2018.7.22
Jenny Chen
Article 173, Paragraph 4 of the Company Act provides: “When the board of directors fails to or cannot convene a shareholders’ meeting on account of share transfer or any other cause, the shareholder(s) holding 3% or more of the total number of outstanding shares of the company may, after obtaining an approval from the competent authority, convene a shareholders’ meeting on their own.” Its legislative reasons point out: “A shareholders’ meeting should be basically convened by the board of directors. However, if the board of directors do not or cannot convene the shareholders’ meeting, it is appropriate to provide shareholders with a right to request the organization of the shareholders’ meeting or to conduct the shareholders’ meeting on their own. Such right is designed for this article and has no bearing on whether a supervisor can convene a shareholders’ meeting. Therefore, Paragraph 4 is amended to avoid controversies.” This shows that this article seeks to resolve a deadlock where the board of directors cannot call a shareholders’ meeting pursuant to law by granting the shareholders with the right to call the shareholders’ meeting on their own so that the company may still resume its normal operation through shareholders’ meetings convened by way of its internal self-governance.
Article 208-1, Paragraph 1 of the Company Act provides: “In case the board of directors fails or is unable to exercise its power and authority to the extent which is likely to cause damage to the company, the court may, at the petition of interested party or parties or a public prosecutor, appoint more than one temporary administrator to exercise the power and authority of the chairman of the board and the board of directors, provided, however, that such temporary administrator(s) shall not engage in any act unfavorable to the company.” Its legislative reason indicates: “When the board meeting of a company cannot be conducted due to death, resignation or ipso facto removal of directors, or if the entirety or the majority of the board of directors is subject to provisional disposition by a court and cannot discharge their duty, or even if the remaining directors not subject to the provisional disposition passively fail to discharge their duty, the company’s business operation may come to a halt. Since this undermines shareholders’ equity and domestic economic order, this article is added to meet practical needs.” This shows that this article also seeks to stipulate a mechanism where temporary administrator can be appointed, when the board meetings cannot be conducted to discharge the duty of the board, to restore the company’s normal business operation as soon as possible.
Although the legal requirements for the above articles are different, still they both seek to resolve a deadlock where a company’s board of directors cannot operate normally. Therefore under certain circumstances, the two requirements may compete with each other. For example, when a company cannot call a board meeting to adopt a resolution to convene a shareholders’ meeting since all of the directors have been removed and thus the company cannot call a shareholders’ meeting to elect directors and supervisors, grinding the company’s operation to a halt, such scenario meets the requirements under both Article 173, Paragraph 4 of the Company Act and Article 208-1, Paragraph 1 of the Company Act. In this case, which remedy approach should the shareholders choose? On the face of the legal provisions, both options are available. Therefore, it is quite common in practice that a company’s shareholders elect to request a court to appoint a temporary administrator pursuant to Article 208-1, Paragraph 1 of the Company Act. Particularly when there are disputes over the management right among shareholders, the issue is deliberately not resolved through the autonomous mechanism of shareholders’ meetings. Instead, the company’s management right is improperly obtained by appointing temporary administrators. An observation of the recent court opinions shows that more and more courts have held that a company should opt for the principle of autonomous control by shareholders’ meetings. If shareholders can still call a shareholders’ meeting pursuant to Article 173 of the Company Act on their own to elect directors to constitute a normal board of directors, there is no need to file a motion to a court to appoint a temporary administrator pursuant to Article 208-1, Paragraph 1 of the Company Act. Several practical opinions are hereby cited below:
I. The Taichung District Court of Taiwan indicated in its 100-Kang-164 Ruling, which was upheld by the Taichung Branch of the Taiwan High Court 100-Fei-Kang-384 Ruling, , that: “When the directors and supervisors of the Respondent’s company were ordered by its competent authority Ministry of Economic Affair to conduct a re-election within a stated period but the re-election was not completed within such period, the tenure of the directors and supervisors of the Respondent’s company will certainly expire beginning with April 20, 2011．．．Under Article 173, Paragraph 4 of the Company Act, shareholders holding over 3% of the total outstanding shares still may, subject to an approval from the competent authority, call a special shareholders’ meeting on their own to re-elect new directors and supervisors of the Respondent’s company and to reconstitute the board of directors and elect the new chairman to represent the Respondent’s company externally and carry out the chairman’s duty. In addition, in the interest of the Respondent’s company, currently all shareholders of the Respondent’s company may call a special shareholders’ meeting on their own to re-elect directors and supervisors with an approval from the competent authority. This means that it is still possible to reorganize the board of directors of the Respondent’s company through a resolution adopted during a shareholders’ meeting. Objectively, it is not appropriate to have a court appoint a third party not relevant to the Respondent’s company to serve as a temporary administrator to discharge the duty of the chairman and the board of directors of the Respondent’s company, since this may potentially undermine the principle of corporate autonomy. Therefore, it is certainly difficult to conclude in this matter that it has become necessary to appoint a temporary administrator for the Respondent’s company in order to maintain its operation.” 」
II. The Taipei District Court of Taiwan stated in its 103-Se-176 Ruling: “With respect to the provision concerning the appointment of temporary administrators, it is a judicial control mechanism where the court intervenes to appoint a temporary administrator only when a company limited by shares cannot conduct reasonable operation through mechanisms to form internal intention or to adopt resolutions… Therefore, if the executive organ of a company limited by shares cannot operate for factual or legal reasons but the operation of its board of directors can still be controlled through the election, supplemental election or removal of directors in a shareholders’ meeting, even though the company may be potentially harmed for failure of the board of directors to carry out its duty, basically autonomous control by the shareholders’ meeting should still be selected. The court should not be directly requested to appoint a temporary administrator for the company in accordance with Article 208-1, Paragraph 1 of the Company Act.” This specifically discloses the principle that autonomous control by the shareholders’ meeting shall take precedence over judicial intervention.
