Newsletter
HIGHLIGHTS OF COMPANY LAW AMENDMENTS
The Company Law has been extensively over-hauled in order to facilitate Taiwan's economic development, advance the government's policy of administrative reform, and simplify company registration procedures. The amended Law was promulgated by the President on 12 November 2001, and came into force on November 14. The amendment affects 235 articles, with 24 new articles, 55 repealed, and a further 156 revised. The main points of the amendments are outlined below:
Relaxation of regulatory framework
A company may set up a company limited by shares as its sole shareholder. This change is intended to obviate the need to find six other nominal shareholders in order to be able to set up a company, as in the past. The directors and supervisors of such company are directly ap-pointed by the sole shareholder. All powers of a shareholders' meeting are exercised by the board of directors, and the Law's provisions concerning shareholders' meetings do not apply. The amendment also allows single-shareholder lim-ited companies, and either an individual or a company can set up a limited company.
The old Article 14 prohibited companies from using short-term debt to raise funds to expand their production facilities, which was intended to assure companies' financial soundness by pre-venting them from funding long-term operations through short-term borrowing. However, whether using short-term debt is likely to lead a company into financial difficulties is a question better left to the company to consider for itself. As such, it is a matter of corporate self-governance, rather than being an appropriate subject of mandatory provisions. Therefore Ar-ticle 14 has been repealed, to allow enterprises greater operating flexibility.
Companies that have business relations may now loan each other funds without the need for the loan to be linked to an underlying business transaction. Even where there is no pre-existing business relationship, short-term loans (within one year or one business operating cycle) are also permitted where necessary, but the amount loaned must not exceed 40% of the lending company's net worth. The criminal penalties for violations of Article 15 have been repealed.
The provisions requiring a single general man-ager to be appointed if a company has more than one manager, and prescribing the job titles "deputy general manager," "assistant general manager" and "assistant manager," have been abolished. These matters are returned to corpo-rate self-governance, so that a company may now decide for itself the number of its manage-rial staff and their titles. A new anti-mafia clause has been added to the disqualifications of a manager. Any person who is the subject of a confirmed conviction for an offense under the Organized Crime Prevention Statute may not hold a position as manager until five years after serving the sentence period.
The amendment also provides that a manager has the authority to manage affairs and sign docu-ments on the company's behalf within the scope delegated by the company's articles of incorpo-ration or by contract. The old Article 35, which required managers to sign all statements and records of account prepared by them, has been repealed; this is now left to companies to decide for themselves in accordance with the various duties of their managers.
To enable companies to successfully issue new shares and raise funds, the amendment allows a public issuing company to issue shares at a price below par value, if the regulations imposed by the securities regulatory authority so permit. In coordination with this change, Article 27 of the Securities and Exchange Law has also been amended to provide that when a company changes its issue price per share, it merely has to report this to the regulatory authority.
The old Law required a company to issue shares publicly if its capital exceeded a certain level (i.e. NT$500 million). This is now considered to be a matter of corporate self-governance, and not one that should be the subject of mandatory re-quirements. Therefore the amendment provides that a company may decide by resolution of the board, but not obligated, to apply for a public issuance of shares.
Under the old Law, shareholders' contributions of capital to a company limited by shares had to be made in cash, except in the case of the com-pany's promoters and other exceptions defined by the Law. As now amended, the Law permits shareholders to contribute capital not only in cash, but also in kind to include a monetary claim on the company, or of technology or commercial goodwill needed by the company. The exchange of a monetary claim for shares can improve the company's financial position and reduce its debt ratio; commercial goodwill, as an intangible as-set, can enhance operational effectiveness and help to rapidly expand business; and the injection of technology can improve competitiveness, and is conducive to a company's future development. To avoid undesirable effects on shareholders' interests and the company's normal operation, the Law requires that the number of shares to be acquired in exchange for such contributions should be determined by an ordinary resolution of the board.
A company may issue new shares in exchange for shares in another company. But because the issuance of new shares for a swap dilutes the shareholders' interest, such an exchange must be approved by special resolution of the board, in order to protect the interests of existing share-holders. The new shares so issued are not subject to the employees' pre-emptive right.
Under the old Law, a company should issue share certificates within three months following registration of its establishment or issuance of new shares. However, since there is no real need for a closely held corporation to issue share cer-tificates, this requirement is now relaxed so that a company with capital below a certain level (currently NT$500 million) need not issue share certificates unless its articles of incorporation require it to do so. However, if a company does not issue share certificates, transfers of share-holdings in the company will not qualify for the current tax-free treatment for income from secu-rities transactions. This may lead to inequity in taxation, so the Department of Taxation, Minis-try of Finance is currently considering accom-panying measures in response.
