There are various reasons which suggest that the two-tier system may not function effectively in the context of Pakistan. For example, the representatives of shareholders on the supervisory board would, in fact, represent large shareholders as they are required to be elected democratically. This means the supervisory board is meant to appease large shareholders and small shareholders will continue to be unrepresented on the supervisory board and thus, may remain unprotected against managerial wrongdoings. The representatives of employees will be equally ineffective in disciplining dishonest behaviour of directors in view of the fact that the leaders of trade unions, who due to their political connections and fear of being sacked by directors, are expected to become puppets in the hands of controlling managers in Pakistan.114 Independent directors are expected more, if given independence, but their role to supervise executive board can be compromised being family members and close friends of controlling shareholders.115
Furthermore, inadequacy of professional knowledge of the representatives of employees and shareholders on the supervisory board may render the supervisory board an unnecessary mechanism in the context of Pakistan. The cost overruns might be another problem of this dual board system. Co-existence of supervisory board and the
113
Carsten Jungmann, ‘The Effectiveness of Corporate Governance in One-Tier and Two-Tier Board Systems – Evidence from the UK and Germany’(2006)3 (4)European Company and Financial Law
Review 426-474,432
114 See Daily Dawn, a national newspaper,< www.dawn.com/news/1112918 > accessed 09 March 2016. 115
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current system of the non-executive directors (NEDs) may cause an overlap and create ambiguities in the rights and responsibilities of both. The failure of supervisory board in China offers evidence as to such ambiguities over the rights and responsibilities of supervisors and the NEDs.
German scholars Schoenbaum and Lieser pointed out that supervisory board may not be suitable for small or medium sized companies because it is too easy for the controlling shareholders in these companies to control the board.116The problem is almost the same in Pakistan where the Controlling shareholders take the dominant position. Thus, the independence of supervisory board to monitor executive board is subject to question as its members are to be appointed by the large shareholders. As a result, the supervisory board members would be as under the subjugation of the large shareholders as the executive board members are in Pakistan.
This thesis argues that law has to intervene to put constraints on directors’ duties in order to reduce agency costs. In this context, Kraakman et al opine that carefully designed legal strategies can facilitate actions to be brought against dishonest management, which, in turn, may reduce agency costs.117 Reisberg, as discussed earlier, holds derivative action system as an effective tool for managerial discipline in the sense it poses the threat of liability which may bring forth the alignment of shareholders’ interests with those of management.118 Likewise, McDonough maintains that derivative
116 Thomas J Schoenbaum and Joachim Lieser, 'Reform of the Structure of the American Corporation:
The "Two-Tier" Board Model' (1973) 62 Kentucky Law Journal 91,92.
117 Ibid (n25) Chapter 2, 37 118
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action system has a key role to play in reducing agency costs as it empowers shareholders to make good wrongs done to the company.119
This thesis contributes to the research by advancing argument in favour of rationale and functional derivative action system in Pakistan which can be achieved by the introduction of statutory derivation actions in order to reinforce shareholders’ enforcement power to preserve corporate assets. A coercive authority in the form of the state lies behind the imposition of legal liabilities on the dishonest management. Consequently, managerial wrongdoings can be made good; supervisory board as such has no role. Thus, law has an important role in rectifying infringements of shareholders’ rights, restoration of damaged interests and retrieval of expropriated assets.120
The unfair prejudice remedy has received a world-wide approval due to its wider scope and accordingly flexibility of relief it provides to minority shareholders.121 However, remedy against managerial oppressions on private rights of shareholders as provided under section 290 of the Ordinance suffers serious shortcomings and hence, this provision has rarely been sought in Pakistan owing to strict requirements it demands and very narrow scope it seeks to cover.122 An effective unfair prejudice remedy like that in the UK does not exist in Pakistan which the situation underpins need for legislative amendments in order to afford due protection to minority shareholders. Khan has investigated minority rights and remedies provided under the Ordinance and termed the enforcement remedies as imperfect, remediless and claims that they fall
119
Darryl. D. McDonough, ‘Proposed New Statutory Derivative Action-Does It Go Far Enough?’ (1996)8(1) Bond Law Review 47-72,63
120 Ian Ramsay Benjamin B Saunders, , ‘ Litigation by Shareholders and Directors: An empirical study of
the statutory derivative action’ Research Report ; Centre for Corporate Law and Securities Regulation The University of Melbourne (2006) 6
121Ibid (n89) 277.
122The WB and IMF Report on Corporate Governance and Country assessment Pakistan June 2005
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short of ending up minority sufferings.123He finds that the open-ended statutory language of section 290 of the ordinance poses a considerable degree of uncertainty that gives unfettered discretion to the courts to decide on the question of ‘managerial oppression’. As a result, courts in Pakistan have interpreted the expression of an ‘oppressive act’ differently on similar cause of action.124
For example, he maintains, that in Registrar v PICLD case,125 the court gave a very restricted interpretation126 of the term, ‘oppressive act’ on the part of the management whereas in Pfizer Laboratories’ case,127
the court decided by providing a very liberal explanation128 to the term of ‘oppressive conduct ‘of the management. He has suggested that there should be explanations for courts to interpret managerial oppressions against private rights of shareholders in order to avoid conflicting assessments in interpreting section 290 of the ordinance. In addition, he recognises that the pre-requisite to seek remedy against managerial oppression is too strict as it stipulates that disinterested shareholders may litigate only if they occupy shares not less than 20 per cent in a firm.129 Shareholders representing less than 20 per cent shares are left at the mercy of controlling managers and hence they are either forced to leave the company or stay in the company unprotected.