III. The Taipei District Court of Taiwan stated in its 101-Kang-336 Ruling: “The provision concerning the appointment of a temporary administrator under Article 208-1 of the Company Act allows the court to intervene and appoint a temporary administrator only under special circumstances where a company limited by shares cannot conduct reasonable operation based on mechanisms to form its internal intention or adopt resolutions. Such provision concerning the appointment of a temporary administrator comes with the issue of depriving the shareholders’ meeting and board of directors of an opportunity to appoint a competent representative of the company through majority democracy. Therefore, its application requires more caution so that in the event of any dispute over the management right of a company among different shareholders, the internal procedures for calling a shareholders’ meeting or a board meeting and for election will not be bypassed, to obtain the company’s management right through such improper means, on the ground that the board of directors fails or is unable to discharge its duty. This will, on the contrary, cause damage by interfering with the company’s operation.” 」
IV. The Taipei District Court of Taiwan stated in its 103-Kang-108 Ruling: “In the spirit of corporate autonomy, a company is basically supervised by its internal organ or constituting members, and it is only under special circumstances such as security maintenance of social transactions and national economic development that government authority may intervene and conduct administrative or judicial supervision. 」
V. The Taitung District Court of Taiwan stated even more clearly in its 104-Kang-4 Ruling: “If a court appoints a temporary administrator pursuant to the above requirement to discharge the duty of the chairman or a director, the normal internal system by which the company has operated would be replaced. Basically, this is preferably the last resort in order to avoid potential damage to the company due to interference with the company’s normal operation by different shareholders through the appointment of a temporary administrator by the court, or to avoid the concern of depriving the company of its autonomy.” This attests to the principle that the mechanism for appointing a temporary administrator is the last resort and serves as a good reference.
Based on the above-mentioned principle that priority should be given to autonomy through shareholders’ meetings, if shareholders have applied to call a shareholders’ meeting on their own pursuant to Article 173, Paragraph 4 of the Company Act, the court may certainly reject the application for appointing a temporary administrator. Even if the shareholders have not applied to call a shareholders’ meeting on their own pursuant to Article 173, Paragraph 4 of the Company Act, as long as the shareholders meet the application qualifications under such article and it is still possible for the company to be reorganized by way of a resolution adopted during a shareholders’ meeting, the court will reject a shareholder’s application to appoint a temporary administrator (see the 100-Kang-164 Ruling of the Taichung District Court of Taiwan).
It should be noted that Article 173-1 of the Company Act, which was just adopted on July 6, 2018, provides: “Shareholders who have continuously held the majority of the total outstanding shares for at least three months may call a special shareholders’ meeting on their own.” This provision follows the above-mentioned thinking that priority should be given to the autonomy of shareholders’ meetings and greatly eases the threshold for the organization of shareholders’ meetings by shareholders of their own initiative. As a result, major shareholders, who have already had key influence on the operation and shareholders’ meeting of the company, will be more willing and likely to realize corporate governance through internal shareholder-based self-governance. However, in contrast to Article 173, Paragraph 4 of the Company Act, which stipulates that shareholders’ meetings convened by shareholders of their own initiative still require an approval of the competent authority, the new law completely excludes any possibility of intervention by the competent authority and put all management right disputes about a company to the shareholders’ meeting through its self-governance in order to strengthen corporate governance. Whether such new attempt will possibly give rise to other applicable disputes and issues is worthy of continued attention.