Since the implementation of the 2018 amendment to the Company Act, the content and interpretation of Paragraph 1 of Article 157 of the amendment has attracted much attention due to its close relations with shareholders' rights. Lately, the Ministry of Economic Affairs ("MOEA") has provided its interpretation on Subparagraph 4 of Paragraph 1 of Article 157 regarding preferred stocks with veto power. We hereby provide a summary as follows:

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1. Interpretation of "specific matters"

Subparagraph 4 of Paragraph 1 of Article 157 of the Company Act provides that a company may issue preferred stocks with veto power over specific matters. According to MOEA's letter interpretation Jing-Shang-Zi No. 10702430970 dated January 4, 2019, the term "specific matters" refers specifically to matters decidable by a shareholders' meeting, excluding election of directors and supervisors. As for matters decidable by a board of directors' meeting such as the appointment, dismissal, and remuneration of managers, such matters are undoubtedly outside the scope of "specific matters."

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2. Time period for exercising of veto power

With respect to the time period for exercising of the veto power of preferred stocks, according to the same letter interpretation, veto power, in principle, shall be exercised at the shareholders' meeting where such matter is being discussed. However, where the preferred stock issuance terms allow for the exercise of veto power "after a shareholders' meeting," the shareholders of preferred stocks may also exercise their veto power within a "reasonable period of time" after a shareholders' meeting.

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3. Issues Yet to Be Resolved

3.1 If the shareholder of preferred stocks with veto power did not attend a shareholders' meeting, can such shareholder exercise his/her voting right after the shareholders' meeting?

Where the terms for preferred stocks allow the "exercising of veto power after a shareholders' meeting," if a holder of preferred stock did not appoint an agent to attend the shareholders' meeting and did not exercise his/her voting right in writing or in electronic form, but later found that the resolution of the shareholders' meeting did not serve his/her interests, can such a shareholder exercise his/her veto rights to veto the resolution that has been made? At this point, the MOEA has not expressed a definite opinion on this. This author believes, a shareholder who did not attend a shareholders' meeting was not counted into the quorum of the meeting and has in fact waived his/her right to express any consenting or dissenting opinion on the resolution proposals. It is not appropriate to allow shareholders who have waived their rights to be able to exercise their voting rights again through the exercising of veto power.

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3.2 If a holder of preferred stocks with veto power exercises his/her voting right electronically or in writing, is he/she "deemed to have waived his/her right" with respect to his/her veto power on extemporary motions and amendments to original proposals in the shareholders' meeting?

According to Paragraph 2 of Article 177-1 of the Company Act, a shareholder who exercises his/her/its voting power at a shareholders meeting in writing or by way of electronic transmission shall be deemed to have attended the said shareholders’ meeting in person, but shall be deemed to have waived his/her/its voting power respective of any extemporary motion(s) and/or the amendment(s) to the contents of the original proposal(s) at the said shareholders’ meeting. Where the terms of preferred stocks expressly stipulate that "veto power may be exercised after a shareholders' meeting," if a holder of preferred stocks with veto power exercises his/her voting right by way of electronic transmission or in writing, does his/her veto power fall into the scope of Paragraph 2 of Article 177-1 of the Company Act regarding waiving of rights? At this point, the MOEA has not provided any specific interpretation regarding this. In this author's opinion, since Paragraph 2 of Article 177-1 of the Company Act deems that the shareholder has attended the shareholders' meeting and waived his/her right on extemporary motions and amendment to original proposals, which means that such shareholder has waived his right to consent or dissent, and since veto power pertains to a right to dissent, it should also be included in the scope of those rights which have been "deemed as waived" as provided in Paragraph 2 of Article 177-1 of the Company Act.    

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4. Recommendation:  Expressly provide in the Articles of Incorporation regarding the exercising of veto power to avoid disputes

The exercising of veto power may impact the stability of a resolution in a shareholders' meeting and is likely to introduce disputes. In addition, after a resolution is made in a shareholders' meeting, the implementation of the resolution needs to be completed in a certain time frame. If a dispute arises, the MOEA or a judicial ruling may not be of timely help. As such, based on the principle of corporate self-governance, we recommend that the exercise of veto power be clearly provided in the articles of incorporation. However, since a preferred stocks' veto power pertains to the new amendment to the Company Act for which related interpretations are still developing, in the future if articles of incorporation provisions disagree with new interpretations of the amendment, it will be up to judicial decisions to determine the effectiveness of such provisions.

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