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I.Definition, qualifications, basic rights and responsibilities of the responsible person of a company
- Introduction
According to Article 8 of the Company Act, responsible persons of a company are divided into:
- De facto responsible person
This refers to the business performance body and representative body of a company as legally required: a shareholder conducting the business of or representing the company in the case of an unlimited company or unlimited company with limited liability shareholders, and a director of the company in the case of a limited company or a company limited by shares.
- Responsible person acting within the scope of its duties
A managerial officer or liquidator of a company, or a promoter, supervisor, inspector, reorganizer or reorganization supervisor of a company limited by shares acting within the scope of its duties, is also the responsible person of a company. Where a government agency or a juristic person acts as a shareholder, it may be elected as a director or supervisor, provided that it shall designate a natural person as its representative to exercise duties on its behalf (Company Act §27I). Although a government agency or juristic person may act as a director or supervisor, it must designate a natural person as its representative to exercise duties on its behalf since it is not an actor entity and only a natural person is (Company Act §27I proviso). Said representative may, on account of its duties, be replaced by a person to fulfill the remaining term of office of the predecessor (Company Act §27III). Moreover, to ensure safe transactions, no restriction placed by a government agency or juristic person upon the power or authority of its authorized representative may be used as defense against any bona fide third party (Company Act §27IV).
Where a government agency or a juristic person acts as a shareholder, its authorized representative may also be elected as a director or supervisor. In the event of multiple authorized representatives, each of them may be so elected, but such authorized representatives may not be selected or serve as a director or supervisor concurrently (Company Act §27II, Securities and Exchange Act §26-3II).
- Non-director with civil, criminal and administrative liabilities as a director
This refers to a non-director of a public company who de facto conducts business of a director or de facto controls the management of the personnel, financial or business operation of the company and de facto instructs a director to conduct business, provided such liabilities shall not apply to an instruction of the government to a director it appoints for the purposes of economic development, promotion of social stability, or other circumstances conducive to public interests (Company Act §8III).
- Directors and board of directors
- Introduction
The purpose of a company limited by shares is to amass funds from a majority of people to create a big capital. A large number of shareholders is therefore detrimental to each of their participation in the business operations of the company, and a business performance body as legally required must be established to be in charge of such operations. Hence the separation of business ownership and business operation which is the essence of a company limited by shares. Pursuant to the Company Act, the business of a company shall be performed pursuant to resolutions to be adopted by the board of directors, except for matters the execution of which shall be effected pursuant to resolutions of a shareholders' meeting as required by this Act or the Articles of Incorporation of the company (Company Act §202). The board of directors may not number less than five persons (Securities and Exchange Act §26-3I) and shall elect a chairman of the board directors from among the directors to represent the company (Company Act §208I, II, III). In other words, the Company Act in force has referred to examples of legislation in the U.S. and Japan in establishing the board of directors as the legally required collective business-performance body of a company limited by shares endowed with discretionary rights in the business operations of the company.
- Term of office
The term of office of a director shall not exceed three years; but it may be eligible for re-election. In case no election of new directors is effected after expiration of the term of office of existing directors, the term of office of outgoing directors shall be extended until the time new directors are elected and assume their office. However, the competent authority may, ex officio, order the company to elect new directors within a given time limit; and if no re-election is effected after expiry of the given time limit, the outgoing directors shall be discharged ipso facto from such expiration date (Company Act §195). The term of office of a director must be appropriate. The three-year maximum as stipulated by the Company Act is deemed appropriate. To meet actual requirements, it is further provided that in case no election of new directors is effected after expiration of the term of office of existing directors, the term of office of outgoing directors shall be extended until the time new directors are elected and assume their office. Furthermore, as delay in the election of new directors by contention for the company's management rights is common, outgoing directors are required to be discharged ipso facto from the expiration date, to protect shareholders' rights and interests and ensure sound business operation of the company.
The tenure of directors should be specified in the articles as a required particular (Company Act §129), or the articles will be invalid.
- Qualifications
- Qualification
An independent director of a public company shall meet one of the following professional qualification requirements and have at least five years' work experience: a. An instructor or higher in a department of commerce, law, finance, accounting, or other academic department related to the business needs of the company in a public or private junior college, college, or university; b. a judge, public prosecutor, attorney, certified public accountant, or other professional or technical specialist who has passed a national examination and been awarded a certificate in a profession necessary for the business of the company; c. work experience in the area of commerce, law, finance, or accounting, or otherwise necessary for the business of the company; or d. may not be involved in any of the circumstances in the subparagraphs of Article 30 of the Company Act or be elected in the capacity of the government, a juristic person, or a representative thereof as provided in Article 27 of the Company Act.
