Taiwan considerations for 2013 board and shareholder meetings

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The nation’s Company Act and the Securities and Exchange Act have been amended in consideration of development trends in corporate governance. The content of this notice is intended as summarized analysis of implications of relevant amendments on companies and business operators, an overview of matters which need attention with regard to companies convening meetings of the Board of Directors and meetings of shareholders, and an explanation of matters which need attention and to be taken care of when meetings of the Board of Directors and meetings of shareholders are called and held in 2013.

I. The International Financial Reporting Standards (IFRSs) formally sets out

Considering the international development trend that IFRSs have become generally accepted standards in the capital markets worldwide, the Competent Authority develops a two-phase promotion scheme to urge companies in the nation to adopt IFRSs when preparing their financial statements. The first phase includes TWSE-listed companies, OTC-listed companies, emerging stock companies, some financial institutions, which are required to adopt IFRSs starting from 2013, and public companies which willingly adopt such practices before being required. The following are matters which the aforementioned types of companies applicable to the adoption of IFRSs need to pay attention to when convening meetings of the Board of Directors and meetings of shareholders.

Unless under special circumstances for the financial sector as otherwise governed by the Competent Authority, TWSE-listed companies, OTC-listed companies, emerging stock companies, and public companies which adopt IFRSs need to pay heed to the following four aspects when implementing relevant financial reporting processes on account of the amendments of Article 36 of the Securities and Exchange Act and the adoption of IFRSs.

1. The primary format of financial statement

Beginning from this year, consolidated financial statements are of primary reporting format while individual entity financial statements are provided as supplements. Only consolidated financial statements are required for the first, second and third quarters for TWSE-listed companies and OTC-listed companies, and for the second quarter for emerging stock companies and public companies which adopt IFRSs. Both consolidated financial statements and individual entity financial statements need to be prepared and included in annual reports.

2. The attestation to financial statement

Beginning from this year, TWSE-listed companies and OTC-listed companies need not prepare individual entity financial statements for the first and third quarter but need to provide their consolidated financial statements duly reviewed by a certified public accountant. Moreover, starting from this year TWSE-listed companies, OTC-listed companies, emerging stock companies and public companies adopting IFRSs need not produce individual entity financial statements for the second quarter, but have to provide their consolidated financial statements duly reviewed by a certified public accountant.

3. The requirements concerning the board of directors

Beginning from this year, financial statements for the first and third quarter shall be reported to the board of directors, and those for the second quarter are only required to be reported to but not necessarily approved by to the board of directors.

4. The requirements concerning the audit committee

In accordance with Article 14-5 of the current Securities and Exchange Act in force, annual and semi-annual financial reports shall be subject to the consent of one-half or more of all audit committee members for companies that establish an audit committee. Hence financial reports for the second quarter still have to be approved with the consent of the audit committee albeit they are only required to be reported to but not necessarily approved by to the board of directors. This makes a distinction between financial reports for the second quarter and for the first and third quarter, and requires special attention.

As for public companies not adopting IFRSs, second quarter and annual financial reports need to include individual entity financial statements as well as consolidated financial statements, second quarter consolidated financial statements need to be reviewed by a certified public accountant, and semi-annual individual entity financial statements need to be duly audited and attested by a certified public accountant, pursuant to the existing provisions of the Securities and Exchange Act. Furthermore, it is worth noting that in accordance with the existing Act second quarter individual entity financial statements and consolidated financial statements of public companies not adopting IFRSs are still required to be approved by the board of directors and recognized by the supervisors.

As for companies in the financial sector, second quarter consolidated financial statements are required to be duly audited and attested by a certified public accountant and approved by the board of directors pursuant to the existing Act. This is the main distinction between companies in the financial sector and not in the financial sector.

II. Stricter standards for handling stock affairs

(I) For public companies, filings of handling of stock affairs by themselves shall be approved by resolution of the board of directors.

In accordance with new amendments to Standards for Internal Control Systems in Shareholders Service Department, companies which plan to handle stock affairs by themselves must file relevant documents to the Taiwan Depository and Clearing Corporation (TDCC) and shall not start processing stock affairs by themselves until at least six months after the filing is examined and approved by TDCC. Such companies shall not start handling stock affairs by themselves if the filing is not approved. Furthermore, in accordance with new amendments to Standards for Internal Control Systems in Shareholders Service Department, companies which plan to handle stock affairs by themselves shall meet the criterion of “approved by resolution of the board of directors”. On that account, TWSE-listed companies, OTC-listed companies, and emerging stock companies which plan to handle stock affairs by themselves shall especially note that they shall not start processing stock affairs by themselves prior to such plan being approved by resolution of the board of directors, filed to TDCC, and examined and approved by TDCC for at least six months.

(II) Requirements with regard to passive criteria and due diligence are added.

The new amendments to Standards for Internal Control Systems in Shareholders Service Department also add a set of passive criteria on which companies shall not file handling stock affairs by themselves. In addition to the aforementioned stipulations, the new amendments specify that TDCC shall exercise due diligence to examine qualifications of companies filing for handling stock affairs by themselves, situations in transfer of stock affairs information, and relevant tasks to be done, for the purpose of understanding their actual deployment of staff and facilities and their situations in transfer of information relating to stock affairs. Companies planning to handle stock affairs by themselves ought to pay heed to this regard.

III. Conclusion

Starting from this year, some corporations in the nation has formally adopted IFRSs to prepare their financial statements. Since two years ago, the Competent Authority has requested corporations which are urged to adopt IFRSs in the first-phase promotion scheme to develop appropriate plans, to establish dedicated teams, and to disclose relevant information in their annual financial reports. However, in view of constant changes in relation to financial statements announcement timeline, accounting, and the dividend policy, corporations applicable to the adoption of IFRSs should carefully and accurately comply with related laws and regulations.

As corporate governance develops around the world, not only government institutions need to advance in building a more comprehensive legal environment, but also domestic corporations ought to shift their corporate governance goals from regulatory compliance to more than just complying with legislation and policies, from corruption prevention to profits promotion, only that it is fundamental that corporations strictly observe existing legislation and policies. In this sense, public companies should continue to pay close attention to and cautiously review the contents of the aforementioned amendments and put them into practice in the meetings of shareholders and meetings of the board of directors this year to strengthen corporate governance and to further create corporate value.