The Supreme Court rendered the 107-Tai-Shang-4182 Decision of August 29, 2019 (hereinafter, the “Decision”), holding that a controlling company shall be held liable if it that directly or indirectly causes its affiliated company to operate in manners not consistent with normal business practice or resulting in other disadvantages without providing proper compensation to an extent that results in damage to the affiliated company.
According to the facts underlying this Decision, Appellant A, who was the chairman and president of Company B, had actual control and was the ultimate decision maker. Appellant C, who was the vice president and accounting supervisor of the company, was in charge of finance. After Company B went public, it planned to set up factories in mainland China in order to reduce production costs. With the assistance of Appellant C, Appellant A used his own money to set up a paper company in the name of a person not a party to this lawsuit in order to control the operation of outsourced factories in mainland China. In particular, Company D and Company E actually engaged in processing operation. Appellant A arranged for Company B to enter into a commissioned processing agreement with Company D and Company E. However, Company B’s revenue declined sharply. Appellant sought to reduce the losses sustained by Company D and Company E, whose capital was contributed by Appellant A. As a result, out of an intent to seek their own illegal gain and in breach of their duties, Appellants A and B, who obviously were aware that the commissioned processing agreement executed by Company B with Company D and Company E contains no provision on subsidizing idle capacity, elected to re-enter into a new version of the commissioned processing agreement containing provisions on a subsidy to idle capacity without obtaining the approval of the board of directors first pursuant to requirements such as Company B’s Contract Management Procedural Plan and the Operation Management Procedure for Related Party Transactions. Company B subsequently subsidized the idle capacity losses of Company D and Company E pursuant to the above provisions, resulting in impairment to Company B’s assets and major damage to Company B and its shareholders.
According to this Decision, the so-called “formally controlling company” and the “affiliated company” under Article 369-2, Paragraph 1 of the Company Law mean that the voting shares or capital of the affiliated company which is owned by the company which is the controlling company exceeds half of the total outstanding voting shares or total capital of the affiliated company. In addition, under Paragraph 2, the actual controlling company and affiliated company are companies with personnel, finance or business operation subject to direct or indirect control between them. In addition, Article 369-4, Paragraph 1 of the Company Law provides that the controlling company which directly or indirectly causes its affiliated company to conduct business which is contrary to normal business practice or not profitable without proper compensation at the end of the fiscal year to the extent that the affiliated company is damaged shall be liable for compensation, and this applies to formally or actually controlling companies and affiliated companies.
It was further pointed out in this Decision that according to the facts identified in the original decision, Company D and Company E were merely paper companies whose recruitment and removal of personnel, control of finance and business operation were controlled and dictated by Company B. To wit, Company B exercised direct or indirect control of such companies. The original decision held that since Company D and Company E had been established with capital privately contributed by Appellant A and Company B was not a shareholder to these two companies, Company B and the two companies had no substantive controlling company to affiliated company relationship. Therefore, there is room to further explore whether the provision of Article 369-2, Paragraph 2 of the Company Law is satisfied.