In addition, during the two years before being elected or during the term of office, an independent director of a public company may not have been or be any of the following: a. An employee of the company or any of its affiliates; b. a director or supervisor of the company or any of its affiliates. The same does not apply, however, in cases where the person is an independent director of the company, its parent company, or any subsidiary in which the company holds, directly or indirectly, more than 50% of the voting shares; c. a natural-person shareholder who holds shares, together with those held by the person's spouse, minor children, or held by the person under others' names, in an aggregate amount of 1% or more of the total number of issued shares of the company or ranking in the top 10 in holdings; d. a spouse, relative within the second degree of kinship, or lineal relative within the third degree of kinship, of any of the persons in the preceding three subparagraphs; e. a director, supervisor, or employee of a corporate shareholder that directly holds 5% or more of the total number of issued shares of the company or that holds shares ranking in the top five in holdings; f. a director, supervisor, officer, or shareholder holding 5% or more of the shares, of a specified company or institution that has a financial or business relationship with the company; g. a professional individual who, or an owner, partner, director, supervisor, or officer of a sole proprietorship, partnership, company, or institution that, provides commercial, legal, financial, accounting services or consultation to the company or to any affiliate of the company, or a spouse thereof, provided that this restriction does not apply to any member of the remuneration committee who exercises powers pursuant to Article 7 of the Regulations Governing the Establishment and Exercise of Powers of Remuneration Committees of Companies Whose Stock is Listed on the TWSE or Traded on the GTSM.
- Disqualification
- Article 30 of the Company Act is applicable to directors mutatis mutandis (Company Act §192V). The restrictions set forth in Article 30, Subparagraph 6 of the Company Act on the disqualification of an officer, as enumerated below, are to protect social benefit and corporate interest and applicable to directors mutatis mutandis:
- Presumed to have committed an offence under the Statute for Prevention of Organizational Crimes and subsequently adjudicated guilty by a final judgment, and the time elapsed after he has served the full term of the sentence is less than five years;
- Having committed the offence in terms of fraud, breach of trust or misappropriation and subsequently punished with imprisonment for a term of more than one year, and the time elapsed after he has served the full term of such sentence is less than two years;
- Having been adjudicated guilty by a final judgment for misappropriating public funds during the time of his public service, and the time elapsed after he has served the full term of such sentence is less than two years;
- Having been adjudicated bankrupt, and having not been reinstated to his rights and privileges;
- Having been discredited by the clearing house, and the term of such sanction has not expired yet; or
- Having no or only limited disposing capacity.
- A supervisor may not be concurrently a director (Company Act §222, first part).
- A civil servant may not be concurrently a director of a private company (Civil Service Act §13I).
- A Control Yuan member may not be concurrently a director of a private company (Grand Justices' directive no. Shi Zi 81).
- An active serviceman may not be concurrently a director of a company (Civil Service Act §24 and §13).
- Neither a legislator nor a Control Yuan member may be concurrently a director of a public enterprise (Grand Justices' directive no. Shi Zi 24).
- Election
- General directors (non-independent directors)
- Election body
- Election body of directors of the initial term
Directors of the initial term are elected by the promoters if the company is incorporated by way of promotion (Company Act §131I, second part) and by the inaugural meeting if the company is incorporated by the offer method (Company Act §146I, first part).
- Election body after the establishment of the company
Directors after the establishment of the company are elected by the shareholders' meeting. It may not be stipulated in the articles that the right to election of directors be exercised by other body of the company or a third person or that consent from a third person be required for the resolution of the shareholders' meeting on the election of directors to become valid.
- Election resolution
The Company Act adopts cumulative voting in the hope that candidates supported by minority shareholders will have a change to be elected as directors. Therefore, in the process of electing directors at a shareholders' meeting, the number of votes exercisable in respect of one share shall be the same as the number of directors to be elected, and the total number of votes per share may be consolidated for election of one candidate or may be split for election of two or more candidates. A candidate to whom the ballots cast represent a prevailing number of votes shall be deemed a director elect (Company Act §198I). Cumulative voting applies not only to the election of directors after the establishment of the company but also to the election of directors of the initial term.
- Independent directors
Pursuant to Article 5 of the Regulations Governing Appointment of Independent Directors and Compliance Matters for Public Companies, the election of independent directors at a public company is subject to the provisions of Article 192-1 of the Company Act in that a candidate nomination system shall be adopted, that such system shall be expressly stated in the articles of incorporation of the company, and that shareholders shall elect independent directors from among the those listed in the slate of independent director candidates. Provisions governing the election body and election resolution in regard to independent directors are the same as those in regard to general directors.