Modeled on the provisions of Article 28-2 of the Securities and Exchange Law, the new article provides that by special resolution of the board, a company may buy back its own shares as treas-ury stock, to be transferred to employees within three years, on the conditions that the number of shares does not exceed 5% of the company's total issued shares, and that the total amount does not exceed the sum of the company's retained earn-ings plus realized capital surplus. Such share transfers may be used as incentive to outstanding employees and strengthen their commitment to the company.
This new Article provides that by special reso-lution of the board, a company may conclude stock option agreements with its employees, under which an employee may purchase a specified number of shares in the company at an agreed price within a certain period. On con-cluding such an agreement, the company should issue a stock warrant to the employee. This amendment is intended to respond to the need to attract and retain talented employees.
The old Law required a company's articles of incorporation to place an upper limit on the voting rights of any shareholder holding 3% or more of the company's total issued shares. But in practice most companies have set this limit at a symbolic 99%. Thus the requirement had no practical benefit, and it also created a burden-some need for calculation. Therefore the above provision has now been repealed, to restore the principle of one vote per share. To facilitate this change, companies should amend their articles of incorporation as quickly as possible to remove the limit in line with the new Law.
Under the old Law, directors and supervisors had to be chosen from among the company's share-holders. This was out of step with the world trend to separate ownership from management. The amendment removed this restriction, so that outside directors and supervisors can be elected to enhance directors' and supervisors' profes-sionalism and independence.
Under the old Law, the election of directors and supervisors had to be by a cumulative voting system. The amended Law makes the method of election a matter of corporate self-governance. Companies can now define other election methods in their articles of incorporation, and are no longer limited to using cumulative voting.
To meet their operating and management needs, companies often establish subordinate compa-nies to perform various functions such as re-search and development, production or market-ing. However, in the past, employees of subor-dinate companies could not enjoy the same rights as employees of the controlling company to re-ceive shares as bonuses, and this was not in line with actual needs. This amendment adds a pro-vision to the effect that a company's articles of incorporation may designate employees entitled to receive bonuses in the form of shares, in-cluding employees of subordinate companies who meet certain qualifying conditions.
To facilitate fund raising, the amendment intro-duces the private placement of corporate bonds. It also provides that issuing companies are not limited to TSE- or OTC-listed and public issuing companies, and that a private placement does not require the prior approval of the securities regu-latory authority.
Improvement of Corporate Operation
The amendment introduces new provisions re-quiring the responsible persons of a company to exercise a fiduciary duty and a duty of care to-ward the company. Failure to do so renders them liable to compensate the company for damages incurred.
In view of the so-called "landmine share" (the share of the financial distressed companies) in-cidents caused by cross-holdings of shares be-tween affiliated companies, the Law now re-stricts such cross-holdings. A subordinate company in which the controlling company holds more than half the total issued voting shares or total capital may not purchase shares in the controlling company, or accept such shares as pledged; and where a controlling company and its subordinate companies together directly or indirectly hold more than half the total issued voting shares or total capital of another company, the other company may not purchase or accept as pledge shares in the controlling company or its subordinate companies. However, this provision does not apply retroactively to cross-holdings between affiliate companies existing before the Law was amended.
The old Law made no provision as to who should chair a shareholders' meeting convened by someone other than the board; nor did it define the procedure for adjourning a shareholders' meeting. In practice this has frequently led to major disputes when there is a struggle over the control of management power. The Law now provides that where a shareholders' meeting is convened by a qualified person other than the board, that qualified person should chair the meeting. Companies are also required to draw up rules of procedure for the conduct of share-holders' meetings, and where a chairperson an-nounces the adjournment of a meeting in breach of the rules of procedure, the shareholders pre-sent may by majority vote appoint a new chair-person and continue the meeting.
Under the Law, if the procedures by which a shareholders' meeting is convened, or by which it passes a resolution, violate legal requirements or the company's articles of incorporation, share-holders may within 30 days request the court to annul the resolutions so affected. This is indeed helpful in protecting shareholders. But if they are permitted to continually file suits against minor procedural flaws that are irrelevant to the substance of the resolutions concerned, this can cause the resolutions to be left in a state of un-certainty for long periods of time, which is in fact not conducive to the normal operation of the company. Therefore a new article has now been added to allow the court to dismiss a case if in the court's opinion the violation is not a material one and does not affect the substance of the resolu-tion. As for what violations are material, courts may refer to the provisions of Article 172 Para-graph 5 of the Law regarding election of direc-tors and supervisors, amendments to articles of incorporation, the dissolution, merger or demerger of a company, etc.
