By Dah-In Yeh and Li-Chi Yeh, Founding Partner and Senior Associate of Formosan Brothers, Attorneys-at-Law

With respect to the powers and responsibilities of independent directors, the Securities Exchange Act provides that provisions regarding supervisors in the Company Act apply mutatis mutandis to independent directors. However, the purpose and the role of the independent director in corporate operations are different from the supervisor. After all, the independent directors are members of the board of directors. How to keep oneself out of the board of directors and decide to convene a shareholders’ meeting when it is deemed necessary and for the benefit of the company is indeed a dilemma.

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In the past year, independent directors of public companies were often the focus of media attention. Companies such as Top High Image Corp. (3284), Kuo Toong International Co., Ltd. (8936), Comlink (3609), United Fiber Optic Communication Inc. (4903), D-Link (2332), and Yungtay (1507) all ran into circumstances where their independent director convened a special shareholders’ meeting on their own to discuss the matters of discharge of directors or re-election of all directors. The legitimacy of independent directors convening shareholders' meetings has attracted much attention and discussion.

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The right for independent directors to convene shareholders' meetings is based on Paragraphs 3 and 4 of Article 14-4 of the Securities Exchange Act, which provides that the provisions regarding supervisors in the Company Act shall apply mutatis mutandis to the audit committee and that Article 220 of the Company Act shall apply mutatis mutandis with regard to independent directors who are members of the audit committee. As such, under the condition that “the board of directors does not or is unable to convene a meeting of shareholders,” or “when it is deemed necessary and for the benefit of the company,” the independent directors may call a meeting of shareholders in accordance with Article 220, and decide on issues the company faces through the resolutions of the shareholders’ meeting. However, the law does not expressly provide the criteria for the condition of “when it is deemed necessary and for the benefit of the company,” one can only decide on a case by case basis depending on the objective facts surrounding the causes for the convening of the shareholders’ meeting by the conveners.

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In the past, the circumstances held by the court to meet the condition of “when it is deemed necessary and for the benefit of the company“ for supervisors to convene a shareholders’ meeting in accordance with Article 220 of the Company Act include: where the directors or supervisors’ term had expired and no election was effected, the supervisors convened a shareholders’ meeting to elect new directors/supervisors (Taiwan Supreme Court 109-Tai-Shang-Zi No. 357 and 106-Tai-Shang-Zi No. 86 civil judgments); where the supervisor, while exercising his/her supervisory duty, found that a large amount of lien had been placed on the company’s assets as a guarantee for a third party company’s obligation, and, after notifying the chairman of the board of such circumstances, the board failed to act or take legal action, hence the supervisor convened a special shareholders’ meeting to elect new directors/supervisors (Taiwan Supreme Court 106-Tai-Shang-Zi No. 2607 civil ruling); or where a supervisor found that a director was engaged in a business which is within the scope of the company’s business without the approval of the shareholders’ meeting to waive the non-competition requirement, and convened a special shareholders’ meeting to discuss the discharge of such director and exercise the right of disgorgement (Taiwan Supreme Court 108-Tai-Shang-Zi No. 2092 civil ruling). From the aforementioned cases, one can see that it  needs to be a just cause for a supervisor to convene a shareholders’ meeting in order to meet the condition of “when it is deemed necessary and for the benefit of the company.“

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If a supervisor convenes a shareholders’ meeting without meeting the criteria for the convention, judicial practices often hold that “where a supervisor convenes a shareholders’ meeting absent the necessity of convention, it is different from the circumstance where the one has no authorization and convenes a shareholders’ meeting. It is only a matter of whether the procedure for convening a shareholders’ meeting violates any law or regulations or articles of incorporation, and the right holders may file a complaint to the court for annulment of the meeting resolutions.” (Taiwan Supreme Court 88-Tai-Shang-Zi No. 2886, 89-Tai-Shang-Zi No. 425 civil judgments) Hence, even a supervisor convenes a shareholders’ meeting when it is not necessary, a right holder can only ask the court to revoke the resolutions from such shareholders’ meeting pursuant to Article 189 of the Company Act. Yet, judicial procedures take so much time. Even if the court eventually revokes the resolutions from such shareholders’ meetings, it may not be timely enough to resolve the disputes. Moreover, it is not difficult to see how the litigation procedure might hurt the operations of the company.  

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In order to make supervisors to exercise their supervisory power, the Company Act endows them the supervisory authority, which includes the right to convene shareholders’ meetings. With respect to the powers and responsibilities of independent directors, the Securities Exchange Act provides that provisions regarding supervisors in the Company Act apply mutatis mutandis to independent directors. However, the purpose and the role of the independent director in corporate operations are different from the supervisor. After all, independent directors are members of the board of directors. How to keep oneself out of the board of directors  and decide to convene a shareholders’ meeting “when it is deemed necessary and for the benefit of the company” is indeed a dilemma. Moreover, pursuant to Articles 23 and 224 of the Company Act, in case a supervisor or independent director has, in performing his functional duties, violated the provisions of any law, regulations, or the Articles of Incorporation of the company and thus causing any damage to the company, he shall be liable for indemnifying the company for such damage. Supervisors and independent directors shall be vigilant when exercising their supervisory power.

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In judicial practice, there have been the precedents that a supervisor, ignoring the fact that the board of directors had scheduled a meeting to discuss the scheduling of a shareholders’ meeting, insisted on convening a shareholders’ meeting on his/her own and such resolutions of the shareholders’ meeting were revoked by the court (Taiwan High Court Taichung Branch 108-Shang-Zi No. 448). There are indeed boundaries to supervisory powers; supervisors and independent directors need to be careful about it. Also, from the cases that supervisors or independent directors convened the shareholders’ meetings in the past, it is not difficult to see that there were signs of the operation of major shareholders or directors behind the convention of the shareholders’ meetings. The shareholders’ meetings that were convened by supervisors or independent directors “for the benefit of the company and when it is deemed necessary” were often tools for the fight of the management right. This has made people suspect the independence of the independent directors even more. As the independent agents to supervise the operation of the company, supervisors and independent directors are expected by the shareholders to exercise their supervisory power. As a response to their shareholders’ expectations, supervisors and independent directors should be more prudent and self-restraining when exercising their supervisory power or convening shareholders’ meetings in order to avoid the suspicion of doing so only for the interests of some shareholders. Only then the best interests of the company may be realized.  

(This article was published in the Expert’s Commentary Column of the Commercial Times.  https://view.ctee.com.tw/legal/27251.html)

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