含羞草社区

When Korean companies invest in Taiwan, in most circumstances, these companies establish a Taiwanese company either by a sole proprietorship or joint venture with others (or become a new shareholder of an existing Taiwanese company). In the case of a joint venture, whether the shares can be transferred freely between the parties, the method and ratio of capital contribution and the allocation of management rights are key to the design of the contract.

Companies in Taiwan are mainly divided into limited companies and companies limited by shares. A limited company is more suitable for a sole proprietorship or a number of shareholders with a close relationship (such as a family business). If the plan is to establish a joint venture company with a business partner, setting up a company limited by shares is usually the preferable option.

This article focuses on a company limited by shares and introduces how to apply the provisions of Taiwan’s Company Act to design a joint venture contract that suits the needs of Korean companies.

In terms of the shareholders’ composition, the joint venture contract often stipulates that within a certain period of time, or before certain conditions precedent are met, shareholders cannot transfer shares freely, in order to maintain the company’s stable development at its initial stage.

However, in principle the shares of a company limited by shares can be freely transferred according to the laws of Taiwan. Specifically, if a party to the joint venture contract transfers shares in violation of the contract, the transfer of shares is still valid, and the other parties can only seek an indemnification for the breach of contract as remedy.

Therefore, if it is necessary to ensure that shareholders cannot freely transfer their shares, the parties can choose to establish a close company limited by shares. The basic conditions for establishing such a company are that the number of shareholders cannot exceed 50 entities, and the restrictions on the transfer of shares for all shareholders must be expressly provided in the articles of incorporation (which may impose different restrictions on different shareholders).

It should also be noted that, according to the interpretation of the competent authority, simply restricting the transfer period (e.g., “the shareholders cannot transfer shares within five years after acquiring the shares”) does not meet the requirements for setting up a close company limited by shares, and there must be additional restrictions.

In terms of capital contribution, Taiwan’s Company Act stipulates that, in addition to cash, the capital contribution may be in the form of property or technical know-how required by the business of the company. A shareholder of a close company limited by shares may also choose to contribute the capital in the form of service.

In the event of a joint investment between the cash equity investors and the technical know-how holders or service providers, they can use different types of capital contributions to allocate the shareholding so that the technology holder or service provider can invest with less cash while obtaining a certain percentage of shareholding, which would encourage them to contribute technical know-how or service.

However, it should be noted that because a Korean company is a foreign investor, the Korean company must obtain prior approval from the Investment Commission of the Ministry of Economic Affairs (MOEAIC) before investing and setting up a Taiwanese company.

If a foreign investor plans to invest in the form of property or technical know-how, other than in mergers and acquisitions, the types of capital contributions expressly approved by the MOEAIC are “machine, equipment and raw materials for company own use” and “intellectual property rights”.

Thus, if the parties to a joint venture contract desire to make capital contributions in the form of other properties or services, it is advised to confirm with the MOEAIC in advance to ensure that such form of investment is feasible.

Regarding the allocation of management rights, it is common that the parties stipulate the number of directors and supervisors of each joint venture party in the JV contract, and each party will agree to vote for the directors and supervisors’ candidates nominated by the other party.

Before the amendment to the Company Act came into effect on 1 November 2018, such voting agreements were often considered unlawful and invalid by the courts. However, after the amendment’s effective date, a written agreement between shareholders to exercise shareholder voting rights jointly is legal and permissible, and a shareholder voting rights trust contract can also be set up so that the trustee can exercise the voting rights according to the trust contract.

This means that shareholders can agree in writing on how to exercise their voting rights in order to allocate seats for directors and supervisors, and they can also agree on other voting matters in the shareholders’ meeting, provided that such agreements do not contradict corporate governance principles or violate any laws or regulations.

However, it should be noted that the Company Act does not stipulate that a company is subject to the voting agreement between shareholders. Therefore, if one party violates the voting agreement, the voting shall still be considered valid. However, the breaching party shall be liable for the breach of contract.

The allocation of management rights can also be carried out through the issuance of preferred shares. The Company Act allows a company limited by shares to issue different types of preferred shares, such as preferred shares with no voting rights, preferred shares with multiple voting rights, and preferred shares with veto rights over specific matters.

Preferred shares may also be issued to restrict or prohibit the rights of shareholders of preferred shares to be elected as directors or supervisors, or the rights to elect a specific number of seats of directors. For example, to meet the needs of the company, preferred shares may be issued to attract pure financial investors who are entitled to a fixed amount, or a fixed rate of dividends or bonuses, but have no voting rights and cannot be elected as directors or supervisors.

To attract strategic investors, preferred shares may be issued with multiple voting rights, or veto rights on specific matters important to business operation decisions, or the right to elect a specific number of seats of directors. The joint venture contract can also specify how to design the types of preferred shares and the target subject.

Taiwan and Korea have very similar laws and regulations, and the geographical and language barriers are relatively small. These characteristics have allowed many Korean companies to easily invest in Taiwan. During the covid-19 pandemic, Taiwan’s economic activities were mostly unaffected.

Stable social and economic activities are expected to continue in 2024, and the economic environment of Taiwan is very suitable for investment by Korean companies. If Korean companies can make good use of the provisions of the Company Act and design suitable joint venture contracts with their business partners, such co-operation will create greater benefits for both Korea and Taiwan.