Analysis of the 2018 Amendment to the Company Act – “SOGO Provision” (Series No.1)

Author: Jamie C. Yang

On July 7, 2018, the Legislative Yuan, which is the national legislation body of Taiwan, announced amendment to hundreds of provisions of the Company Act. The Amendment is hailed as the largest revamp on the Company Act in 17 years with ambition to improve corporate governance, ease rules on corporate fundraising, and strengthen the anti-money laundering mechanism.[1] This article will be the first one of Innovatus Law’s new series of analyzing major topics of the 2018 Amendment.

Bank Tower by Kyle Pearce is licensed under CC BY-SA 2.0

Amendment to Section 4, Article 9, or the “SOGO Provision,” as referred to by major media outlets in Taiwan, is one of the most significant changes to the Company Act and has become a hotly-debated issue during the late stage of the legislation process. The SOGO Provision received its name from the long drawn-out fight over the control of the Pacific SOGO Department Stores among three camps, Min-Chiang Chang (章民強) and his family who control the Pacific Construction Group (太平洋建設集團), the real estate magnate Heng-Long Lee (李恆隆) and the multi-facet conglomerate Far Eastern Group (FEG, 遠東集團). There are more than eighty lawsuits filed in the Taiwanese civil, criminal and administrative courts spanning over the past decade arising from their dispute.[2]

I.   The Decade Long Corporate Control Fight Over Pacific SOGO Department Store

Chang (章民強) and his family were the controlling shareholders of the Pacific Construction Group. The group was hit hard by the 1997 Asia Financial Crisis and the September 21, 1999 mega-earthquake, became short of working capital and was on the brink of default on bank loans and facing foreclosure. The Chang family also owned the Pacific SOGO Department Store which was generating good cash flow, but not enough to pay the bank loans with approaching due dates.

The Chang family desperately sought help through their connections to save their businesses, and eventually, Chang turned to Lee. Chang first came to know Lee during a purchase from him certain real estate at the heart of Taipei City. To improve the creditworthiness of Pacific SOGO Department Stores, Chang ceded his position as the president of Pacific SOGO Department Stores to Lee, who claimed to have good credit and can act as a new guarantor to the department store’s bank loans.

Later, Pacific Distribution Investment Co., Ltd. (“Pacific Distribution”, 太平洋流通投資股份有限公司) was structured as the sole shareholder of the Pacific SOGO Department Stores, and whoever controls Pacific Distribution will control Pacific SOGO Department Stores. Pacific Distribution is a company limited by shares which has 1 million shares (with a paid-in capital of 10 million NTD) in total, and 400,000 shares were held by Pacific SOGO Department Stores and 600,000 shares were held by Lee.

While Lee contacted FEG to invest in Pacific Distribution, the Chang family favored  another group of investors, Sunrider (仙妮蕾德) and the Humble House Group (寒舍集團) and they entered into a MOU for Sunrider to acquire the shares in Pacific SOGO Department Stores and the Humble House Group to acquire the building and the land lease. Nonetheless, the MOU was never enforced because by then the Chang family no longer had control over Pacific Distribution.

The board of Pacific Distribution consists of three directors, Lee, Chang and Yong-Ji Lai (賴永吉). On September 19, 2002, Lee and Lai ousted Chang from the board. Two days later, an extra ordinary shareholders’ meeting and a board meeting of Pacific Distribution took place at Lee’s residence and an officer of one of FEG’s subsidiaries, Ming-Zong Guo (郭明宗), was the one who prepared the meeting minutes. According to Guo’s testimony, he was instructed by his senior officer to observe a meeting to be held in Lee’s residence to increase Pacific Distribution’s capital. When Guo arrived, Lee was the only one present and he held Lai’s proxy letter. Lee advised that he and Lai had reached a consensus, and instructed Guo to act as the meeting secretary and dictated the main points of their consensus. Guo’s note provided that Pacific Distribution’s total capital shall be increased by 4 billion NTD, and 1 billion NTD of which shall be in cash. Guo’s note was filed at the Ministry of Economic Affairs’ company registry as Pacific Distribution’s board and shareholders’ meeting minutes.

Later, Lee and FEG had a fallout about procedures and substance of the agreed capital increase. According to Lee, they have an agreement which required FEG to first seek valuation reports about Pacific SOGO Department Stores and Pacific Distribution, then purchase shares in Pacific Distribution, and finally FEG and Lee shall increase Pacific Distribution’s capital to 4 billion at the ratio of 67:33. While Lee had sold his 600,000 shares in Pacific Distribution to FEG on paper, he claimed that those shares were not sold to but only entrusted to FEG, and FEG breached the trust.

