Encouraging new businesses and accelerating investment with amendments to the Company Act

  • Date: 2018-01-02

I. Background

On December 21, 2017, the Executive Yuan approved draft amendments to the Company Act formulated by the Ministry of Economic Affairs. Once passed by the Legislature, the revisions will enable Taiwan to adapt to the rising trend towards new models of economic growth, as well as meet the challenges of economic transformation and the rapid development of startups.

Nearly 150 articles out of the law’s 449 total are slated for amendment. The scope of this change is the largest in 10 years and is expected to achieve such goals as creating a friendly environment for startups and entrepreneurs, improving corporate governance, enhancing the rights and interests of shareholders, increasing compliance with international anti-money laundering norms, and boosting enterprises’ operational flexibility, management efficiency and digitalization efforts.

II. Three main priorities: flexibility, digitalization and internationalization, and enhanced corporate governance

A. Flexibility

1. Flexible tools for rewarding employees
The revisions propose to expand the range of employees eligible for bonuses at profitable firms to include those working at parent and subsidiary companies, thus benefitting corporate recruiting and employee retention.

2. Flexibility in the structure of corporate boards at non-publicly traded firms
While the Securities and Exchange Act requires that boards of directors at publicly traded companies have at least five members, boards at non-publicly traded companies will be allowed to seat as few as a single member, thus reducing operational expenses.

3. Flexibility for board votes at non-publicly traded companies
The board of directors will be able to vote via written ballot without meeting physically. This revision is expected to improve efficiency by avoiding aborted meetings where low attendance prevents the board from taking action.

4. Flexibility for strategic alliances among shareholders of non-publicly traded companies
The draft amendments propose to specifically authorize the participation of like-minded shareholders in strategic voting blocs via contract or proxies.

5. Flexibility in the distribution of profits
All corporations, publicly traded or otherwise, will have the option of distributing profits (as cash dividends or equity) twice per year. The proposed revisions specify that mid-year cash dividends can be authorized by the board of directors, rather than by a full shareholders meeting. At publicly traded companies, the payment of cash dividends at the end of the year can also be decided by the board of directors.

6. Flexibility in issuing debt
Restrictions on the issuance of corporate bonds will be relaxed in order to provide flexibility in financing and make it easier for startups to source capital. The limit on total debt issued by non-publicly traded firms will be eliminated. Non-publicly traded firms will also be allowed to issue convertible bonds and equity warrant bonds.

7. Flexibility to issue par-value or non-par-value shares
Non-publicly traded companies will have the option of issuing shares either with or without a par value (non-par-value shares have no face value, allowing the price of future shares to be set to reflect the value of the firm at the time of issuance). This draft revision is expected to benefit startups by enabling low pricing of initial equity sales in order to encourage early investment on heightened expectations of future profits.

8. Flexibility in setting the terms of preferred shares
Companies will be able to issue preferred shares with terms such as super voting rights, veto power over specific issues, no right to serve as directors or supervisors, or a guaranteed number of board seats so that investors may participate in company affairs. This proposed change aligns with international trends, and is expected to provide greater flexibility and attract even more investors.

B. Digitalization and internationalization

1. Paperless stock certificates
Instead of only publicly traded companies allowed to issue paperless stock certificates, non-publicly traded firms will also be able to do so and thereby reduce expenses.

2. Electronic shareholder proposals
Shareholder proposals will be accepted electronically as well as via written submissions.

3. Virtual shareholders meetings for non-publicly traded companies
This draft amendment proposes to allow shareholders meetings to be conducted via video teleconferencing and other methods.

4. Recognition of foreign corporations
The requirement for foreign corporations to obtain government approval to qualify as legal entities will be rescinded. Only registration of a subsidiary will be necessary. This proposed revision matches global patterns and is expected to simplify administrative procedures.

5. Registration of foreign-language company names
In order to improve international brand recognition and allow enterprises to use a foreign-language name when transacting business across national borders, corporations will be given the option of registering foreign-language names in addition to Chinese names.

C. Improved corporate governance

1. New mechanism for calling board meetings
Instead of only the chairman of the board authorized to convene board meetings, the draft revisions provide for meetings of the board to be called by a simple majority of directors.

2. Simplified board nomination process
Shareholders will need only to specify candidates’ qualifying academic and career experience to nominate directors and supervisors. To prevent the arbitrary elimination of candidates, nominations will no longer require review by the board of directors.

3. Explicit authority for the convener of shareholders meetings
This amendment includes clear provisions entitling the convener of a shareholders meeting to have access to the company’s shareholder register, and proposes penalties for refusal to provide access.

4. New position of company secretary
The primary role of a company secretary is to assist the board of directors in following rules and regulations, and carry out corporate governance. While non-publicly traded firms will not be required to create this position, the Financial Supervisory Commission will gradually promote the naming of company secretaries at publicly traded companies based on actual need.

5. Compliance with international anti-money laundering norms
With exceptions for companies meeting specific conditions, all corporations will be required to provide information about beneficial owners (i.e., board members, supervisory board members, managers and shareholders with over 10 percent ownership) and end the system of non-registered shares. This change is expected to prevent firms from becoming tools for money laundering.

III. Conclusion

This round of draft amendments to the Company Act aims to continue building a healthy environment for startups and entrepreneurs without significantly increasing compliance costs. The proposed changes will help develop the nation into a suitable destination for global investors and produce a commercial climate beneficial to the growth of all manner of industries, while providing greater operational flexibility for small and medium-sized enterprises and attracting even more entrepreneurs from at home and abroad to establish businesses in Taiwan.