Author: Janine Lin
The newly enacted Article 173-1 of the Company Act allows shareholder(s) to directly convene a special meeting of shareholders without the approval from the Ministry of Economic Affairs, which draws intensive public attention and discussion. This has also been referred to by media as “Tatung Provision,” because Tatung Company, a well-known public company controlled by the family of Lin, Wei-Shan, will likely encounter a fight for change of control pursuant to this new provision.
Photo Courtesy Juhasz Imre CC BY 2.0
I. Shareholders are not allowed to directly convene a special meeting of shareholders prior to the enactment of Article 173-1 of the Company Act.
Prior to the enactment of Article 173-1 of the Company Act, any shareholder(s) of a company could only convene a special meeting of shareholders after an approval from the competent authority in the following two situations:
- The shareholders having continuously held 3% or more of the total number of issued shares for a period of 1 year or a longer time, and having filed a written proposal setting forth the subjects for discussion and the reasons to request the board of directors to call a special meeting of shareholders, but the board of directors fails to give a notice for convening a special meeting of shareholders within 15 days after the filing of the request, may then convene a special meeting. (See Paragraphs 1 & 2, Article 173 of the Company Act).
- The shareholders having held 3% or more of the total number of issued shares, and the board of directors fails to or cannot convene a meeting of shareholders by reason of share transfer or any other causes may convene a special meeting. (See Paragraph 4, Article 173 of the Company Act).
For public companies, Paragraph 4, Article 43-5 of the Securities and Exchange Act provides that, “[i]f, after the public tender offer, the total number of issued shares of the acquired company held by the offeror and its related parties exceeds 50% of the total number of shares issued by the company, the offeror may, by a proposal in writing, with reasons stated therein, request the board of directors to convene a special meeting of shareholders; the restrictions set forth in Paragraph 1, Article 173 of the Company Act shall not apply.”
II. Shareholder(s) continuously holding more than half of the total number of the company’s issued shares for no less than three months can directly convene a special shareholders’ meeting under the newly enacted Article 173-1 of the Company Act.
The newly enacted Paragraph 1, Article 173-1 of the Company Act provides that, “[a]ny number of shareholder(s) of a company who has/have continuously held more than 50% of the total number of outstanding shares for a period of 3 months or a longer time may convene a special meeting of shareholders on his/their own (emphasis added).” This means any shareholder who can satisfy the requirements of both shareholding ratio and holding period specified above, will be entitled to call a shareholders’ meeting without filing a request to the board of directors and obtaining the competent authority’s approval in advance.
The purposes of this new provision are to improve the corporate governance and to break the deadlock when the company’s board of directors refuses to convene a special shareholders’ meeting upon the request from the shareholder(s) under the existing Company Act. This provision gives the majority shareholders an opportunity and a right to participate in the company’s governance and to replace the existing directors if they are not satisfied with the current business performance. Ideally, only those who can improve the company’s performance and competitiveness could win the support from the majority shareholders and remain as the company’s operation and management level. This provision embodies the protection of the shareholder’s right over the company.
III. Opinions on this new “Tatung Provision.”
Opponents criticized that this provision would endanger all Taiwanese enterprises and industrial stability, because this will open a door to massive invasion and acquisition by China-sourced investors and frequent changes of control within the companies. Opponents also pointed that this provision may contradict Paragraph 4, Article 43-5 of the Securities and Exchange Act, which entitles a tender offeror acquiring more than 50% of a public company’s issued shares to request the company’s board of directors to convene a special shareholders’ meeting, and hence create confusion regarding the applications of these two provisions.
On the other hand, the supporters argue that if majority shareholders may be entitled to convene a special shareholders’ meeting and to change the composition of the board of directors in line with the shareholding ratio, the company’s business performance would be more beneficial to more shareholders. This new provision could mend a long-existing and common flaw among companies in Taiwan. Many Taiwanese companies, especially public companies or family businesses, are strictly controlled by minority shareholders or the founder’s family members, who only hold a small number of shares of the company. But the business performance of these companies usually are poor and the incumbent board of directors neglect to create value for most shareholders. With this new provision, such flaw may be fixed by entitling the majority shareholders to replace poorly performed existing directors with capable new ones.
For example, Tatung Company, which used to be Taiwan’s largest conglomerate known for consumer electronics, had been long controlled by its founder’s family members with minimum shareholding, and had been strongly complained by many individual shareholders about its long-term poor business performance and market value of the shares. Meanwhile, Tatung Company had not distributed any dividends to its shareholders for more than a decade due to continuing financial losses. Later in 2017, Tatung Company’s board of directors, which have close ties to the founder’s family, controversially excluded the candidates of directors nominated by opposing shareholders from the directors election at the annual shareholders’ meeting. These phenomena are criticized as a serious deviation of the basic principles of corporate governance and have resulted in the support of the enactment of Article 173-1 of the Company Act.
In addition, the notion that Article 173-1 will open a door to PRC funding invasion is rejected by the supporters. Taiwan Financial Supervisory Commission (“FSC”)’s supervision over Tatung Company’s shareholding can be a good illustration. In both 2016 and 2017, FSC detected and fined twice the PRC funding which illegally sneaked in and acquired Tatung Company’s shares. FSC also demanded those illegal investors to sell these acquired Tatung shares within a mandated period. FSC’s actions show that the competent authorities can and will closely monitor any illegal investment sourced from PRC. Furthermore, if shareholders are capable of acquiring half or more of a company’s total issued shares within three months, it means such shareholders are powerful enough and whose interests are aligned with the company to justify the convention of a meeting of shareholders to elect new directors and supervisors.
Besides, in response to the question regarding the applications of Article 173-1 of the Company Act and Paragraph 4, Article 43-5 of the Securities and Exchange Act, the FSC proposed to remove the latter provision and such proposed amendment to the Securities and Exchange Act is now pending the Legislative Yuan’s deliberation. Once the amendment is passed, no matter the company is a public company or not, shareholders holing 50% or more of the company’s total issued shares for no less than three months are entitled to directly convene a special meeting of shareholders without a request to the board or an approval from the competent authority.
Article 173-1 of the Company Act will become effective on January 1, 2019. It is worthy to observe whether Tatung Company would face the change of control after the effectiveness of this new provision, how often the application of this new provision would be, and what the companies controlled by minority shareholders would do to cope with the impact of this new provision.