This article first appeared in Forum, The Edge Malaysia Weekly on May 16, 2022 - May 22, 2022
Based on its latest annual report, Serba Dinamik Holdings Bhd has in excess of 69,500 shareholders. The company’s market capitalisation is now down to RM315 million.
Serba’s market cap was close to RM6 billion a year ago, when KPMG PLT red-flagged its accounts and reported the matter — as required by law — to the Securities Commission Malaysia (SC). KPMG’s audit alert was the start of Serba’s fall from grace.
In the last one year, its shareholders have lost 95% of the value of their shares in the company. The company is battling creditors and needs to come up with a scheme to restructure its debts of RM1.8 billion and US$42.4 million to lenders, including bondholders.
Shareholders are sitting on a RM5.5 billion wipeout in paper losses.
The four directors of Serba who were hauled up by SC for furnishing false information have paid their fines totalling RM16 million, which is a measly sum compared with the losses suffered by minorities.
Bankers have filed a winding-up petition on Serba and are seeking to appoint an interim liquidator to recover the debts. The company has assets but it is unlikely that the bankers will be able to fully recover the amount they lent to Serba.
As for the shareholders, they have little choice but to hold on to their shares and hope that the company’s fortunes improve, which is almost impossible. Past examples show that companies with huge accounting discrepancies do not recover and are finally delisted, leaving shareholders with nothing.
Among the examples are Megan Media Bhd and Transmile Group Bhd, whose shareholders were left holding worthless scrips. In both cases, SC took criminal action against the principal officers and directors.
In Megan Media’s case, its former executive chairman was sentenced to 18 months’ jail and fined RM300,000. As for the Transmile case, the principal perpetrator has gone missing after a 10-year trial, in which he was found guilty.
In a nutshell, bankers and the authorities have avenues to seek redress from companies and their principal officers and directors for providing the capital markets with misleading information. But shareholders generally do not have many options except for joint legal action.
On this score, Malaysia and many other countries in this region lack the framework to facilitate effective joint legal action against companies and directors. They do not have laws that allow for entities to come together and make up an ecosystem to facilitate collective legal action such as class suits.
Some of the key components of such a framework are legislation that allows for a collective legal action, a tribunal to ensure that the framework is not abused by “ambulance chasers” and funders who are prepared to bankroll the aggrieved parties.
At present, there are provisions in Malaysia’s Companies Act 2016 that address the oppression of minority shareholders’ rights. However, the benefits — if the minorities are successful — are accrued to the company and not the minority shareholders themselves.
Therefore, the Companies Act is inadequate for protecting the rights of the thousands of minority shareholders in listed companies. This is important because the target of aggrieved minorities is the listed company and its principal directors.
The other key components for facilitating a class action ecosystem are funding avenues, laws that allow legal firms to intervene on their own initiative and a tribunal to weed out the cases that do not warrant class action.
In countries where there are laws that allow legal firms to take charge of class actions, some law firms specialise in such suits. The case would automatically involve all shareholders unless individual shareholders opt out. This means the legal firm does not need to reach out to shareholders before they commence a class action suit.
For instance, as recently as March this year, Australia’s Slater & Gordon initiated a class action suit against The Star Entertainment Group to seek compensation of A$1 billion for aggrieved minority shareholders. The company is alleged to have misled banks and regulators, to be involved in money laundering and to have failed to operate ethically.
What is interesting is that the action by the legal firm — if successful — will automatically benefit anyone who bought shares in The Star Entertainment Group from March 2016 to March this year.
In most capital markets where a class action is among the preferred ways to protect minority interests, there are funds prepared to invest in what is described as “litigation funding” ventures. They are prepared to fund shareholders and coordinate cases in class action suits.
In return, they receive a percentage of the compensation if successful.
Finally, there needs to be a tribunal or legislation that allows the court to determine whether the case warrants class action. Essentially, a tribunal or court will ensure that “ambulance chasers” do not misuse the framework for their own benefit.
The capital markets with the most advanced class action framework and ecosystem are the US, the UK, Australia and Europe. In these markets, class suits are an avenue for minorities to recoup some of their losses.
The biggest hurdle to any class suit action is the absence of regulations that enable legal firms to take the leadership role for such action and funding requirements, especially if the minorities lose their case. What Malaysia needs, for starters, is a framework that covers both aspects.
Introducing such a framework would encourage minority shareholders’ groups to initiate class action when they are saddled with losses due to the misdeeds of the major shareholders. This will allow minorities to take early measures to hit the pockets of the major shareholders.
M Shanmugam is a contributing editor at The Edge
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