The use of a “voting agreement” to stipulate chairman, director and supervisor candidates should be invalid (Taiwan)

Grace Chiang

The Taiwan High Court rendered the 107-Chung-Shang-402 Civil Decision of October 23, 2018 (hereinafter, the “Decision”), holding that the use of a “voting agreement” to stipulate chairman, director and supervisor candidates should be invalid.

The Appellant in this matter filed a complaint alleging as follows.  He was previously the chairman of Company A (a listed company), while the Appellee was a director.  To secure the chairmanship, an agreement (hereinafter, the “Agreement at Issue”) was executed with the following main provisions: the Appellee shall choose either of the following options: (1) the Appellant supports the candidate assigned by the Appellee to be new chairman in exchange for a payment of NT$200 million by the Appellee; or (2) the Appellee resigns as a director and gives full support to the candidates assigned by the Appellant to be directors and supervisors in exchange for a payment of NT$200 million by the Appellant.  If no choice was made within the required period, Option (2) shall be deemed to have been selected.  If either party defaulted, a default penalty shall be paid by the party in default.

However, the Appellee did not make a choice but introduced an extemporaneous motion in a board meeting of Company A to take a vote to remove the Appellant as the chairman and to be appointed as the chairman.  Since this violated the Agreement at issue, a complaint was filed to claim a default penalty from the Appellee.

According to the Decision, the Agreement at Issue had the characteristics of a “voting agreement.”  However, if a voting agreement may be executed between and among shareholders in advance, a company is likely to be controlled by a small number of major shareholders.  This is not only unfair to minority shareholders but also is conducive to illegalities before director elections, such as imposition of threats or enticement with benefits.  Moreover, ambitious shareholders are more likely to enter into such an agreement by unjust means to achieve the objective of manipulating the company.  Since this goes against the original purpose of the provisions concerning resolutions adopted in shareholder meetings or board meetings under the Company Law and violates good social morals, such agreement should be construed to be invalid.

Moreover, the system of directors, board meetings and supervisors of a company limited by shares is designed for professional division as well as checks and balances to pursue the company’s sustainable development and the shareholders’ interest.  The election of directors, chairmen and supervisors should certainly be handled pursuant to law.

Therefore, that the two parties agreed, via the Agreement at Issue, to grant one party with the options to purchase the voting right of the other party or to have his own voting right purchased by the other party would render meaningless the system in which directors, supervisors and chairmen are elected under the Company Law.  This would also affect the general investors who purchase the shares of Company A in an open market.  Based on the foregoing, the Agreement at Issue should be invalid and could not effectively bind the Appellee.  Therefore, the Appellant shall not request the Appellee to pay the default penalty on such basis.