The Supreme Court rendered the 108-Tai-Shang-640 Decision of June 12, 2019 (hereinafter, the “Decision”), holding that the exercise of the conversion right by corporate bond holders is still subject to the restrictions on the conversion right under the conversion rules, and that only when the conversion right is exercised lawfully is the issuing company obligated to issue shares pursuant to its corporate bond conversion rules.
According to the facts underlying this Decision, the Appellee issued on June 22, 2010 a domestic unsecured convertible bond, which would mature on June 22, 2015 with a conversion period from July 23, 2010 through June 12, 2015, and formulated the rules for converting the corporate bond at issue (hereinafter, the “Conversion Rules at Issue”). The Appellant was a holder of the corporate bond at issue. When applying to the Appellee to convert the corporate bond at issue into common shares on June 10, 2015, the Appellee rejected the application on the ground that the period of April 17 through June 15 of 2015 was the period when any transfer of shares was suspended before the company’s regular shareholders’ meeting (hereinafter, the “Lock-in Period at Issue”). When the Appellant applied for conversion again on the 15th and 18th of the same month, the application was still rejected by the Appellee. Therefore, the Appellant sought a decision to compel the Appellee to convert the corporate bond at issue in the possession of the Appellant into common shares for transfer to his account in accordance with Article 9 of the Conversion Rules at Issue and Article 235 of the Company Act and to pay the dividend that should have been distributed for the period between June 16, 2015 and the delivery date of the shares and the statutory interest for the cash dividend.
According to this Decision, Paragraph 1 of Article 252 and Paragraph 1 of Article 253 of the Company Act provide that a corporate bond contract is established when the corporate bond investor specifies the investment amount in the subscription form prepared by the issuing company and affixes his/her signature or seal. A corporate bond investor can only enter into a corporate bond contract based on the conversion terms set by the issuing company and has no right to individually negotiate the provisions of the contract. Under Article 248, Paragraph 1, Subparagraph 18 of the Company Act and Article 29, Paragraph 1, Subparagraph 10 of the Guidelines for Handling the Offering and Issuance of Securities by Securities Issuers, if a corporate bond contract stipulates that the bond may be converted into shares, the manners of deciding the conversion terms (including the conversion price, conversion period and the type of shares into which conversion will be made) should be stipulated in the conversion rules. In addition, although corporate bond holders have the right to convert their corporate bonds into the shares of the issuing company under the proviso of Article 262, Paragraph 1 of the Company Act, nevertheless the exercise of the conversion is still restricted under the conversion terms stipulated under the conversion rules. Only when it is legally appropriate to exercise the conversion right is the issuing company obligated to issue shares pursuant to its conversion rules.
It was further pointed out in this Decision that since the Appellant failed to exercise the conversion right during the conversion period stipulated under Article 9, Paragraph 1 of the Conversion Rules at Issue, the conversion terms under the corporate bond contract were not met. Therefore, the original trial court was not legally inappropriate in its determination that the conversion was not valid, that the Appellee could not issue common shares, and that the Appellant could not seek a court decision to compel the payment of the dividend at issue and the interest on the cash dividend in accordance with Article 235 of the Company Act. In addition, the redemption right under Article 18 of the Conversion Rules at Issue is a right whose exercise is up to the Appellee’s decision. The failure to issue a redemption notice upon maturity can hardly be regarded as a violation of the principle of good faith. Moreover, when the Appellee’s corporate bond at issue matured, the Appellee remitted the investment back to the Appellant based on the face value of the bond in accordance with Article 6 of the Conversion Rules at Issue. Since the Appellant could not substantiate the Appellee had engaged in any falsehood, fraud or any other act sufficient to lead to the Appellant’s misbelief in the issuance of the corporate bond at issue, the Appellee certainly did not violate Article 20, Paragraph 1 of the Securities and Exchange Act.
Based on the foregoing reasons, investors seeking to purchase convertible bonds are advised to heed the restrictions under the conversion terms formulated under the conversion rules to prevent impediment to the exercise of rights.