2018.5.29
Teresa Huang
As trading opportunities for cross-border and cross-industry mergers and acquisitions are increasing, the distribution mechanisms for a company’s operating rights and the seats of directors have become important issues for the tugs of war and negotiations among various parties when shareholders with different interests are deciding whether to engage in a joint venture or cooperation or how to actually operate the company’s business. However, the provisions concerning the election of the directors of a company limited by shares in Taiwan’s Company Law specifically require that candidates receiving votes representing relatively more voting rights in a cumulative voting system adopted in a shareholders’ meeting shall be elected directors. Based on the foregoing reason, shareholders have reached a consensus on the arrangements for the seats in the board of director. However, since there is no room for direct assignment of directors by shareholders under the current law except for a company limited by shares which is solely owned by a government or a juristic person shareholder and for which directors and supervisors may be directly assigned by the government or juristic person shareholder, it is still possible that director election results are different from past consensus reached among various shareholders. Therefore, voting provisions are often added to a shareholders agreement in practice to effectively compel the shareholders to fulfill their commitments concerning the distribution of operating rights.
However, there are different opinions among lawmakers and courts in Taiwan concerning the legal effect of such voting agreement. As a result, such provisions concerning the distribution of operating rights, which are quite common in cross-border merger and acquisition deals, had often entirely been denied in judicial practices in Taiwan before but they gained more acceptance and approval in recent times. The evolution of relevant laws and regulations and court opinions is hereby briefly summarized as follows:
1. Except for matters involving corporate mergers and acquisitions, the legal effect of a voting agreement on the election of directors is denied across the board.
According the 71-Tai-Shang-4500 Decision of the Supreme Court, the so-called “voting agreement” refers to a contract among shareholders on the exercise of their voting rights associated with their shares towards a particular direction on general or specific occasions. Such contract is entered into among shareholders who assume that they cannot achieve their objective of controlling the company with their own voting rights in order to pull together the voting rights of the majority of the shareholders by contractual means to successfully control the company through resolutions adopted during shareholders’ meetings. Regarding whether such voting agreement is permitted by law, there are positive and negative academic theories. Nevertheless, with respect to the exercise of voting rights for electing directors, the interest of all shareholders should be considered. If shareholders are permitted to enter into a voting agreement on the voting rights for electing directors in advance, the company is very likely to be controlled by some major shareholders. This is very unfair to minority shareholders. In addition, the Company Law specifically adopts a cumulative voting system for electing the directors of a company limited by shares so that minority shareholders also have chances to be elected directors. At this juncture, if shareholders are allowed to enter into a voting agreement before the election of directors, the performance of the contract at issue, as concluded by the Supreme Court, will effectively vitiate the requirement for the compulsory cumulative voting system, resulting in legal violations before the election of directors such as coercion or enticement. As a result, ambitious shareholders are more likely to enter into such contract through unjustified means to achieve the objective of manipulating the company. Since such contract violates good social morals, it shall be deemed invalid. Similar views were subsequently adopted in the 96-Tai-Shang-134 Decision of the Supreme Court and the 105-Chung-Su-260 Decision of the Taichung District Court of Taiwan.
However, to encourage strategic alliances and mergers and acquisitions among companies or shareholders and to stabilize the policies of the companies during a corporate merger or acquisition and to consider the fact that shareholders’ voting rights contracts are generally recognized under company laws in major states in the US, such contracts should not be prohibited. Therefore, Article 10, Paragraph 1 of the Enterprise Mergers and Acquisitions Law specifically provides that shareholders may agree, by way of written contract, the manners in which shareholders’ voting rights are exercised jointly as well as other relevant matters.
2. Restrictions are eased to recognize the legal effect of a voting agreement for close companies.
According the legislative reasons for Article 356-9, Paragraph 1 of the Company Law, which was added on July 1, 2015, it is specifically stipulated, in reference to Article 10, Paragraph 1 of the Enterprise Mergers and Acquisitions Law, that shareholders of a close company may enter into a voting agreement so that they may pull together minority shareholders by way of agreement or trust to gather the required voting rights and consolidate the leading role of the management in the company by exercising their voting rights jointly.