Under the old Law, if a new election was not held before the terms of office of existing di-rectors expired, the existing directors could con-tinue to perform their duties until such time as new directors were elected and took office. If a company delayed the election for a long period and failed to comply with a government order to hold an election, the authority could merely impose administrative fines. There was no pro-vision that in such cases incumbent directors should automatically be removed from office. As a result, there were many cases in practice in which companies intentionally delayed elections due to battles for control. To eliminate such non-compliance and to protect shareholders' in-terests, the Law now provides that if a company is ordered to hold a directorship election within a specified period, but fails to do so, its directors are automatically removed from office when the period expires.
Under the old Law, a shareholders' meeting could dismiss a director or supervisor by ordi-nary resolution. This tended to cause instability in corporate governance. The amended Law provides that the dismissal of a director or su-pervisor requires a special resolution of a shareholders' meeting.
The old Law did not set a specific time limit for a company to hold an elections to fill vacant board seats when a third of its directorships fell vacant, and this led to many disputes in practice. The amended Law requires the board to convene an extraordinary shareholders' meeting to hold such election within 30 days in the case of a non-public issuing company, or 60 days in the case of a public issuing company.
With the development of electronic communi-cations technology, matters can now be dis-cussed by means of videoconferencing just as effectively as by meeting in person. In view of this, the amended Law allows board meetings to be held by videoconferencing. When carrying out company registration procedures, it is suffi-cient for participation by videoconferencing to be noted under a director's name in the board's meeting attendance book.
One often hears of cases in which the death, resignation or automatic removal from office of one or more directors makes it impossible for the board to convene meetings and exercise its powers of office; or in which all or most of a company's directors are barred by the court's provisional injunction from carrying out their duties, or the remaining directors not affected by such an injunction fail to exercise their functions. In such circumstances a company's business may come to a halt, and this affects the interests of shareholders. Therefore the Law has now been amended to provide that if the board does not or cannot exercise its powers of office, such that there is a risk that the company will suffer harm, the court may, at the application of an interested party or of a public prosecutor, appoint one or more persons as temporary administrators, to exercise the powers of the chairperson and the board. The same applies mutatis mutandis if supervisors do not or cannot exercise their pow-ers.
Certificateless trading system and stock warrants
To simplify the issuance and delivery of securi-ties, reduce their costs and remove transaction risks associated with the current certificate-based trading system, the amended Law introduces a certificateless trading system. When a public issuing company issues new shares or corporate bonds, it may print a single certificate for the entire issue, and deposit the certificate with a central securities depository organization. The provisions regarding serial numbers and en-dorsement and transfer do not then apply. Or the company may dispense with printing share or bond certificates, in which case the shares or bonds must be registered with a central securities depository organization.
To facilitate timely action and better manage-ment, a company may, within the limits of its authorized capital and taking account of the state of the capital markets, flexibly choose between increasing its capital and issuing new shares, or issuing convertible bonds, stock warrants, bonds with warrant or preference shares with warrant.
Improved corporate reorganization system
In the past, the reorganization system was often abused by companies as a means to avoid their debt obligations. Therefore the amendment now limits the use of reorganization to companies that have a genuine possibility of future viability after reorganization (Articles 282, 285-1). Otherwise, an application should be rejected by the courts, and if a company meets the criteria for bank-ruptcy, the court may forthwith declare the company bankrupt. Also, in order to save judi-cial resources, after receiving a petition for re-organization the court should first examine it for compliance with the formal requirements, and should reject it if not compliant (Article 283-1).
To enable the courts to take into consideration the views of creditor banks, the amended Law provides that the courts should seek the opinion of the central banking regulatory authority (Ar-ticle 284) and should require the authority to compile a list on the specific opinions of the creditor banks as to whether the company should be reorganized. To prevent this consultation procedure from taking too long at the expense of the opportunity for timely reorganization, the agency consulted must provide its opinion within 30 days.
To enable timely reorganization, the amended Law requires the court to rule either for or against reorganization within 120 days after re-ceiving a petition. However, if necessary it may declare up to two postponements of not more than 30 days each (Article 285-1).
In the past, reorganization was in principle car-ried out with the directors acting as administra-tors, but much doubt was cast in the way this process worked in practice. An administrator is required to carry out the work of reorganization from an objective and neutral standpoint. But if the administrator is himself a director or share-holder, it is almost inevitable that in exercising his functions he will tend to be biased toward the interests of shareholders. Therefore the amended Law provides that the administrator shall be appointed by the court from among creditors, shareholders, directors, and candidates recom-mended by the central competent authority for the industry concerned or the securities regula-tory authority, and that when appointing an ad-ministrator the court must make a careful overall consideration, weighing the advantage of a creditor's, shareholder's or director's greater fa-miliarity with the company's business or debts, against the disadvantage of their possible bias.
