Issues to watch for at 2011 shareholders’ meetings

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The general shareholders’ meeting season in Taiwan is rapidly approaching. In the interest of helping companies conduct these important annual events smoothly, we will go over recent changes in government policies and regulations, reminding companies of the issues they should look out for and how to respond. Awareness of these issues may also help companies maintain effective compliance and seize emerging opportunities.

New corporate governance rules

Compensation committees made mandatory:

Some companies continue to give their directors and supervisors large increases in compensation even after posting consecutive losses. To prevent abuses of this kind and strengthen the reasonableness and transparency of executive compensation decisions, the Securities and Exchange Act (Article 14-6) was amended to require publicly listed companies to establish compensation committees.

The scope of compensation decisions under a committee’s review extends to all salaries, stock options and other substantive rewards for directors, supervisors and managers. As to salary compensation items, these ought to include cash remuneration, stock options, stock bonuses, retirement benefits and severance pay, various subsidies and allowances, and other material incentives. At a minimum, such compensation needs to be disclosed in annual reports to shareholders’ meetings. For details on the professional qualifications of compensation committee members, the exercise of their authority and related matters, one can refer to ‘Guidelines on the Establishment of a Compensation Committee, and the Exercise of Its Authority, by a Company Listed on the Taiwan Stock Exchange or Traded Over-the-counter’ as passed by the Financial Supervisory Commission (FSC) on 3 March 2011. Under these ‘Guidelines,’ publicly traded companies need to install compensation committees by 30 September 2011, although those with paid-in capital under NT$10 billion are given until 31 December 2011 to complete the installation.

According to the new provisions, companies will not need to revise their articles of incorporation when they set up a compensation committee, but they will need to issue committee rules and have them approved by a resolution of the board of directors. Companies are urged to get to work early on the committee installation process so that they can keep to the schedule provided in the ‘Guidelines.’

Authority of directors/supervisors strengthened

In order to bolster corporate governance and fully leverage the supervisor function, the FSC issued guidance in February (Order No. 0990005875) stipulating that the term ‘representative’ in Article 26-3, item 2, of the Securities and Exchange Act is to include representatives appointed by governmental or corporate shareholders, or by entities under their control or in a subordinate relationship to them (including ‘juristic persons’ and ‘juristic associations’). As to how the governing authorities determine a ‘controlling/subordinate relationship,’ the relevant standards are Article 369-2 of the Company Act on substantive controlling or subordinate relationships, and Article 369-3 of the same Act on where a controlling/subordinate relationship is presumed to exist. Companies must pay particular attention to these standards when they elect board members, and if the circumstances of a sitting board member are in violation, the new rules will apply upon completion of the member’s current term.

New private placement rules: summary of key amendments

In view of growing suspicion recently that the private placement system has been abused, the FSC revised the ‘Directions for Public Companies Conducting Private Placements of Securities’ (hereafter, Directions) to strengthen oversight of the system. The main revisions are as follows: Restrictions imposed on reference prices to reduce leeway for price manipulation:

  • The private placement reference price is to be the higher of the price on the last one, three and five business days prior to the date the price is set, or the average price over the past 30 business days.
  • If a subscriber is an insider of the company or a related party, the purchase price per share may not be less than 80% of the reference price.
  • The share purchase amount or consideration for shares in a private placement must be collected within 15 days following passage of the respective resolution by the board of directors.

Qualifications for private placements by profitable companies:

  • The buyers targeted in a private placement should be strategic investors
  • The company conducting the private placement is a company formed by the government or a single corporate shareholder.
  • A company listed on the Taiwan Stock Exchange, GreTai Securities Market or Emerging Stock Market (i.e., a publicly traded company in Taiwan) must have a valid reason for not conducting a public offering. It must show that it has pressing need to raise funds, and must obtain advance permission from the governing authorities. The subscribers may not be the company’s insiders or related parties.

Full disclosure of private placement information:

  • Where a subscriber is an insider of the company, a related party or strategic investor, rules specified in the Directions must be followed and the relevant information must be provided to the board of directors for discussion and clearly stated in the notice for convening the shareholders’ meeting.
  • Where there has been a significant change in management rights within the year preceding the private placement, or if the private placement will bring in strategic investors and cause a significant change in managerial rights, an assessment and opinion on the private placement’s necessity and appropriateness must be sought from a securities underwriter, and the relevant facts must be clearly stated in the notice to convene the shareholders’ meeting
  • Where a company has completed a private placement of securities within the preceding year and has already collected payment, then, in its report to the following year’s shareholders’ meeting, the company must describe clearly its progress towards completing the planned utilization of the funds collected, along with other pertinent information.

To summarize the above, companies using private placement to raise capital need to pay particular attention to the rules in the Directions and follow the prescribed procedures for passing resolutions in shareholders’ meetings and board meetings. If not, the Financial Supervisory Commission may turn down any subsequent application for a share offering after the three-year lock-up period on the grounds that the Directions were not followed. A company may then suffer harm because the shares in its private placement could not be traded on the open market.