The filing at the company registry became the legal battleground. If the company registration withstands legal challenge, FEG would remain as the controlling investor of Pacific Distribution because the total capital was increased to 4.01 billion NTD, however, if the registration is cancelled, the paid-capital of Pacific Distribution would revert back to 10 million NTD and Lee would be a 60 percent shareholder.

II.   Legal Question: Is False Documentation a Ground to Cancel Company Registration?

The previously effective Section 4, Article 9 of the Company Act provides that “after a company has been adjudicated, by a final judgment, to have submitted any forged or altered documents in filing an application for registration of its company incorporation or other company alterations, the prosecutors’ office shall notify the central competent authority to cancel or to nullify such registration of the said company.”

There are, however, a couple of different crimes associated with forged or altered documents. The crime of forgery criminalizes a person who produces a document in the name of another person without authorization. The crime of false documentation criminalizes a person who records in his line of work facts which he knows that are untrue and causes injury to the public or another person. Guo was charged and convicted of the crime of false documentation but not forgery.

The question before the courts was, whether the crime of false documentation falls within the scope of crimes provided in Section 4, Article 9, and if the answer were affirmative, the company registration would have been revoked. The law was unclear, but most courts had narrowly construed the crime in Section 4, Article 9 to exclude the crime of false documentation.

Nonetheless, the High Prosecutor’s Office notified the MOEA to cancel the company registration following Guo’s conviction of false documentation, and in 2010, the MOEA methodically cancelled all modifications to Pacific Distribution’s company registry since 2002.

III.   Legal Question: Does a Person who would Lose Shareholder Status per the Cancellation of Company Registration have Standing?

In 2010, when the MOEA cancelled all modifications to Pacific Distribution’s company registry since 2002, it literally wiped out all investment by FEG. FEG immediately appealed to the [Administrative] Petitions and Appeals Committee, which reviews decisions made by the MOEA. The Committee held, because the MOEA’s cancellation decision was made on Pacific Distribution and not FEG, and even though FEG’s shares in Pacific Distribution were wiped out by the decision, FEG has no legally recognizable interest and has no standing to challenge.

FEG appealed the Committee’s disposition to Taipei High Administrative Court. In late 2010, the court found that FEG’s shareholder’s interest in Pacific Distribution was adversely affected by MOEA’s decision, and it further held that FEG’s shareholder’s interest is a legally recognizable interest and revoked both the Committee’s holding and the MOEA’s cancellation decision. This was a significant victory for FEG, and the case was sent back to square one and the company registration cancellation was revoked.

IV.   The 2018 Amendment’s Response to the Legal Questions

1. All crimes in the Offenses of Forging Instruments or Seals Chapter are grounds to cancel or nullify filings

Throughout the SOGO Department Stores litigation, the scope of crimes that are covered under Section 4 of Article 9 was unclear, and most courts had excluded the crime of false documentation by narrowly construing the crime in Section 4, Article 9.

The 2018 Amendment of the Company Act takes the opposite view. The amended Section 4, Article 9 now reads, “If the person-in-charge, an agent or an employee has been adjudicated, by a final judgment, to have committed a crime in the Offenses of Forging Instruments or Seals Chapter (emphasis added) in the Criminal Code in filing an application for registration of its company incorporation or other company alterations, the central competent authority shall, at its discretion or by application of an interested party, to cancel or to nullify such registration of the said company.”

2. Interested parties can also seek cancellation of the company registry, and the MOEA can also rectify at its own initiative

Prior to the Amendment, the law provided that the prosecutors’ office shall notify the central competent authority to cancel or to nullify the company registration following a final judgment of forgery. Although jurisprudence and academic writing are in the opinion that the MOEA is not bound by the prosecutors’ office’s notice, but in practice, the MOEA has no incentive to make its own determination.

The Amendment obligates MOEA to make its own determination following a final judgement of any crime in the Offenses of Forging Instruments or Seals Chapter committed in filing a company registration application. The Amendment also open the door to interested parties to apply to the MOEA for cancellation in the same scenario. The door to challenge the company registry is now much wider.

3. Interested parties also have legal standing to challenge a MOEA decision to not cancel company registry

In the case of the SOGO Department Stores, when FEG challenged the MOEA’s cancellation decision, the challenge was first denied for lack of legally recognizable interest and lack of standing.

By contrast, standing for interested parties is no longer an issue after the Amendment. Since the interested parties can also apply to the MOEA for cancellation, their application would either be accepted or rejected by the MOEA in the form of a decision in which that party is the addressee, and the party would have legal standing to challenge that decision.

[1] Huang Jui-hung and Frances Huang, Taiwan completes largest revamp on Company Act in 17 years,  Focus Taiwan, http://focustaiwan.tw/news/aeco/201807070005.aspx.

[2] See Jiang Yuan-Ching, The Judiciary Pacific, Reportage Publication (2014).