123 See Generally, Imtiaz khan, Adoption and Convergence in Corporate Governance to International
Norms in Pakistan’( PhD thesis, University of Glasgow 2014).
124 Ibid,151.
125 Registrar of Companies v Pakistan Industrial and Commercial Leasing Ltd [2005]CDL
463,SHC,P480
126 According to the court’s observation, the overriding objectives of the legislature seemed to be that the
section does not provide punishment for any individual violation. However, if there is series of violations and those remain unaddressed, it, then, amounts to an oppressive conduct of management.
127 Pfizer Laboratories Ltd v Parke Davis & Co Ltd[2007] CDL 1047 SHC
128 The court observed that even non-payment of returns to minorities on their investments would be
deemed as an ‘oppressive conduct’ of the management.
129
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Khan has pointed out that unfair prejudice remedy is deficient and suffers a number of limitations in protecting minor shareholders. This is why the remedy against managerial oppressions on minorities’ interests has rarely been sought by disgruntled shareholders owing to the strict requirements and narrow scope of this remedy in Pakistan.130 Moreover, he highlights problems with the common law principles of derivative actions and recommends that the situation needs to be rectified by introducing a codified derivative action system in Pakistan.
This thesis extends Khan‘s argument that law regarding enforcement powers of shareholders needs to be strengthened. This thesis goes one step further and contributes to the literature by putting forward reform proposals concerning statutory framework for derivative actions in Pakistan as other managerial disciplinary tools individually may not provide an effective substitute to derivative litigation. As such, the original contribution that differentiates this thesis from other studies can be found mainly in three aspects.
First, this thesis contributes to the topic by providing an in-depth theoretical examination to enrich legal scholarship on derivative proceedings in Pakistan. Prior to this, there is no study in the context of Pakistan that determines solely the extent to which derivative litigation can serve as a tool to promote good corporate governance and prevent corporate rights from being infringed.
Second, this study contributes by suggesting guidelines and reforms in relation to the statutory framework for derivative actions, clarifying the procedural route for an effective use of derivative litigation and prevention of abusive suits. Since the major
130 Despite widespread expropriation of minority interests by controlling shareholders, only few actions
have been brought by minority shareholders under section 290 of the Ordinance; this is based on the authentic search engine of legal database in Pakistan, Pakistan Law Journal, Pakistan Law digest, Civil Law cases.
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problem in Pakistan relating to derivative litigation is in reference to incentivise and encourage shareholders, this study also contributes to the subject of derivative litigation by suggesting an alternative approach to funding problems that largely operate as disincentives to shareholders in derivative proceedings.
Third, prior to this thesis, there is no qualitative empirical study so as to see how statutory derivative action system works effectively in the marketplace. This thesis also contributes to the legal scholarship on derivative actions in Pakistan by reflecting the viewpoint of interviewees regarding the reform proposals. The comments and opinions of the interviewees are expected to help in providing more realistic solutions of enforcement problems and to suggest a meaningful and functional derivative actions framework for Pakistan.
2.10 Concluding Remarks
After having reviewed literature on current corporate governance status and managerial misbehavioral issues in Pakistan, it found that most of the studies are introductory in nature highlighting how the concentrated ownership of Pakistan poses threats to the interests of corporations and their small investors. There is no study so comprehensive and exhaustive in nature in the context of Pakistan that determines the extent to which derivative proceedings can promote good corporate governance and thus, help minorities to receive adequate protection. A significant argument this thesis makes relates to inadequacies of law which facilitate pyramiding arrangements and lead to the expropriation of corporate assets in Pakistan.
The current commercial environment of Pakistan requires that laws regarding corporate governance should keep pace with the latest developments of laws in the world. The commercial society in Pakistan is progressively developing. With the
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commercialisation and industrialisation in Pakistan, the Pak-China Economic Corridor project- the mother of associated enterprises, in the most magnificent leading factor set to, where has generated a tremendous economic activity, would also attract the attention of legislators and policy makers towards law reforms regarding shareholder protection in Pakistan. The momentous economic activity is likely to encourage significant investments in stocks and corporate sector.
This stir up in economic field and corporate enterprise has boosted incentives across the society and also provided legal awareness of rights and liabilities. The recent unprecedented performance of the Pakistan Stock Exchange (PSE), where enhanced the confidence of investors, has also attracted global attention. The president of World Bank Jim Yong Kim has acknowledged the performance with high resounding remarks and word of commendation.131 In this context, legal conflicts are likely to emerge. This flourishing economic environment is, of course, likely to lend rise to legal issues, needing effective legal framework to keep the wrongdoers disciplined.
131 See Daily ‘The News’ 22 July 2016 ‘Pakistan Stock Exchange declared Asia's best market’
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