- Obligations
- The relationship between a director and a company is a non-gratuitous mandate. A director shall carry out the business of the company with the care of a good administrator (Civil Code §535), or it shall be liable for damages to the company.
- Noncompete
- Content
As part of its noncompete obligation, a director who does anything for itself or on behalf of another person that is within the scope of the company's business shall explain to the meeting of shareholders the essential contents of such an act and secure its approval (Company Act §209I). As a board member, a director may, through participation in decision-making over the business execution of the company, familiarize itself with the internal operations as well as trade secrets of the company. Therefore, if a director is allowed to freely compete with the company outside, it may likely, to the prejudice of the company's interest, derive gain for itself or another person in the exercise of its duties. This thus gives rise to noncompete obligations, to avoid a conflict of interests of the two sides.
- Permission
Though owing a duty of noncompetition to the company, a director may engage in competition with the company so long as it has explained to the meeting of shareholders the essential contents of its act and secure the approval of said meeting. The legislative purpose of noncompetition is to protect the company's interest. Once the shareholders of the company determine the competition between a director and the company is not prejudicial to the company's interest, the director may be relieved of the above duty by a resolution adopted by a majority of the voting rights of the shareholders present in a shareholders' meeting attended by shareholders representing two-thirds or more of the total number of its outstanding shares.
- Effects of breach
In case a director does anything for itself or on behalf of another person in violation of its duty of noncompetition, the meeting of shareholders may, by a resolution, consider the earnings from such an act as earnings of the company (Company Act §209V). This is called disgorgement, with a one-year limitations period from the realization of such earnings, no longer exercisable after the statute of limitations runs out.
- Obligation to sign securities of the company
Share certificates or corporate bonds issued by a company limited by shares shall be affixed with the signatures or seals of three or more directors (Company Act §162I and §257I).
- Obligation to report shareholding
Each director elected shall declare to the competent authority the number and amount of the shares of the company being held by it at the time it is elected (Company Act §197I, first part).
- Liability of directors
- Liability to the company
A director's liability to a company arises out of damage caused to the company by the director's violation of obligations to the company. As the business performance body of a company, a director becomes liable only when it violates its obligations in the course of business execution causing damage to the company. Notwithstanding, while there are circumstances where a director causes damage to the company in the former's performance of business acting on a board resolution, there are other circumstances where it causes such damage, as enumerated below:
- Acting on a board resolution:
Where the company sustains damage as a result of a violation by a board resolution of laws and regulations, the articles, or a resolution of the shareholders' meeting, directors participating in the adoption of such resolution are liable to indemnify the company, provided, directors whose disagreement appears on record or is expressed in writing shall be exempted from liability (Company Act §193II).
- Failing to act on a board resolution:
As board members, directors shall perform duties in accordance with board resolutions. Any director who fails to exercise the due care of a good administrator and follow board resolutions in conducting the business operation of the company is deemed to have committed subjective negligence and shall indemnify the company (Company Act §23I).
- Acting beyond authority
As the relationship between a director and a company is non-gratuitous mandate, a director acting beyond its authority thereby causing damage shall indemnify the company pursuant to Article 544 of the Civil Code.
- Liability to a third party
Pursuant to Article 23 of the Company Act, if the responsible person of a company has, in the course of conducting the business operations of the company, violated laws or regulations thereby causing damage to any other person, it shall be liable for indemnify such other person jointly and severally with the company. As a responsible person of a company limited by shares (Company Act §8I), a director is naturally governed by this article. Such claim for damages will be extinguished by prescription if not exercised within two years from the time the damage and the person bound to make indemnification becomes known to the claimant; the same rule applies where ten years have elapsed from the time the wrongful act time is committed (Civil Code §197I). In case a supervisor is liable for damages to a third party and a director is also liable, such supervisor and director shall be joint debtors (Company Act §226).
- Authority of the board
- The board has decision-making authority over the conduct of business of the company
Business operations of a company shall be executed pursuant to resolutions adopted by the board of directors, except for matters the execution of which shall be effected pursuant to resolutions of the shareholders' meeting as required by this Act or the articles (Company Act §202). This means the board has the authority to indicate its intent as to the business operations of the company, and the intent it decides is carried out by the chairman, vice chairman or managing directors of the board.
