By Lipu Lee & Rachel Hsieh, Managing Partner & Senior Associate of Formosan Brothers, Attorney-at-Law

Lately, there have been many cases of fights over the control of a company, including the reshuffle of the Chang Hwa Bank’s directors, the battles over management right between D-Link and Taiwan Steel Group, the clashes over management right between TECO and Pau Jar, and the recent actions of Pau Jar targeting TECO Electric and Machinery Co., Far Eastern Department Stores, and the wind power giant Yeong Guan, etc. All of these events have attracted the attention of the market.

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For shareholders of public companies, some may see management right battles as benevolent competitions that help companies grow. However, the crux of the issue is how due process can be ensured. If the rules of the game are not strictly followed, one can expect to see harm to the company’s governance due to the vigorous investors strategically forming an alliance, or the management team using its home advantage to solidify its control, or any other strategy adopted.  Also, if judicial remedies cannot relieve current urgent issues, the primary challenge would then be whether the current Company Act is sufficient to prevent and resolve such urgent issues.

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With respect to the controversial tactics often used by a company’s management team to retain its management right, the amendment to the Company Act dated November 1, 2018 contains provisions that strengthen the requirement regarding a director’s passive qualification. However, if the passive qualification requirements provided in the amendment pertains to criminal acts, the application of such provisions will be difficult since it would extremely difficult to obtain a concrete criminal verdict. Moreover, since the amendment does not provide a general clause (note: catch-all clause) but follows the old provision that sets out the exhaustive list of the requirements, omissions are possible. Some scholars think if a director is discharged based on a judgment confirming his/her material damage to the company pursuant to Article 200 of the Company Act, or if a director repeatedly violates the order of the competent authority and refuses to provide necessary information or perform related registration, such instances should pertain to cause of incompetence to perform company management duties. However, such instances are not included in the list of passive qualifications. It is clear that the current provisions are still not sufficient to eliminate and eradicate unqualified directors.      

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For de facto directors hidden behind a holding company, if they are in contravention of the aforesaid provisions on passive qualifications, they may be able to willfully circumvent the law and the current provisions cannot effectively prohibit them from managing the company. Moreover, the aforesaid provisions on passive qualifications of directors do not impose on the ipso facto discharged director the obligation to notify the company and competent authority. Hence, in practice, companies often fail to register such change in accordance with the law, resulting in misrepresentation in the registered documents and, in turn, harming the interests of the shareholders and creditors. More importantly, in the event that a director is ipso facto discharged on account of passive qualification, although s/he shall not act as a director of the company, if such a director continues to act as a director in contravention of the law, pursuant to the current law, his/her liability is limited to the extent borne by a director. This limitation of liability gives little or noa deterrent effect to such director. If the competent authority or the court is not able to further impose a more stringent administrative or criminal liability on such violators, they will have limited ammunition to prevent illegal activities and uphold justice.    

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Since the requirements for director qualification and the mechanism for director disqualification now are not comprehensive enough, in 2016, experts from the industry, government and academia formed a committee to overhaul the Company Act. They enlisted the British “director disqualification system” as a significant content to be included in the amendment and clearly indicated that the old Company Act was missing a director disqualification system. Those directors who were disqualified would only have their mandate relationship with the company terminated. They per se did not seem to suffer any unfavorable consequences. Whether such provision was sufficient for the legislative purpose was debatable. Therefore, the committee advised considering the British “company director disqualification system,” which makes reasons for director disqualification out of the criminal acts related to the founding, establishment, operation, liquidation, or acting as a bankruptcy administrator of the company, or frequent violation of the reporting obligation related to company registration as prescribed in the Company Act. The committee also suggested consequences for a person unlawfully assuming the position a company director to prevent abuses and to help the implementation of truthful registration.

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However, if the British disqualification system is deemed too different from our current system, the committee advised modifying the current system by adding general clauses for violation of commercial regulations to prevent omissions. It shall also assign criminal liabilities to violators, with the supporting measures of adding de facto directors to the definition of directors, so that the legislative intent of preventing unqualified directors from managing the company may be achieved. Unfortunately, the aforesaid advised amendments were not adopted by the legislators at the end, making them the biggest snubs of the amendment to the Company Act then.

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The frequent disputes over management right of public companies show the insufficiency of our laws and regulations in dealing with such disputes. It is a challenge to the competent authority in its wisdom about how to strictly adhere to the boundary between administrative and judicial power when providing prompt and effective remedies on the aforesaid disputes.  The fact of frequent disputes also reflects the necessity to reexamine the completeness of related regulations of the Company Act. In fact, many scholars have called for a complete solution to the issue of discharging company directors by incorporating the aforesaid director disqualification system into the Company Act, so that the disqualified directors may not act as a responsible person of a company within a designated period and in turn be subject to civil and criminal liabilities. With this, disqualified directors can be removed from company management, and the company's legal compliance awareness can be strengthened to protect the interests of its creditors and investors, making it a possible solution for preventing repeating similar disputes.

(This article was published in the Expert's Commentary column of the Commercial Times. https://view.ctee.com.tw/business/21959.html)

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