Securities and Exchange Act amendment

The following changes were made to Article 36 of the Securities and Exchange Act, effective 1 January 2012:

  • From 2012 on, public share-issuing companies must, within three months of the close of the fiscal year, issue annual financial statements audited and certified by a qualified CPA and passed by the board of directors and supervisors
  • The shareholders’ meeting of a publicly traded company in Taiwan must be convened within six months after the end of the fiscal year. (Article 170, paragraph 2 of the Company Act may not be applied, and the meeting may not be postponed further for any reason.)
  • In the year that a publicly traded company’s director or supervisor completes his/her term of office, the board must arrange for a by-election at that year’s general shareholders’ meeting. If the shareholders’ meeting is not held in accordance with regulations, the competent authority may ex officio set a deadline for convening such meeting. If the meeting is not held within the term of office, then the entire body of directors and supervisors will be dismissed upon completion of the term.

Other reminders on regulatory compliance

  • IFRS adoption issues: If a publicly traded company in the course of switching to IFRS obtains an assessment or performs complete tests showing concrete financial effects, and among them are material effects on shareholders’ interests or securities prices, the company must seek an opinion from a qualified CPA and make public the significant information after providing them to the board of directors and supervisors. To avoid misleading investors, moreover, the ‘significant information’ must be ‘comprehensive’ and ‘relevant,’ and not be limited to the disclosure of effects of IFRS on specific financial statement items, or the effects of specific IFRS bulletins on the financial statements.
  • Installation of agent for internal audit personnel: By law, publicly traded companies in Taiwan were required to appoint agents for internal audit personnel by 8 July 2010, and to institute programmes for further training and study. They are also required to submit information regarding such agents by the end of January each year.
  • Reporting by publicly traded companies to the TWSE: Files uploaded for reporting purposes are required to be in both Chinese and English versions.
  • Publicly traded companies transferring shares to employees: Under guidance issued by the FSC in November 2010 (Order No. 0990059226), a publicly traded company’s board of directors may amend the ‘Rules for Transfer of Repurchased Shares to Employees’ (hereafter, ‘Transfer Rules’), such that the price per share in the transfer is higher than the ‘average price of shares actually repurchased.’ However, to do so under the amended ‘Transfer Rules,’ it must post them on the TWSE Market Observation Post System website. If the transfer price stipulated in the ‘Transfer Rules’ used by a publicly traded company is not the ‘average price of shares actually repurchased,’ the actual calculation and its basis must be clearly stated in its ‘Transfer Rules,’ with the restriction that the calculation must produce a single and unequivocal price for transferred shares. The share price in the transfer should not be lower than the average price of the shares actually repurchased, except where the number of issued shares has increased prior to the transfer, (in which case an adjustment reflecting the proportionate increase in issued shares is allowed) or where prior approval has been obtained in the shareholders’ meeting. On the other hand, when a company actually transfers the shares to employees, in accordance with the ‘Transfer Rules’ it has adopted, and the transfer price is higher than the closing price on the employees’ payment due date, voluntary subscription consent forms must be obtained from the employees.
  • Issuing intangible securities: In keeping with the government’s policy initiative to promote entirely ‘intangible’ (paperless) issuance of securities, where companies had not revised their articles of incorporation by the 2010 shareholders’ meeting to allow them to issue securities without tangible form (or to do so other than in conjunction with an increase of capital), such companies need to revise their articles prior to their 2011 shareholders’ meetings. Companies should also bring up for resolution by their boards proposals to switch entirely to intangible securities issuance and carry out the related tasks.
  • Revised standards for corporate lending and endorsement: If a public company needed to revise its internal procedures for loan endorsements and guarantees in order to comply with the amended ‘Regulations Governing Loaning of Funds and Making of Endorsements/Guarantees by Public Companies,’ and had not submitted a proposal to do so at the 2010 shareholders’ meeting, then it must pass the revised procedures at the 2011 shareholders’ meeting.
    As a separate matter, if the total amount of loan endorsements and guarantees of a company and its subsidiaries reaches 50% or more of its net value, the necessity and reasonableness of those endorsements and guarantees must be explained at the shareholders’ meeting so that shareholders are made aware of the associated risks.
  • Employee welfare funds may no longer be used to buy a company’s odd lots of shares or government bonds: Seeing as the Council of Labor Affairs has scrapped a previous ruling allowing an employee welfare committee to purchase its own company’s odd share lots, then by law individuals on employee welfare committees may no longer be designated subscribers of odd lot shares.

From the foregoing brief summary of revisions in governance and securities regulations over the past year, it is apparent that these regulatory changes can crucially affect the legality and advisability of many corporate management decisions. Public companies must bear in mind that the more they interact with the general investing public, the more important it is for them to have a firm grasp of regulatory trends and create a good corporate image by making sure they comply with laws and regulations.


(This article was completed with assistance from Andrew Chiu. It originally appeared in Accounting Research Monthly in April 2011.)