It isnot uncommon to hear of stories like this: due to lack of prior planning andcommunication on family succession issues, the offspring end up competing forassets and neglecting the business, ultimately resulting in outsiders takingover the business. In response, some family business owners intend to use a"close company" as a means of arranging the control and succession oftheir family business. So, what are the characteristics of a close company thatcan be used to maintain family control and succession?

■There are restriction on the transfer of the shares of a close company.

Generallyspeaking, shares of a company should be freely transferrable. However, in orderto maintain the close nature of a close company, the Company Law provides thata close company must include in its articles of incorporation the restrictionson the transfer of shares. These restrictions may include a "consentclause" or a "first refusal clause," providing priority foracquisition under the same conditions, thereby restricting the transfer ofshares. If a shareholder violates the restrictions on the transfer of sharesset forth in the articles of incorporation, the transfer would then, inprinciple, be deemed invalid.  

Inshort, when a family business owner uses a close company for family succession,they can specify in the articles of incorporation a "consent clause"or a "first refusal clause," restricting the transfer of shares toprevent future generations who are uninterested in running the business fromselling inherited shares. This safeguards against non-family members enteringthe family business's control structure.

■The design of shares with multiple voting right and golden shares

Closecompanies may issue special shares with multiple voting rights or veto powerover specific issues (often referred to as golden shares). By issuing suchspecial shares to succeeding family members under the control mechanism of aclose company, family businesses can effectively control the decision-makingpower of the business.

If theowners of a family business use a close company for control, they may not onlyimplement restrictions on share transfers as mentioned earlier but alsoconsolidate their dominant position within the company. This can be achieved bypooling the strength of the shareholders in the family to jointly exercisetheir voting rights through a written agreement on the exercise of such votingrights. This approach prevents family members colluding with outsiders fromconvening a special shareholders' meeting under Article 173-1 of the CompanyAct, which could potentially lead to a battle for control of the familybusiness — a scenario that family businesses typically aim to avoid.

TheMinistry of Economic Affairs’ letter Jing-Shang-Zi No. 09402094290 dated July15, 2005, states: “According to the provisions of Article 131 of the Company Act,the shares issued may be offset by the assets needed for the company’sbusiness. Accordingly, the founder uses the shares to offset the sharessubscribed. If the asset is needed by a professional investment company, it maytherefore be offset. ..." This means that a family business owner can usethe shares of the family business they hold as the capital of a close company setup as a holding company for the family business. However, when shares of a familybusiness are used to offset the capital contributions for shares in a holdingcompany, in addition to paying attention to whether relevant taxes will be incurred,one must also be aware of the following circumstances: If you are a director,supervisor, officer, or major shareholder holding more than 10% of the sharesof a listed company, you need to report to the competent authority; and whetherthere is an issue of ex-officio dismissal due to transfer of shares exceedingone-half of the amount of shares held at the time of the director's election,as provided in Article 197 of the Company Act.

Moreover,the number of shareholders of a close company cannot exceed 50. Therefore, ifthe shares of a close company are held by individuals, the number ofshareholders may exceed the upper limit when succession occurs. Hence,considering the possibility of an increasing number of family members, it isrecommended to utilize a trust, family constitution, family council, or familyoffice in the comprehensive planning of the succession of a family business.

Thisarticle was published in the Expert’s Commentary Column of the CommercialTimes. https://www.ctee.com.tw/news/20240117700099-439901

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