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.
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.’
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.
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:
Qualifications for private placements by profitable companies:
Full disclosure of private placement 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.
The following changes were made to Article 36 of the Securities and Exchange Act, effective 1 January 2012:
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.)