Under the structure of corporate governance where the management right is separated from the ownership, most shareholders do not directly participate in the operation and management of the company, and the company’s operating information such as finance and sales is controlled by the management, resulting in serious information asymmetry between the company’s shareholders and management. Therefore, the rights and interests of shareholders fare very poorly. To strike a balance by enabling shareholders to supervise the internal behavior of the company and prevent legal violations, Article 245 of the Company Act sets up a system where minority shareholders may apply to appoint an inspector, which empowers shareholders who meet specific conditions to apply to a court to appoint an inspector. By such system, the rights and interests of all shareholders can also be protected through an audit performed by an external professional third party on the business operations, financial accounts and property status of the company so as to supplement the inadequacy of the supervisor mechanism.
To benefit shareholders who need to adopt the inspector appointment system or to allow the company or interested parties facing the shareholders’ appointment of an inspector to gain a preliminary understanding of such system, this article will briefly introduce practical manners in which the inspector appointment system upon application of minority shareholders is operated.
1. Principle followed by the court concerning the inspection application of shareholders – formal examination:
In accordance with Article 245, Paragraph 1 of the Company Act: “Shareholders who have been continuously holding three per cent of the total number of the outstanding shares of a company for a period of one year or longer may apply to the court for appointment of an inspector to inspect the current status of the business operations, financial accounts and property of the company.” With respect to the criteria for a minority shareholder’s inspection appointment application, there is no qualification restriction other than the requirements that the shareholder shall continuously hold 3% of the total number of the outstanding shares of the company for a period of one (1) year or longer.
In addition, an observation of the current practices shows that if shareholders meet the statutory requirements under the above-mentioned Company Act in their application to the court to appoint an inspector to inspect the status of the business operation, financial accounts and property of the company, the court usually grants such application (although there were instances where the court rejected inspection appointment application due to the court’s finding that the shareholders had obviously abused their rights, still such instances were relatively rare). Moreover, since an application to appoint an inspector is a non-litigation event, which shall be handled pursuant to a non-litigation procedure, the court only needs to conduct formal examination and adjudication to determine if the shareholders meet the above requirements under the Company Act. The court does not need to and should not conduct substantive examination and adjudication (please refer to the gist of the 90-Tai-Kang-649-Ruling of the Supreme Court and the 89-Tai-Kang-660-Ruling of the Supreme Court).
2. How does a court determine the inspector to be appointed?
First, shareholders may nominate an inspector candidate to the court upon appointment application. However, the court may also ask a third party (such as a bar association or a CPA association) to recommend candidates before appointing an inspector.
Although there is generally no specific provision that constrains the qualifications of an inspector, still a disinterested person with relevant expertise (such as professional backgrounds in commerce, law, finance or accounting and educational training or experience associated with the company’s business) shall be appointed.
Moreover, since the exercise of the inspection right may also interfere with the company’s operation and affect its normal business execution; pursuant to Article 172 of the Non-litigation Law and practical opinions, the court is required to inquire of the parties and interested persons (who are persons whose rights and interests will be affected by such court ruling and whose scope should be generally determined based on factors such as the objects of legal protection, the objectives of regulation and the desired regulatory effects) about their opinions on “whether an inspector should be appointed” and “who the appropriate candidates are for the inspector” to enable the court to make a correct judgment on matters relating to inspector appointment so as to balance the conflicts of interest between minority shareholders and the company concerning the inspection right and to safeguard the rights and interests of both.
In addition, with respect to a court’s ruling on inspector appointment pursuant to Article 245, Paragraph 1 of the Company Act, a dissatisfied party or interested person may appeal against the ruling at all times (Article 175, Paragraph 1 of the Non-litigation Law). In practice, there were instances where a company subject to such inspection successfully appealed against such ruling on the ground that the court had failed to carry out the procedure of inquiring about the opinions of the parties before appointing an inspector or that the inspector so appointed by the court had conflicts of interests with both parties.
3. Scope of corporate documents which may be inspected by the appointed inspector:
Currently, there is no clear demarcation in this matter in practice. Instead, it is perceived that the inspector should inspect the status of the company’s business operations, financial accounts and property after exercising his/her discretion within an objectively reasonable and necessary scope based on actual inspection needs, his/her professional convictions, and the differences between the facts of the individual case and the appointment authority. To wit, the inspector may basically inspect all relevant documents he/she deems necessary. There is no specific prior limitation on the scope and time periods of inspected documents in practice.
4. After the completion of inspection:
After an inspector completes the inspection, a written report shall be submitted to the court. If necessary, the court may also inquire of the inspector. Moreover, if the court deems necessary with respect to the report so submitted, it may order the supervisors to convene a shareholders’ meeting to provide explanation to the shareholders (Article 173 of the Non-litigation Law and Article 245, Paragraph 2 of the Company Act).
In addition, Article 8, Paragraph 2 of the Company Act provides that an inspector is also a responsible person of the inspected company within the scope of his/her inspection execution. To wit, the inspector executes inspection on behalf of the “inspected company” and is required to perform the inspection duty independently by fulfilling the duty of care as a good administrator. The inspector neither serves the minority shareholders who makes the appointment application nor is directed or supervised by them. Therefore, the inspector shall not disclose any relevant documents under inspection to the applying shareholders without the court’s instruction, and the shareholders applying for reviewing such inspection report are required to apply to the court according to the file review application procedure.
However, if the contents of the inspection report involves the company’s business secrets, the court may still limit or reject the file review application upon other parties’ application or ex officio (Article 48 of the Non-litigation Law and Article 242, Paragraph 3 of the Code of Civil Procedure). Therefore, it is not true that minority shareholders are certainly entitled to obtain the inspection report or review its entire contents. In practice, there were cases where a juristic person shareholder applied to review an inspection report on the company but the court restricted such juristic person from reviewing documents between the company and third parties concerning privacy or trade secrets as contained in the inspection report after inquiring about the company’s opinion that such juristic person shareholder and the company had business competition relationship (106-Fei-Kang-32 Ruling of the Taiwan High Court).
In addition, if legal violations are indeed found in an inspection report issued by an inspector, minority shareholders may also rely on the contents of such inspection report as evidence to seek civil or criminal remedies (e.g., bringing civil suit against the company’s directors to seek damages compensation or remove the directors for breach of fiduciary duty or pressing criminal charges for breach of fiduciary duties). However, the remedies so pursued will be treated as separate independent cases, and the contents of the inspection report are not binding to the court. In past cases, the court still independently examined and determined the facts of the case and formed its opinion based on the merits of the individual case, and in consideration of the assertions by the parties in the course of litigation and other relevant evidence. It was not true that the court always adopted the entire contents of an inspection report.