Newsletter
FINANCIAL HOLDING COMPA-NIES' TREASURY STOCK AND CROSSHOLDINGS
The Financial Holding Companies Act (FHCA) is silent on the acquisition by a financial holding company of its own shares through a share ex-change. Article 167 of the Companies Act and Article 28-2 of the Securities and Exchange Act provide for companies' buyback of their own shares, but the purposes envisioned for such buyback are different from the situation were a financial holding company acquires its own shares through a share exchange. Accordingly, the Companies Act and the Securities and Ex-change Act do not apply either. In view of this, the Ministry of Finance stated in an interpreta-tion dated 29 September 2003 that within three years from the date of a share exchange through which a financial holding company acquires its own shares, it must transfer such shares to its employees, or use them for conversion of con-vertible securities issued by the financial holding company. Treasury stock that is not converted or transferred during that period must be treated as unissued shares and the capital of the financial holding company registered with the authorities must be modified.
After a financial holding company transfers or converts shares in the above manner, it must state the transfer or conversion procedure, price, quantity, time limits, and mode of transfer in the notes to its financial statements. It may not pledge treasury stock acquired through a share exchange, nor enjoy shareholders' rights in such stock.
Article 38 of the FHCA provides that a subsidi-ary of a financial holding company, or an enter-prise in which a subsidiary of a financial holding company holds 20% or more of the voting shares, or holds a controlling interest, is not permitted to hold shares in the financial holding company. In other words, Article 38 forbids crossholdings of shares between a financial holding company and its affiliates.
However, to facilitate the establishment of fi-nancial holding companies, Article 31 of the FHCA grants a three-year grace period so that invested enterprises may transfer their shares in the financial holding company to the employees of the financial holding company or its subsidi-aries, use such shares for conversion in accor-dance with Article 28-2 of the Securities and Exchange Act, or sell them on the Taiwan Stock Exchange or GreTai Securities Market. In other words, an investee may continue to hold shares in the financial holding company for up to three years. If by the end of the three-year period the investee has not transferred, converted, or sold such shares, they are to be treated as unissued shares. However, the FHCA does not provide any provision as to whether, within the three-year time limit, the shares held by such invested enterprises enjoy voting rights.
According to the oral explanations of an MOF official, the FHCA is a law of special application, and matters not explicitly covered by it are regulated by the Companies Act. Therefore, if as a result of a share exchange an invested enter-prise holds one-third or more of the total voting shares in a financial holding company, and the financial holding company also holds one-third or more of the voting shares in the invested en-terprise, then under Article 369-10 of the Com-panies Act, the invested enterprise may not ex-ercise voting rights of the shares that exceed one-third of the total issued voting shares or total capital of the financial holding company. Within the one-third limit, an invested enterprise still enjoys voting rights for its shares in the financial holding company.
However, at the time of election of directors or supervisors of a financial holding company, the financial holding company would able to use the voting rights of its invested enterprises or sub-sidiaries, to support favored candidates. This may impair the interest of minor shareholders against the spirit of good corporate governance.
Thus, an amendment to the FHCA was proposed to eliminate subsidiaries' voting rights attached to their shareholdings in the financial holding company. As of this date, the amendment has not yet been approved by the Legislative Yuan.