含羞草社区

Based on our experience assisting South Korean clients in expanding their business presence in Taiwan, we understand that the topics of greatest concern to them are business formalities and the protection of intellectual property during employment services. This article provides a concise yet thorough analysis of these two aspects.

Types of business entities

There are four types of business entities under Taiwan’s Company Act, including:

1. 1. Unlimited company;
   2. Unlimited company with limited liability shareholders;
   3. Limited company; and
   4. Company limited by shares (article 2). Limited companies and companies limited by shares are the most common types of entities established for operating businesses in Taiwan.

Limited company. A limited company is organised by one or more members (article 2). The liability of a member to the company is generally limited to the capital contribution of that member (article 99). Limited companies do not issue shares, and the transfer of a member’s capital contribution is subject to the approval of the majority of the members and the other members’ pre-emption right (article 111).

Company limited by shares. A company limited by shares is organised by at least two shareholders, or a sole shareholder in the case of a government shareholder or a corporate shareholder (article 2). The company is formed with capital being divided into shares of equal value, and with the liability of the shareholder to the company being generally limited to the amount to be paid on the shares held by such shareholder (article 154).

In principle, the shareholders may freely transfer their shares to others (article 163), except where the transfer of preferred shares may be restricted if so provided in the company’s articles of incorporation (AOI) (article 157), and in the case of a close company (article 356-1).

A company limited by shares may also opt to be registered as a “close company” if it has fewer than 50 shareholders and its AOI imposes a restriction on transferring the company’s shares (article 356-1). A close company enjoys more flexibility than a non-close company. For example, a shareholder of a close company could contribute to the company’s equity capital by providing services to the company, while this is not allowed in a non-close company (article 356-3).

Branches. In addition to the major formalities previously mentioned for establishing business entities, foreign companies may also opt to set up a branch in Taiwan. The branch will generally possess the legal capacity necessary for day-to-day operations, such as entering into purchase orders with retailers and suppliers, hiring employees, and enrolling them in mandatory social benefits schemes.

However, it is crucial to understand that a branch office is merely an extension of the foreign company in Taiwan, not an independent legal entity. This means that the foreign company is liable for the actions of its branch office in Taiwan.

Given the advantages of limited liability and the flexibility to transfer shares, a non-close company limited by shares, or a limited company, is frequently chosen by foreign investors when establishing a subsidiary in Taiwan. Establishing a branch may be a quicker but riskier option as it could expose the foreign parent company to legal liabilities.

IP protection in employment

According to the Labour Standards Act (LSA) and its enforcement rules, all major labour conditions must be clearly outlined and mutually agreed on in employment agreements to be enforceable. In practice, Taiwanese employers who recognise the necessity of IP protection typically include three major types of restrictive covenants in their employment agreements. These covenants are designed to prevent the unauthorised disclosure of trade secrets or any other confidential information resulting from a breach of contract.

Post-employment non-compete undertaking. The enforceability of post-employment non-competition obligations outlined in employment agreements between Taiwanese employers and their employees is subject to specific legal requirements. More specifically, the enforceability of these obligations depends on whether the criteria established in article 9-1 of the LSA are met.

These criteria include:

1. 1. The employer must have legitimate business interests that require protection through such a clause;
   2. The employee’s position must provide access to, or the ability to utilise, the employer’s trade secrets;
   3. The duration, geographic area and scope of the non-competition clause must be reasonable; and
   4. The employer must provide reasonable compensation to the employee, which should be no less than 50% of the employee’s average monthly salary at the time of termination.

As for reasonable compensation, article 9-1 of the LSA and article 7-3 of the enforcement rules stipulate that the employer must provide reasonable compensation that meets all of the following requirements (this will be subject to judicial review on a case-by-case basis if challenged by the employee):

1. 1. At least 50% of the employee’s monthly average salary;
   2. Sufficient to cover the employee’s living expenses during the non-compete period following termination; and
   3. Commensurate with the loss suffered by the employee in terms of duration, region, scope of professional activities, and lost employment opportunities due to compliance with the non-compete agreement.

Therefore, to determine the exact amount of the monthly average salary and the corresponding reasonable post-termination compensation, employers should, under the lenient definition of the court precedents and the burden of proof prescribed by the Labour Incident Act, consider any additional regular payments that the employee received in the six months immediately preceding the termination of employment.

Non-solicitation clauses. Due to the complex statutory requirements and the significant risks of being deemed non-compliant and having agreements invalidated by the court, some foreign employers opt for non-solicitation clauses as an alternative means of preventing employees from soliciting key customers or talent after termination.

Currently, there is no explicit legislation in Taiwan regarding non-solicitation agreements for customers or employees between employers and employees.

Under the principle of freedom of contract, parties in an employment relationship may negotiate their own terms. However, the court will assess the reasonableness and fairness of such clauses on a case-by-case basis if their enforceability is challenged by employees in a post-employment labour dispute.

IP compensation and moral rights. For IPs under the Patent Act, compensation is mandated but may be waived through a contractual agreement. While some courts hold the view that an explicit stipulation excluding compensation in employment contracts is adequate, other courts may still assess whether employees are reasonably compensated overall.

This assessment may include considerations such as the base salary and the value of the invention or patent created by the employees.

Under articles 11 and 21 of the Copyright Act, moral rights are exclusively held by the author and cannot be transferred or assigned. When a job is created by an employee within the scope of their employment, that employee is considered the “author” of the work. However, if an agreement specifies that the employer is the author, that agreement will take precedence.

According to articles 7.4 and 21 of the Patent Act, the right to be recognised as an “inventor” cannot be waived or assigned. If the ownership of the right to apply for a patent and the patent rights are vested in the employer or the funding provider, the inventor, utility model creator or designer involved is entitled to have their name acknowledged as such.

In light of the above-mentioned, even in cases where employers and employees have reached an agreement in the employment agreement regarding the ownership of copyrightable and patentable works created during employment, it is crucial to specify or restrict employees from exercising their moral rights if deemed necessary by the employers.

LEE AND LI, ATTORNEYS-AT-LAW
8F, No. 555, Section 4
Zhongxiao E Rd
Taipei 11072
Taiwan, ROC
Tel: +886 2 2763 8000
Fax: +886 2 2766 5566
Email: attorneys@leeandli.com