- Internal supervisory authority
As mentioned, the board has decision-making authority over business execution whereas the actual execution is undertaken by the chairman, vice chairman or managing directors. The board therefore has supervisory authority over the specific business execution of directors. To enable the implementation of the board's internal supervision as described above, the Company Act endows the board with the right to appoint and dismiss the chairman, vice chairman and managing directors (Company Act §208I).
- Powers under the Company Act
Besides laying down general provisions on the authority of the board in Article 202, the Company Act further enumerate its powers, chiefly: decision over the appointment and dismissal and the compensation of officers (Company Act §29I), submitting of proposals to a shareholders' meeting for a material change in the business or assets of the company (Company Act §185V), convening shareholders' meetings (Company Act §171), election of the chairman, vice chairman and managing directors of the board from among the directors (Company Act §208I and §208II), being authorized by the articles to adopt resolutions on the distribution of dividends and bonuses in the event of a company whose shares are issued in public (Company Act §240VI), capitalizing the legal reserve (Company Act §241II), decision over the invitation of subscriptions for corporate bonds and requests of subscription payments (Company Act §246 and §254), issuing new stock (Company Act §266II), and filing reorganization applications (Company Act §282II) etc.
- Obligations of the board
- Obligation to convene shareholders' meetings
The board has the authority to convene shareholders' meetings (Company Act §171). The board is obligated to convene a special shareholders' meeting under the following two circumstances: (1) In case the loss incurred by the company aggregates to one-half of its paid-in capital, the board of directors shall convene and make a report to a meeting of shareholders (Company Act §211I), and (2) When the number of vacancies in the board of directors equals to one-third of the total number of directors, the board of directors shall call, within 30 days, a special meeting of shareholders to elect succeeding directors to fill the vacancies (Company Act §201I).
- Obligation to report to shareholders' meetings
The board is obligated to report the cause or subject of a shareholders' meeting to be convened to said meeting. Pursuant to the Company Act, the board shall report to a shareholders' meeting under the following circumstances:
- if the loss incurred by the company aggregates to one-half of its paid-in capital;
- if the board is authorized by the articles to distribute dividends and bonuses in the event of a company whose shares are issued in public, the board shall report to a shareholders' meeting after the distribution;
- if the board is authorized by the articles to capitalize the legal reserve in the event of a company whose shares are issued in public, the board shall report to a shareholders' meeting after the capitalization; and
- the board shall report the cause for inviting subscriptions for corporate bonds and relevant matters to a shareholders' meeting after the issue of corporate bonds by the company.
- Obligation to petition for bankruptcy of the company
Where the assets of the company are insufficient to set off its liabilities, the board of directors shall apply to court for pronouncement of its bankruptcy immediately (Company Act §211II). "Assets of a company" refers to the net realizable value. "Liabilities" shall include long-term liabilities to investors.
- Obligation to give notice and make a public announcement of dissolution of the company
In the event of dissolution of the company, the board of directors shall forthwith notify each of the shareholders of the essentials of the dissolution plan and shall make a public announcement if bearer share certificates are issued, except where the company is to dissolve on account of bankruptcy (Company Act §316IV). The reason is the court shall make a public announcement pursuant to the Bankruptcy Act.
- Suppression of the board's violations of law
- Suppression by shareholders
In case the board of directors decides, by resolution, to commit any act beyond the registered business scope of the company or in violation of laws or regulations or the articles, any shareholder who has continuously held shares for a period of one year or longer may request the board of directors to discontinue such act (Company Act §194). Such right to claim suppression of violations by the board is to prevent directors from abusing their authority and protect the interest of the company and shareholders.
- Suppression by a supervisor
If the board commits an act in the course of business execution in violation of laws and regulations or the articles or operates business beyond the registered scope, a supervisor shall immediately request the board to cease its act (Company Act §218-2II). The legislative purpose is to strengthen the authority and duties of supervisors and mitigate the company's loss.
In sum, under the framework of the Company Act in force, both shareholders who have continuously held shares in the company for a period of one year or longer or supervisors have the right to suppress acts committed by the board in violation of the articles or laws and regulations. Between these two, there is no order of preference in the exercise of the claim, the reason being that the suppression of board violations is a precautionary measure to be taken in advance and must be carried out in the interest of time.
- Board meetings
- Significance
The board meeting is a meeting body. To determine its intent, the board must convene meetings, namely board meetings. Board meetings shall be convened by persons with the right to convene according to the prescribed procedure. Meetings convened not in accordance with such procedure are deemed to fail to conform to law, in which event resolutions adopted by the meetings may not be deemed board resolutions.
