The Validity of Shareholders Voting Agreement under Taiwan Laws after Taishin Financial Holding Co., Ltd. v. Ministry of Finance

Author: Janine Lin

Chang Hwa Commercial Bank (“Chang Hwa Bank”) will hold its annual meeting of shareholders to re-elect the directors and supervisors on June 16, 2017, and the fight for the corporate control of Chang Hwa Bank between Taishin Financial Holding Co., Ltd. (“Taishin”) and the Ministry of Finance (“MOF”) draws public attention again. This dispute arose from a civil litigation filed by Taishin against MOF in the Taipei District Court, in which Taishin argued that before the 2014 annual shareholders’ meeting of Chang Hwa Bank, MOF breached the mutual consents with Taishin in 2005 by soliciting proxy appointments through securities firms and mobilizing other government controlled entities to acquire additional shares in Chang Hwa Bank on public market which lead to Taishin’s failure to maintain corporate control over Chang Hwa Bank by losing the election of directors.

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The Taipei District Court made its decision on April 27, 2016 (the “TDC decision”) and found the following:  first, the mutual consents between MOF and Taishin in 2005 (the “Agreement”) is a valid voting agreement between these two shareholders of Chang Hwa Bank; second, the Agreement contained two major provisions: (1) MOF shall transfer its control over Chang Hwa Bank to Taishin when reaching the Agreement with Taishin in 2005, and (2) MOF shall not prevent Taishin from obtaining corporate control of Chang Hwa Bank so long as Taishin remains as the largest shareholder of Chang Hwa Bank. The Taipei District Court found that the first provision is a one-time obligation and MOF had already performed it. The Taipei District Court found that MOF had a continuing obligation under the second provision not to interfere with Taishin’s control of Chang Hwa Bank. However, according the TDC decision, MOF’s proxy solicitation and mobilization of other government owned entities to acquire additional Chang Hwa Bank shares before the 2014 annual shareholders’ meeting of Chang Hwa Bank had “not” prevented Taisin from obtaining the corporate control of Chang Hwa Bank because Taishin’s shareholding alone was insufficient to obtain control. Therefore, the Taipei District Court dismissed Taishin’s contractual breach claim against MOF.

MOF promised in its letter for consideration dated July 21, 2005 “not to change its policy that the largest shareholder should control Chang Hwa Bank”. The Taipei District Court apparently interpreted the MOF’s letter as “MOF promised not to prevent the largest shareholder from obtaining the corporate control of Chang Hwa Bank”. Commentators criticized that such interpretation may well be an inappropriate twist of the original text and had prolonged the dispute between both parties. Taishin appealed to the Taiwan High Court and kept arguing that MOF is obliged to allow Taishin’s continuing control of Chang Hwa Bank in the coming 2017 annual shareholders’ meeting.

Nevertheless, the argument about the validity of “shareholders voting agreements” in the TDC decision should be praised.

The “shareholders voting agreement” requires the shareholders to agree in advance to vote their shares in certain prescribed manner. Article 10 of the Business Mergers And Acquisitions Act, and Article 356-9 of the Company Act which only governs closely-held company, are the only two provisions under Taiwan laws expressly admit the validity of such agreement. In practice, the Supreme Court always denies the validity of the shareholders voting agreement and states that such agreement violates the fair election principle under the Company Act and the good public moral. If the shareholders are permitted to enter into a voting agreement before the election of the company’s directors and supervisors, it would render the accumulative voting of directors/supervisors under Article 198 of the Company Act superfluous, as Article 198 intends to give minority shareholders an opportunity to elect their preferred candidates as the company’s directors.

Most Taiwanese scholars have different opinions. According to these scholars, shareholders voting agreement should be legal and valid for reasons such as respecting the freedom of enterprise operation, the freedom of contract and the exercise of voting rights, as the shareholders may freely dispose such rights; and the shareholders should be free to enter into voting agreements if they can authorize another person to vote on their behalf.

The TDC decision stated that the validity of shareholders voting agreement should be determined on the basis of specific circumstances of a given case. The cumulative voting under Article 198 of the Company Act cannot guarantee that minority shareholders can be elected as the company’s directors. Therefore, the validity of the shareholders voting agreement should be determined whether that specific agreement violates the mandatory provisions or good public moral. If not, such agreement should be upheld based on the freedom of contract and protection of property principles. Furthermore, the performance of the shareholders voting agreement is similar to the proxy solicitation. For example, if one shareholder desires to be elected as the company’s director but without sufficient shareholdings, he/she can reach the goal either by signing shareholders voting agreement with other shareholders or through proxy solicitation.

The TDC decision pointed out the rigid and commercially impractical flaws in Supreme Court’s prior decisions, which should be viewed positively. After all, shareholders voting agreements differ in types, and total denial of the validity of such agreements does not guarantee the protection of minority shareholders. If minority shareholders wish to elect someone as the company’s director by entering into shareholders voting agreement with other shareholders, the Supreme Court’s total denial would hinder minority shareholders from fulfilling their wish.

Some Taiwanese scholars believed that admitting the validity of shareholders voting agreements may increase the possibility for shareholders to circumvent the prohibition of proxy purchasing under Taiwanese securities regulations. This statement may be logical, but it is nearly impossible for shareholders to reach an agreement that “Party A shall pay certain amount of money to Party B” in exchange of “Party B’s voting in favor of Party A” in commercial practice because such agreement is equivalent to proxy purchasing.

Some other Taiwanese scholars believed shareholders voting agreements shall only be effective for a limited and reasonable period. But defining the “reasonable” duration may be difficult because there are no explicit laws and regulations in Taiwan. Furthermore, shareholders voting agreements usually intend to maintain the stability of the company operation. If a shareholders voting agreement is not in violation of any mandatory provisions or public good moral, constraining the duration of such agreement would be unnecessary. Therefore, we believe that the TDC decision, which stated that the effectiveness of a shareholders voting agreement depends on whether its purpose violates any mandatory provisions or public good moral in a given case, should be praised.

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