Taiwan - The Prohibition Against Dual Representatives Under Article 223 Of The Company Act Is Not A Compulsory Requirement.
Legal News & Analysis - Asia Pacific - Taiwan - Regulatory & Compliance
23 October 2020
The Tainan Branch of the Taiwan High Court rendered the 108-Zhong-Shang-48 Decision of April 14, 2020 (hereinafter, the “Decision”), holding that since the legislative objective of Article 223 of the Company Act to prohibit dual representatives is to protect the interest of companies not to safeguard public interest, such requirement is not compulsory.
According to the facts underlying this Decision, Appellee A used to be the Chairman of Appellant Company B. Company B entered into a share purchase agreement (hereinafter, the “Agreement at Issue”) with A through Director C, not a party to this lawsuit. Both parties agreed that Company B would sell the shares (hereinafter, the “Shares at Issue”) of Company D, not a party to this lawsuit, to A for NT$15 per share, which is far below its book value. Company B asserted that when A executed the Agreement at Issue, he was the Chairman of Company B. Under Article 14-4, Paragraph 4 of the Securities and Exchange Law, which applies mutatis mutandis to Article 223 of the Company Act, and Article 537 of the Civil Code, when Company B sold the Shares at Issue to A, all of the independent directors of the Audit Committee shall jointly represent Company B, and an ordinary director shall not be authorized by the Board of Directors or the Audit Committee to be the representative. In addition, since neither Company B’s Audit Committee nor Board of Directors adopted a resolution on essential matters such as the quantity and price of the Shares at Issue to be transferred, no prior promise was constituted. Company B denied the validity of the Agreement at Issue and asserted that the Agreement at Issue was not effective to Company B. Since A acquired the Shares at Issue without lawful reasons to the extent that Company B is damaged, A was requested to return the Shares at Issue in accordance with Article 179 of the Civil Code and Company B agreed to return the payment to A. However, the dividend of the Shares at Issue obtained by A should be set off since it was still unjust enrichment. The original trial court rendered a decision against Company B. Company B filed a claim to reverse the original decision and to request A to return the Shares at Issue to the Appellant with respect to the reversed portion.
According to the Decision, Article 223 of the Company Act provides that when directors engage in juristic acts such as sales or lending with the company for themselves or for others, the supervisors shall represent the company. In addition, the legislative objective of Article 223 of the Company Act to prohibit dual representation is to protect the interest of the company, not to safeguard public interest. Therefore, this is not a compulsory requirement. If a director violates such requirement in conducting a juristic act with the company, such juristic act is not ipso facto invalid. If the company gives a promise in advance or subsequently recognizes the act, it would still be effective to the company.
It was further pointed out in this Decision that Company B’s Audit Committee and Board of Directors discussed the proposal to sell the Shares at Issue and explained that such proposal involved a related party transaction with A being the related party (who was the Chairman at that time) and required to recuse himself pursuant to law during the discussion and voting concerning the sale of the part of Company D’s shares. It was also decided that if such proposal was adopted by way of resolution, it was planned to authorize Director C to negotiate and sign the amended agreement and other contractual documents and to handle matters relating to this proposal with full authority. In addition, since the Appellee recused himself and did not participate in the resolution of the proposal and C presided over the deliberation of such proposal, the proposal was carried without objection. C subsequently entered into the Agreement at Issue with the Appellee on behalf of the Appellant and sold the Shares at Issue to A. This shows that Company B’s sale of the Shares at Issue to A was approved by all members of Company B’s Audit Committee, resolved by Company B’s Board of Directors and handled by Director C, who was granted with full authority. Since this conforms to Article 14-5, Paragraph 1, Subparagraph 4 and Paragraph 2 of the Securities and Exchange Act, the procedure is certainly lawful. In addition, since C had been authorized by the entire Audit Committee with a resolution adopted by the Board of Directors, this was certainly a prior promise of Company B, and it should be sufficient to conclude that the Agreement at Issue is legally effective to Appellant Company B.
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Jhen-Yi Chen, Lee Tsai & Partners