2017.7.18
Emily Chueh
To accommodate the challenges and demands for prosperous development and economic transformation from innovative enterprises, the Ministry of Economic Affairs introduced the system of closed company limited by shares to provide room for corporate autonomy. However, since the existing systems under the Company Law are primarily designed for large companies, there is too much regulatory control and too many restrictions on small and medium-sized enterprises in Taiwan. In addition, a number of enterprises have experienced corporate governance disputes in recent years. For the sake of fund-raising and operational flexibility and for the protection of shareholders’ rights and interests and supervision by the competent authority, a private legal revision committee (hereinafter, the “Committee”) consisting of officials from the Ministry of Economic Affairs (hereinafter, the “MOEA”) and legal experts researched and discussed amendments to the current Company Law and announced a version of draft amendments to the Company Law in April 2017. The major direction of the legal amendments include: (1) priority is given to matters that start-ups expect to implement as soon as possible; (2) the dedicated chapter of closed companies is retained to give more operational flexibility to micro start-ups; (3) thorough consideration is given to the differences between publicly offered companies and non-publicly offered company, which have different requirements; (4) laws and regulations should be properly eased, even though the basic legal framework should not be violated in order to enhance transaction security; and (5) matters that have material impact on corporate governance should be dealt with to enhance corporate governance . Since the scale of revision is very extensive with most of the draft containing the revision versions of the MOEA and the Committee, this article will single out important provisions of the draft concerning the General Provisions chapter and the sections and chapters concerning foreign companies and registration which are independently proposed by the Committee or which are different from the MOEA’s revision or juxtapose the drafts of the Committee and the MOEA for discussion:
I. General provisions
1. The foreign company recognition system is abolished so that foreign companies and domestic companies have the same rights and obligations within the confines of laws and regulations. However, a foreign company is still required to apply for branch office registration in order to operate business in this country. (Articles 4 and 371 of the draft)
2. Restrictions on total investment, corporate monetary lending and guarantors:
(1) The total investment shall not exceed 40% of the company’s paid-in capital. Under the current law, the total investment of all companies (publicly offered companies or not) shall not exceed 40% of their paid-in capital, except when such companies are professional investors, or such investment is otherwise stipulated under their articles of incorporation or such restriction is removed pursuant to a procedure approved by the shareholders. Article 13, Paragraph 2 of the draft is revised as follows: only a publicly offered company is subject to the provision concerning 40% of the paid-in capital.
(2) Restriction on monetary lending: Under the existing law, no company is allowed to lend its capital to any shareholder or any other person unless statutory requirements (e.g., existing business dealing or necessity for short-term financing) are satisfied. Article 15 of the draft is relaxed so that only a publicly offered company is subject to the money lending restriction.
(3) Restriction on serving as a guarantor: Under the current law, no company may serve as a guarantor unless it is stipulated otherwise by law or its articles of incorporation. Article 16 of the draft is relaxed so that only a publicly offered company is subject to the money lending restriction.
3. Audit and certification by certified public accounts: The Committee recommended that in combination with an electronic information platform (as described below), even if a company’s paid-in capital is less than NT$30 million (the threshold above which financial reports shall be certified under the current law), the company’s financial reports shall be certified by a certified public account if the scale of the company (indicated by the number of employees, total asset or business revenue) exceeds the large-scale threshold in two of the above indicators for two fiscal years in a row. In addition, if a subsidiary of such company is also a publicly offered company, the financial reports of such subsidiary shall also be certified by a certified public accountant. (Article 20 of the draft; please compare the provision recommended by the Committee and its reasons)
4. A company may set up a corporate secretary: To enhance corporate governance quality and help independent directors obtain critical information, the Committee recommended a corporate secretary be created in the draft. This is a managerial officer appointed by the Board of Directors pursuant to Article 29 of the Company Law and is staff unit of the Board of Directors. The draft also stipulates the qualifications, responsibilities and authority of a corporate secretary. (Article 29-1 of the draft; please compare the provision recommended by the Committee and its reasons)
II. Companies limited by shares
1. An additional provision is made to provide that it is not necessary for a company limited by shares organized by the government or by one juristic person shareholder to set up at least three directors, and that such company is permitted to set up just one director with no supervisor required. (Articles 128-1 of the draft)
2. An additional provision is made to stipulate that a company limited by share may issue shares without par value with no restriction on its stock issuing prices. (Article 129, Subparagraph 3 and Article 140 of the draft)
3. Provisions are made to stipulate that a company limited by shares may stipulate matters such as plural voting rights, preferred shares with veto rights, and restriction on the assignment of preferred shares, conversion into common shares in terms of number of shares and manners of conversion or the appointment of directors and supervisors in its articles of incorporation. However, such provisions do not apply to publicly offered companies. (Article 157 of the draft)
