Newsletter
CONFLICT BETWEEN A COR-PORATE SHAREHOLDER AND ITS REPRESENTATIVE
Under Article 178 of the Company Law, a shareholder who has a personal interest in a matter discussed at a shareholders' meeting, such that the interests of the company may be harmed, shall not vote on the matter, nor vote as a proxy on behalf of another shareholder. This provision also applies mutatis mutandis to resolutions of the board of directors. However, how to define "a personal interest that may harm the interests of the company" has been a matter of much dispute in practice. In this regard, the Ministry of Eco-nomic Affairs (MOEA) issued an interpretation on 16 December 2002 that may provide some guidance.
The MOEA's interpretation states that when the representative of a corporate shareholder is elected a director, the representative gains access to the company's trade secrets. The relationship between the corporate shareholder and the rep-resentative is of a mandate, and under Article 540 of the Civil Code, the mandatee (the repre-sentative) must report to the mandator (the cor-porate shareholder) on the progress of the affairs entrusted to him. Thus the corporate shareholder also has access to the company's trade secrets. Therefore, when a corporate shareholder's rep-resentative exercises his powers as a director at a board meeting, and the matter under discussion relates to the conclusion of a purchase contract between the corporate shareholder and the company, this is a situation in which there is a personal interest that may harm the interests of the company, and the director may not vote on the matter.
As for what constitutes a situation that "may harm the interests of the company," the MOEA's interpretation states that this includes all cir-cumstances in which there may be any detriment to the company's interests. However, how the law applies to the facts of specific cases is a matter to be determined by the courts.
The Company Law also provides, in Article 223, that when a director transacts a purchase or sale, loan, or any other legal transaction with the company, whether on his own account or on behalf of another, the company shall be repre-sented by a supervisor. Therefore, if a director who represents a corporate shareholder transacts a sale or other legal transaction with the com-pany on behalf of the corporate shareholder, a supervisor of the company should act as the company's representative. The legislative intent of this provision is to prevent harm from being done to the company's interests due to a conflict of interests. Thus the MOEA considers it ad-visable for the company to be represented by a supervisor in any matter connected with such a legal transaction, if there is a possibility that a conflict of interests may arise and the company's interests may be harmed. This would include not only the actual "conclusion" of a contract, but also any contract negotiations.