Company demerger and simplified merger procedure
To make it easier to proceed with a demerger and wind up an existing company, the amended Law provides that a company dissolved due to a demerger need not be liquidated, and the oppo-sition period after individual notice to creditors and public announcement is reduced from at least three months to at least 30 days.
The creation of a new company by merger or demerger is different in nature from the ordinary promotion of a new company, in that it is the continuation of a pre-existing juristic personality. Therefore the Law has been relaxed so that when a new company is created by merger or demerger, its promoters may transfer their shareholdings immediately, and are not subject to the normal one-year waiting period.
A demerger or merger is an important matter for a company, and as such must be stated as an item of business in the notice calling a shareholders' meeting; it cannot be introduced as an emer-gency motion. To make it easier for resolutions on these matters to be carried out, the threshold for adoption has been reduced to a simple ma-jority of voting rights at a meeting attended by shareholders representing at least two-thirds of the company's total issued shares.
If a controlling company absorbs a subordinate company in which it holds a great majority shareholding, this has relatively minor impact on the interests of shareholders. Threfore, the amendment introduces a short form mergers procedure, based on the US model. Where a controlling company holds more than 90% of the issued shares in a subordinate company, the two companies may merge by special resolution of both their boards.
To encourage companies to merge and thereby enhance competitiveness, new provisions have been introduced, with reference to the relevant provisions of the Statute for Upgrading Indus-tries and the draft Mergers and Acquisitions Law, providing for incentives in the form of reductions in and exemptions from official fees and taxes. But these provisions do not apply to demergers.
After a company is demerged, the continuing or new companies that take over its operations re-main jointly and severally liable for the debts of the original company. But to avoid making this liability excessively large, the amended Law provides that the liability so assumed may not exceed the amount of the capital contribution of the acquired business. Also, to avoid claims being left outstanding for long periods, the right of a creditor to claim against such joint and sev-eral liability lapses if not exercised within two years after the base date of the demerger.
Deletion of Criminal Penalities
During this revision, many of the criminal pen-alties contained in the old Law were repealed. The most important ones include those for vio-lating the limits on reinvestment (old Article 13 Paragraph 3); for violating the restrictions on loans (old Article 15 Paragraph 3); for violating the prohibition on acting as guarantor (old Arti-cle 16 Paragraph 2); for failure to issue share certificates (old Article 161 Paragraph 3); and for redemption, repurchase or acceptance as pledge by a company of its own shares (old Article 167 Paragraph 3). However, this does not mean that the responsible persons of a company are no longer open to criminal liability, but simply that such matters have been returned to the purview of the Penal Code. If the actions of responsible persons constitute offences such as breach of trust or embezzlement as defined in the Penal Code, they will still be liable to criminal penal-ties.
Furthermore, most of the previous criminal pen-alties have now been converted into administra-tive penalties, because the actions penalized are merely violations of administrative duties, and are not antisocial in nature. The levels of ad-ministrative fines have also been increased, and new mechanisms have been introduced for im-posing successive penalties.
Simplified registration procedures
Since company registration procedures have now been computerized, and in future members of the public can go online to check basic company registration data, there is no longer a need to is-sue company licenses or certificates of recogni-tion. Also, once such licenses/certificates have been issued, if a company is dissolved or ordered to cease trading, but still possesses its certificate and uses it as an instrument of trade, this in fact presents a danger to security of trade for the public. For these reasons, the system of issuing company licenses and certificates of recognition has been abolished. If a company needs docu-mentary proof of its registration, it may apply with the competent authority for the issuance of a certificate confirming its current registration details.
Except for the licensed business that needs to be specified in the articles of incorporation, a company may now engage in any type of busi-ness activity, without the need to individually register such activities. Therefore a company's articles of incorporation or registration may in-clude inclusive wording such as "except for the licensed business, the company may engage in any lawful business." It has been the practice of the registration authorities when performing a company name pre-examination to first check whether companies were engaged in the same area of business, before determining whether company names were identical or similar. Henceforth, the name examination will no longer be linked to the business scope, but will be con-fined to the company name itself.
Under the amended Law, the name examination covers only identical names, and not names that are merely similar. Where two company names contain references to different areas of business or other distinctive wording, they will be held not identical. If use of a company name involves questions of unfair competition or infringement of rights, these should be dealt with under the relevant provisions of the Fair Trade Law or the Civil Code, as appropriate.
The amended Law empowers the central com-petent authority to make regulations governing company registration or recognition and changes in registrations, in order to simplify registration procedures, and to enable the authority to flexi-bly adjust the regulations at any time in response to the spread of electronic commerce and the development of network data transmission methods, so as to reduce the administrative and social cost.
To facilitate public access to company registra-tion information, the competent authority is re-quired to make company registration details public so that any person may examine or tran-scribe them, and to publish them on an informa-tion web site so that they may be easily accessed to by the public.