loans are not secured, usually when the
risk of default is assessed to be minimal or manageable.
● suppliers of goods on credit terms. A supplier can supply goods to the company
on credit, for say, 3 months. If the company sells the goods before the credit term
is up, the company can pay the suppliers from the sale proceeds without using any
of its funds.
● retained earnings. A company that is operating at a profit can retain its profits or
invest the profits to grow its business.
● government subsidies. For example, OpenNet was given a big government
subsidy to build Singapore’s fibre optic network.

Normally, a company registered in Singapore is required to do the following, unless

exempted,:-

● prepare its financial statements on an annual basis;

● hold an annual meeting of its members (commonly called its annual general
meeting) or do so by written means;
● lodge its annual returns;
● file its annual tax returns.

Not all companies are in operation. Sometimes, companies remain dormant after
incorporation or become dormant after ceasing their business operations. The company
may remain dormant until the company operates again or is dissolved.

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Receivership

When business is poor a company may face the prospect of receivership, scheme of
arrangement, judicial management or winding up. A company goes into receivership
when a creditor with the right to do so (for example, a bank) appoints a receiver over all
or some of the properties and assets of the company. The objective of the receivership is
the realisation of the properties and assets for the benefit of the creditor. For example, a
company has 10 factories. Due to its failure to pay the bank, the bank exercises its rights
pursuant to the loan documents and appoints a receiver over 3 factories. The 3 factories
are now under the control of the receiver but the remaining 7 factories are not under
receivership and remain in the control and management of the company.

Scheme of Arrangement

In a scheme of arrangement, the members and creditors agree to restructure the debts of
the company. The creditors may agree to waive off parts of the debt or give more time to
the company to pay. A scheme of arrangement needs to be approved by the requisite
number of members and creditors and the court. However, unanimity is usually not
required. If there is not enough support from the requisite number of members and
creditors, the proposed scheme of arrangement fails. An example of a scheme of
arrangement is the SMRT scheme of arrangement under which Temasek’s wholly-owned
subsidiary acquired the rest of SMRT not owned by Temasek.

Judicial Management of the Company

Sometimes a company may go into a period of difficulty, such as cash flow problems, but
there is prospect for rehabilitating or rescuing the company. In such a situation the
company can go through a process called judicial management, where the court allows
the company a period of time to restructure or rehabilitate itself. During this time the
creditors are not allowed to take any legal action against the company. The company
takes the opportunity to undergo rehabilitation or restructuring. In a judicial management
the court appoints judicial managers to take charge of the company. If the process is
successful, the company comes out of judicial management, with or without undergoing
some structural changes, and operates as a company again. If the process is not
successful, the company proceeds to the winding up stage. There is a similar process in
the United States called Chapter 11 bankruptcy. An example of a judicial management is
the judicial management of Hyflux Ltd (later under winding up).

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The Dissolution of the Company

A company may be dissolved or wound up for various reasons, including the following:-

● it is no longer viable and is making losses;

● it has outlived its purpose;
● it has become redundant after it merged with another company or after its assets
have been taken over;
● the members want to break it up and divide up the assets;
● the members cannot get along with each other.

Sometimes a company is wound up when the judicial management has failed or after a
receivership has started. An example of a company that was ordered to be wound up after
an unsuccessful judicial management is Hyflux Ltd. Sometimes a company is wound up
without having to go through receivership or judicial management.

The person who winds up the company is called the liquidator. The liquidator ensures that
the loans and liabilities are fully paid off first if there are sufficient assets to do so. If not,
the law provides for the order of payments. Normally, all the creditors are paid off first in
priority to members of the company. When the winding up process is completed, the
company is dissolved and ceases to exists as a legal person.

Striking Off of the Company

A company can also be struck off the register of companies. Upon striking off, the
company is considered dissolved.

PART D3: Problems with the Company

The company form can give rise to problems. Here are some problems associated with a
company.

Legal Personality

In many countries, companies can be formed with little difficulty. However, this can give
rise to problems. A company is recognised in law as a legal person with rights and
responsibilities even though it does not have a body or soul. As Sir Edward Coke (1552 –

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1634) observed: “they cannot commit treason nor be out-lawed or excommunicated, for
they have no souls”. The lord chancellor, Edward Thurlow (1731 – 1806) said;
“Corporations have neither bodies to be punished, nor souls to be condemned, they
therefore do as they like”. Sometimes when many managers are involved it becomes
difficult to identify the culprit involved. With the multiplication of companies it becomes
easier to evade regulations. Sometimes managers and directors seek to evade
responsibility on the ground that the person liable is the company and not them.