4. A promoter’s share transfer restriction is deleted (Article 163 of the draft).
5. Adjustment to the restriction on free transfer of shares (Article 163 of the draft):
(1) Except as otherwise stipulated by the Company Law (Articles 157 and 356 of the Company Law concerning the transfer of preferred shares), share transfer shall not be restricted. (MOEA’s amendments)
(2) A company may stipulate its share transfer restrictions in its articles of incorporation, provided that this does not apply to a publicly offered company. (Provision proposed by the Committee)
(3) Share transfer without the transferee being recorded in the roster of shareholders shall be invalid. (Article 165 of the draft; provision recommended by the Committee)
6. A company may buy back its own shares as remuneration to its employees. (Article 167 of the draft)
7. Directors representing the company shall made available the roster of shareholders and information about actual beneficiaries in an electronic registration platform set up by the competent authority. (Article 169 of the draft; provision recommended by the Committee)
8. A company shall have at least one director, and a publicly offered company shall have at least five directors. (Article 192 of the draft; provision recommended by the Committee)
9. A non-publicly-offered company is permitted not to set up a supervisor pursuant to its articles of incorporation. The provisions concerning supervisors in the Company Law do not apply to a company that has no supervisor. (Article 216 of the draft; provision recommended by the Committee)
10. A non-publicly-offered company may also privately place convertible bonds and bonds with attached warrant. However, a resolution shall be adopted during a shareholders’ meeting. If the competent authority for securities has other requirements for publicly offered companies, such other requirements shall govern. (Articles 248, Paragraph 2 and Article 248-1 of the draft)
III. Foreign companies:
1. As previously stated, the foreign company recognition system is abolished. This system is changed into the requirement for the registration of a foreign company’s branch office. (Articles 4 and 371 of the draft)
2. Relevant requirements for domestic companies also apply to foreign branch offices, e.g., audit and certification of business capital by certified public accountants under Article 7 and the requirement that temporary business operation during liquidation may be allowed under Article 26. (Article 377 of the draft)
IV. Registration:
1. The central competent authority is required to set up an electronic registration platform in which a company may post the registration or announcements required under the Company Law. (Article 388 of the draft; provision recommended by the Committee)
2. A company shall set up dedicated personnel to handle the company registration matters. If the registrants knowingly register false matters or provide false registration documentation, they will be criminally penalized. (Article 388-1 of the draft; provision recommended by the Committee)
3. Anyone may access the electronic platform for company registration information, including financial reports certified by certified public accountants. (Article 393 of the draft; provision recommended by the Committee)
IV. Conclusions and Alternative Conclusions:
1. Current Company Law requires that a company limited by shares shall consist of three directors and one supervisor. The Committee proposed to abolish that requirement for a non-publicly-offered company, which should be allowed to have a minimum of one director without any supervisor. The author believes there is no need to require the number of directors of a non-publicly offered company, even though it should still have a supervisor to perform the supervision under Article 218 of the Company Law to protect the rights and interests of shareholders and to supervise managing directors. In comparison with the Committee’s revision reasons, the Committee perhaps intends to have non-managing directors supervise the company with the support of the newly introduced corporate secretary system. However, corporate secretaries are new. How they operate in Taiwan requires further discussions. The author still recommend that a company should set up a supervisor.
2. Since Chin-lung Hsu in the XPEC scandal hollowed out the assets of XPEC Entertainment through dummies by leveraging his capacity as a substantive beneficiary, this exposed the inadequate control over substantive beneficiaries under the existing law. Therefore, the Committee specifically pointed out in the amendment reasons that if information about substantive beneficiaries is provided on an information platform, such scandal can be avoided. In addition, since electronic platforms have been implemented in other countries very effectively, it is proposed that the competent authority should set up an electronic registration platform (generally known as the “e-Platform”) which should contain required registration information of companies, that the companies should be responsible for the authenticity and timeliness of such information, and the electronic registration platform should be implemented by phase. However, the Committee pointed out in its newsletter declaring suspended collaboration with the MOEA that the MOEA’s position is to reject the e-Platform for company registration. In this regard, the Director-General of the Department of Commerce remarked that since the e-Platform has triggered controversies about dedicated registrants, disclosure of financial reports, upload of rosters of shareholders and corporate secretaries, public opinions will be continuously solicited in public hearings.
3. With respect to this issue, the author believes that if an electronic system is set up for company registration, the efficiency and transparency of registration operation can be enhanced. Therefore, this should be an appropriate direction for amending the Company Law in the future. In addition, since many holders of shares are dummies and information in a roster of shareholders has no actual benefits, the author also concurs that a company should record information about substantive beneficiaries of shareholders in a roster of shareholders and make it available on the electronic registration platform (Compare Proposal A of Article 169), and that financial reports certified by certified public accountants should be uploaded to the electronic registration platform. However, in the humble opinion of the author:
(1) For citizens not engaging in business relating to the Company Law, they are not familiar with company registration matters. Since the draft proposed by the Committee imposes criminal liability on dedicated registrants of a company, no one is probably willing to assume this position. If a company has to hire dedicated professionals to work on the registration, the company will assume too much cost. Therefore, issues concerning the dedicated registrants and the proposal of the Committee to have the corporate secretary to handle relevant company registration matters can be further discussed among the stakeholders.
(2) According to the current draft of the Committee, a company’s upload of certified financial reports which will be available to anyone may cause concerns of the company’s managing directors, mangers or shareholders. Therefore, the scope of open portions of the electronic platform or the persons who may access the platform can be further discussed by stakeholders.