3. There seems to be a tendency to completely recognize voting agreements with respect to non-publicly offered companies limited by shares.
Pursuant to Article 175-1, Paragraph 1 as added in the draft partial amendments to the Company Law by the Ministry of Economic Affairs on December 22, 2017, it specifically allows, in reference to the above provisions concerning close companies limited by shares, shareholders of a non-publicly offered company limited by shares to agree to the manners in which shareholders’ voting rights may be jointly exercised by way of written agreement. Moreover, the Taiwan High Court further indicated in its 105-Chung-Shang-621 Decision the several reasons why a voting agreement does not violate good social morals and is effective as follows:
(1) Shareholders are free per se to decide on the exercise of the voting rights associated with their shares. A voting agreement does not change the number of voting rights owned by each shareholder through their shares, which does not run counter to the rationale under the Company Law that there shall be fairness for each “share,” not for each “shareholder.” Agreement on voting rights among shareholders does not always translate into legal violations such as coercion or enticement before the election of directors, and it is not necessarily true that such contract is always executed via unfair means for achieving the objective of manipulating the company. Therefore, to the extent that compulsory legal requirements or good social morals are not violated, prior agreement among several shareholders on the direction in which their voting rights will be exercised should be recognized out of respect of the freedom of private individuals to operate enterprises, to further the benefits of companies and all shareholders, to observe the principle of contractual freedom, to help introduce foreign investors to stimulate domestic economy, and to facilitate overseas deployment and participation of international competition by enterprises.
(2) Although a voting agreement may result in the fact that shareholders holding relative less shares cannot become a member of the management by being elected as directors, which undermine the legislative objective of safeguarding the opportunities of minority shareholders to be elected directors or supervisors through the cumulative voting system under Article 198, Paragraph1 of the Company Law, still whether the cumulative voting system can actually safeguard the opportunities of minority shareholders to be elected directors and supervisors depends on the number of seats of directors and supervisors and the shareholding of each shareholder. No universal conclusion can be drawn on such basis. Therefore, it is certainly inappropriate to ignore the differences of individual cases and overrule the legal effect of a shareholder voting agreement simply because the cumulative voting system can theoretically provide minority shareholders with opportunities to be elected directors or supervisors and the voting agreement may interfere with the freedom of shareholders to exercise their voting rights.
(3) The agreement among shareholders on the direction in which their voting rights are to be exercised is substantively similar, in meaning, to the scenario where proxies are solicited by some shareholders from other shareholders to support specific proposals or to support the election of specific candidates to be directors or supervisors. Now that the system for soliciting proxies is recognized under current laws, there is certainly no need to deny the legal effect of a voting agreement across the board. Such legislative trend is evidenced by the fact that relevant laws and draft amendments to the Company Law have appropriately recognized the validity of a voting agreement among shareholders.
Based on the foregoing reasons, the legal effect of a voting agreement is increasingly accepted according to legal revision trends or the tendency of attitude changes in the practical opinions of courts. This also falls in line with the practical needs and practices of cross-border investors. It is hoped that lawmakers can specifically recognize the legal effect of voting agreements in the Company Law as soon as possible to change the long-term attitude of courts, which completely deny the legal effect of a voting agreement based on the Supreme Court’s decision in 1982.
However, it should be specially noted that since the application scope of voting clauses in practice is very broad, they more often apply to restrictive agreement on the exercise of voting rights over specific proposals in addition to the election of directors and supervisors. In reference to legislative examples and court opinions in the UK or US, it can be concluded that although they basically recognize the validity of voting agreements, they still consider the manners in which agreement is reached on voting clauses in individual cases. If the statutory authority of a company’s board of directors is impaired or if public policies are violated or if there is any fraudulent intent, the agreement would still be deemed invalid[1]. In conclusion, even if lawmakers generally and comprehensively recognize the legal effect of a voting agreement, it is still necessary to continuously observe the acceptance of different types of contractual provisions by courts in Taiwan to prevent such clauses from being invalidated due to their design.
[1] Ta-wei Kuo, Legal Effect of Voting Agreements, Proceedings of the Seminar on Laws and Policies Concerning Share Transfers of State-owned Enterprises, Organized by the Taiwan Law Foundation, January 20, 2018.