Limited Liability

The rationale for limited liability is the encouragement of risk taking by the members of
the company. If the members are responsible for all the liabilities of the company without
limit, not many will be willing to become members of the company. As a result, not many
will want to contribute capital towards the business or own shares in the company. The
limited liability shield, however, can be taken advantage of by the members of the
company.

Liability of Directors and Managers

As seen above, members, directors and the executives try to escape from liability by
taking advantage of a company's legal personality and limited liability. In response the
law imposes liability on the members, directors and executives where appropriate. For
example, in Singapore there are laws imposing personal liability on directors in certain
cases of breach of duties, such as non-payment of CPF contributions and taxes. Another
example is the "piercing of the corporate veil" where the court looks behind the
corporate form and identify the actual person who should bear responsibility. However,
this has not always been successful. Many areas of immunity still apply, such as the
application of the business judgment rule, to deflect liability from the members, directors
or management. The company form has been abused by many who loaded massive debts
on the company with relatively little capital contribution and undertook risky transactions
to increase personal remunerations and bonuses only to abandon the company with losses
to be borne by others.

Conflict of Interest and Problem with the Corporate Structure

Although the board of directors has ultimate responsibility and control over the
management of the company, in reality the management sometimes runs the company
without adequate supervision from the directors or the shareholders. The following

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factors have contributed to the growth in the power of management:-

● Increase in the size of the corporation.

● Skill and business acumen required to manage the company.
● The dispersed and fragmented nature of shareholdings of companies.
● The short-term outlook and interest of shareholders.
● The shareholders’ emphasis on investment rather than ownership.
● The right of management to withhold certain information from the shareholders.
● Managers who also serve as directors thereby wielding substantial influence over
the Board of Directors.

The increase in management power relative to the shareholders and directors has given
rise to problems, such as agency problems, lack of control over management and conflict
of interest. This has led to excessive compensations for managers, excessive retirement
plans (golden parachute), insider trading and difficulty in removing incompetent
management.

Some of the measures proposed or implemented to address these problems include the
following:-

● Improving the Composition of the Board of Directors A better board of

directors is hopefully more able to supervise and direct the management. The
quality of the board of directors can be improved by having more pro-active
independent and diverse directors with appropriate skill sets.

● Establishing Board Committees Board committees with clear lines of

responsibility over specific issues will hopefully lead to better decision making
and oversight.

● Enhancing the Shareholders’ Role Another way to address the agency problem
is to enhance the shareholders’ role. The shareholders can take a more active role
in scrutinising the activities of the managers. Shareholders can form coalition to
pursue their agenda and push for relevant resolutions. Even if the resolution is not
passed, the debates and discussions will publicise their causes. Where appropriate,
shareholders can sue the company or its directors.

● Whistleblowing Mechanism Whistleblowing provisions and procedures can be

implemented to help anyone in the company to tell on their wrongful colleagues
and bring to light anything improper.

● Tightening the Laws and Issuance of Codes Appropriate regulations and

enforcement are essential to prevent misconduct by directors and managers. An

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 Form and Nature of Business (Academic Year 2022-2023)

example of enforcement action taken is the case of Chua Soon Huat Industrial
Corporation, a loss-making furniture maker. Its managing director, Lee Thian
Soo, and four other directors (namely, operations head, Lee Siew Hoe, marketing
head, Lim Khiang Soon, independent director, Sng Keng Liang, and independent
director, Peter Moe) were accused of breaching the Companies Act, which
required that “a director … act honestly and use reasonable diligence in the
discharge of the duties of his office.” They have allegedly failed to inform the
Singapore Exchange that the company’s former executive chairman, Lee Tian
Teck, was no longer in control of the listed company. Mr Lee Tian Teck allegedly
was not fully discharging his duties after he suffered a stroke in December 2003.
They were fined and disqualified from acting as directors for a period of time.

ΩΩΩ
Loo Khee Sheng
ksloo@smu.edu.sg
Feedback is welcome.

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