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Corporate governance laws foster investment in Taiwan

Taiwan’s regulatory landscape for corporate governance encompasses a range of laws, regulations and administrative guidelines and rules. In general, all companies incorporated in Taiwan should comply with the Company Act. Companies listed on the Taiwan Stock Exchange (TWSE) or Taipei Exchange (TPEx) are further subject to the Securities and Exchange Act (SEA) and associated regulations promulgated by the Financial Supervisory Commission (FSC), as well as rules published by the TWSE and TPEx, such as the Corporate Governance Best Practice Principles for Listed Companies.

Under the Company Act, companies limited by shares are governed by the board of directors, shareholders and supervisors. Except for certain circumstances that require shareholders’ approval, the board of directors is granted discretionary power delegated by shareholders to operate the company.

The board of directors owes fiduciary duties to the company, ensuring that their decisions are in the best interest of the company and its shareholders. Supervisors are responsible to oversee the conducts of directors and management, and are empowered to examine and audit the accounts and financial books of the company.

To strengthen the corporate governance of listed companies, the SEA, along with its amendments over time, provide stringent internal control mechanisms including the introduction of independent directors, the mandatory establishment of audit and compensation committees, CPA auditing and attestation requirements, mandatory disclosure of material information of the company, and procedures for handling sinificant asset acquisitions or dispositions, as well as major financial or operational actions of companies.

Corporate governance: transactions

The Business Mergers and Acquisitions Act (M&A Act) has been enacted to facilitate and regulate M&A by companies in Taiwan. Since an amendment to the M&A Act in 2016, listed companies are required, before adopting any resolutions on M&A transactions by the board of directors, to either form a special M&A committee or have the existing audit committee review the fairness and reasonableness of the M&A plan and the related transactions.

The M&A committee or audit committee must seek an opinion from an independent expert on the fairness of the acquisition price and report their findings to the board and shareholders’ meeting.

To prevent conflicts of interest, directors or shareholders with a personal interest in a transaction must abstain from voting in board or shareholders’ meetings. However, to promote a friendly environment for M&A, the M&A Act specifically provides that if a company holds shares in another company involved in the merger, acquisition or share swap, or if it has appointed its representative as a director of the other participating company, both the company and its representative are permitted to vote on the related proposal.

It is expressly stated in the purpose of statute that such “buy first, merger later” scenarios are common and are unlikely to harm the company’s interest; thus, abstention is not required.

On approval by the board of directors, the M&A transaction proposal will be submitted to the shareholders’ meeting. Shareholders who dissent in writing or verbally, with a record made in writing before or during the shareholders’ meeting, may waive the voting right and request the company to buy back their shares at a fair price.

Over the years, courts have determined the fair value for dissenting shareholders’ buyback requests based on the closing price on the date of the shareholders’ meeting that approves the M&A transaction.

In January 2020, the Commercial Case Adjudication Act was enacted, empowering the Commercial Court to adjudicate major business disputes and disputes concerning shareholders of publicly traded companies exercising shareholders’ rights.

This act adopts an expeditious and professional process by implementing mandatory mediation, requiring mandatory legal representation and introducing expert witnesses.

Regulatory updates

In recent years, Taiwan’s regulatory authorities have intensified their scrutiny and conducted legislative reforms to improve corporate governance practices.

(1) Shifting certain supervisory powers from independent directors to the audit committee. In April 2023, the Executive Yuan introduced an amendment to the SEA proposed by the FSC, stipulating that independent directors of listed companies no longer have the power to independently convene extraordinary shareholders’ meetings (EGMs), initiate lawsuits against directors, and represent the company in transactions with directors. Instead, such powers are subject to decisions of the audit committee.

Prior to the amendment, independent directors of listed companies were empowered under the SEA to independently convene an EGM “when necessary” and in the interest of the company, without consensus of the audit committee or prior board approval. While these regulations aimed to empower independent directors with supervisory functions akin to the supervisors, in practice, these provisions have long been misused as a tool of factionalism to gain control over companies.

Factions within companies have been leveraging different independent directors to convene dual EGMs in order to re-elect and remove directors appointed by rival factions. Although minority shareholders may petition the court for interim injunctive orders to prohibit the convening of both EGMs, courts and Taiwan regulatory authorities have maintained neutral stances.

Instead of prohibiting companies from convening dual EGMs in the short term, the courts have adopted a case-by-case assessment to determine whether convening an EGM is in the best interest of the company and is deemed necessary, making it difficult for minority shareholders to stop the dual EGM process.

To avoid protracted battles for corporate control, stabilise corporate operations and protect the rights of minority shareholders, the Executive Yuan adopted an amendment to the SEA. Under this amendment, the convening of EGM, initiating lawsuits against directors and representing the company in transactions with directors will be contingent on the decisions of the audit committee.

Acknowledging potential challenges in convening the audit committee, provisions have been introduced to empower the board of directors to address such matters in exceptional circumstances, thus averting operational disruptions. To enhance the independence and effectiveness of audit committees, measures have been implemented to penalise non-compliance.

(2) Enhancing transparency in corporate shareholding. The amendment to article 43-1 of the SEA, effective since 10 May of this year, lowers the thresholds for reporting and disclosing significant acquisitions of shares in listed companies from 10% to 5%. Following the amendment, any individual or entity acquiring more than 5% of the total issued shares of a listed company, whether directly or through nominees, spouses or children, must disclose such acquisition to regulatory authorities and the public. Any further increase of 1% must also be disclosed.

This change aligns with international standards and ensures that significant changes in company shareholdings are promptly and fully disclosed, enabling investors, companies and regulatory authorities to understand the reasons behind substantial changes in company ownership.

(3) Ensuring fairness in transaction consideration and timely access to M&A information. In response to the Judicial Yuan’s Interpretation No. 770, which highlighted inadequacies in the M&A Act regarding the ensuring of fairness in transaction consideration and timely access to information in M&A transactions, the Executive Yuan published an amendment to the M&A Act on 24 May 2022.

The newly added provision in article 5, paragraph 4 requires companies to outline in shareholders’ meeting agendas the significant details of directors’ interests in M&A transactions. Prior to the amendment, companies could explain the details of directors’ interests during the shareholders’ meeting.

This amendment enhances the transparency of information to protect shareholders’ rights, ensuring that shareholders have access to and understand important information regarding M&A transactions before the shareholders’ meeting, allowing them to better assess and consider their vote on the proposal.

Furthermore, previously, shareholders seeking to request the company to buy back their shares were required to waive their voting rights and express dissent either in writing or verbally, with a written record made before or during the shareholders meeting. However, forfeiting their voting rights could potentially leave shareholders with insufficient bargaining power regarding the buyback price.

To address the concern, the revised article 12 provides that shareholders who express dissent and vote against the proposal during the shareholders meeting may still exercise their rights to request share buybacks, establishing a clear exit mechanism for shareholders who oppose the merger.

The outlook

By implementing robust corporate governance practices aligned with international standards, the Taiwan government has created an environment that is conducive and trustworthy for both domestic and international investors. These changes not only strengthen the competitiveness of Taiwan’s capital market but also play a crucial role in attracting foreign investment to Taiwanese companies in the long run.