June 2022
Elizabeth Pai and Lilian Hsu
Article 209, Paragraph 1 of the Company Act stipulates: “A director who does anything for himself or on behalf of another person that is within the scope of the company’s business shall explain to the shareholders’ meeting the essential contents of such an act and obtain its approval.” The purpose of this provision is to prevent directors from carrying on business similar to that of the company, which may result in a conflict between their interests and those of the Company and result in the failure of the directors to faithfully perform their duties, which may in turn impair the interests of the Company. Therefore, the Company Act stipulates the “non-competition obligation of directors” as part of the directors’ fiduciary duty. .
With regard to the scope of ” competition” as mentioned above, the Ministry of Economic Affairs believes that in case a director serves concurrently as a director or managerial officer of another company operating the same type of business, if the two companies have a 100% shareholding parent-subsidiary relationship, although they are legally two separate legal entities, they are actually one in an economic sense and there is no conflict of interest between them. Therefore, the interlocking directorate in this case does not constitute the competition under Article 209 of the Company Act (the Jing-Shang-10102435880 Circular of October 11, 2012 from the Ministry of Economic Affairs).
In comparison with the relatively conservative attitude towards the determination of ” non-competition ” of the Ministry of Economic Affairs, which believes that “the interlocking directorate between affiliated companies does not constitute competition only when such affiliated companies have a “100% shareholding parent-subsidiary relationship,” the courts have gradually relaxed the criteria for “non-competition” ” in recent years, holding that affiliated companies are not in competition with each other (the 107-Shang-198 Civil Decision of the Taiwan High Court Civil). In addition, the court has even held that the interlocking directorate of affiliated companies is not harmful to the company’s interests, but can expand the group’s overall operating synergy and reduce additional agency costs (the 109-Su-2580 Civil Decision of the New Taipei District Court of Taiwan). In March 2021, the Supreme Court even ruled that “if two companies have a 100% shareholding parent-affiliate relationship, if their shares are 100% held by the same juristic person directly or indirectly, or if they are affiliated companies to each other (compare Article 369-1 of the Company Act), although they are different legal entities since they exist independently, since they are one in an economic sense or do not have any conflict of interest, they are not considered to be in competition with each other.” This shows that the mainstream opinion of the court is that the interlocking directorate of the affiliated companies does not fall within the scope of “competition” within the meaning of Article 209-1 of the Company Act.
The Jing-Shang-10102435880 Circular of October 11, 2012 from the Ministry of Economic Affairs (which held that unless the affiliated company in question is a parent company or subsidiary with 100% shareholding, a director serving as a director or managerial officer of an affiliated company is still required to obtain the approval of the shareholders’ meeting) still reflects the current position of the Ministry of Economic Affairs.
In summary, although the courts are gradually relaxing the determination of “non-competition,” still the Ministry of Economic Affairs is relatively conservative. Therefore, it is recommended that when a director plans to serve as a director or managerial officer of a “non- fully-owned affiliated company,” it is still advisable to obtain the approval of the shareholders’ meeting pursuant to the above provisions of the Company Act to avoid disputes.