- Convention
- Convener
Meetings of the board of directors shall be convened by the chairman of the board of directors, except for the first meeting of each term of the board of directors which shall be convened by the director who received a ballot representing the largest number of votes at the election of directors.
The first meeting of each term of the board of directors shall be convened within 15 days after the re-election. However, in case the re-election of directors was conducted prior to the expiration of the term of office of the directors of the preceding term, and a resolution was adopted not to discharge the directors of the preceding term until the expiration of the term of their offices as directors, the first meeting of the newly elected directors shall be convened within 15 days after expiration of the term of office of the directors of the preceding term. (Company Act §203I and II)
- Procedure of convention
In calling a meeting of the board of directors, a notice setting forth therein the subject(s) to be discussed at the meeting shall be given to each director and supervisor no later than seven days prior to the scheduled meeting date. However, in the case of emergency, the meeting may be convened at any time (Company Act §204I). Such notice may be effected by means of electronic transmission subject to consent of the recipient(s) (Company Act §204II). In other words, a meeting notice must be given in writing stating the subject(s) of the meeting and may not be given verbally. If some of the directors are not notified and as a result the outcome of any resolution is likely to be affected, such board resolution is invalid ipso facto.
- Meetings
Board meetings are chaired by the board chairman (Company Act §208III) and shall be attended by directors in person (Company Act §205I), provided the Company Act authorizes the articles to allow another director to attend a board meeting as proxy, to meet actual requirements. A director appointing another director to attend a meeting of the board of directors in its behalf shall, in each instance, issue a written proxy and state therein the scope of authority with reference to the subjects to be discussed at the meeting. In case a meeting of the board of directors is held via videoconference, directors taking part in the videoconference are deemed to have attended the meeting in person (Company Act §205II).Where a director residing in a foreign country is unable to attend board meetings in Taiwan on a regular basis, the company concerned may appoint in writing a shareholder residing in Taiwan as its proxy to attend board meetings on a regular basis, provided such appointment shall be registered with the Ministry of Economic Affairs (Company Act §205V and VI).
- Resolution
- Resolution
There are two ways for the board to adopt resolutions: One is ordinary resolutions, which shall be adopted by a majority of the directors at a meeting attended by a majority of the directors (Company Act §206I). The other is special resolutions, which are adopted by a majority of the directors at a meeting attended by two-thirds of the directors.
A director who has a personal interest in a matter under discussion at a board meeting shall explain to the board meeting the essential contents of such personal interest (Company Act §206II), and may not vote or exercise voting rights on behalf of another director if said interest is likely to impair the interest of the company (Company Act §206III and §178). The quota of directors shall be duly elected, and the number of directors present at a board meeting is determined by the number of actual incumbents who may attend the meeting as called, less any vacancies created by directors statutorily discharged ipso facto.
- Defect in resolutions
The convention procedure of, or ways resolutions are adopted by, a board meeting will certainly affect the validity of its resolutions if defective or in contravention of laws and regulations or the articles. While setting out relevant provisions governing shareholders' meetings, the Company Act is, however, silent on the validity of resolutions adopted by a defective board meeting. Nevertheless, according to the Ministry of Economic Affairs letter of June 12, 1991 No. Jing (80) Shang 214490, no resolution of a board meeting will take effect if the convention procedure of, or ways such resolution is adopted by, the meeting are in contravention of laws and regulations or the articles.
- Minutes
Board resolutions are binding on all directors. For the avoidance of doubt, minutes shall be taken of the proceedings of board meetings (Company Act §207). The minutes shall record the date and place of the meeting, name of the chairman, method of adopting resolutions, and a summary of the essential points of the proceedings and results of the meeting; affixed with the signature or seal of the chairman of the meeting; distributed to all directors within 20 days after the close of the meeting; and kept permanently throughout the life of the company (Company Act §183).
- Supervisors
A supervisor is a statutory standing supervisory body of a company limited by shares, in charge of overseeing the business execution and auditing the accounts of a company, provided a public company may establish either a supervisor or a audit committee. According to the principle of corporate autonomy, supervision of a company limited by shares is in principle carried out by the company internally, therefore a standing body is set up to oversee the business and financial condition of the company from time to time. This is how the supervisor system comes into being and how supervisors have come to play a critical role in the supervision of corporate autonomy.
- Number and term
Supervisors of a company shall be elected by the meeting of shareholders, among them at least one supervisor shall have a domicile in Taiwan (Company Act §216I). This shows there must be more than one supervisor. The actual number is as determined by the articles. The term of office of a supervisor shall not exceed three years, but it may be eligible for re-election. In case election of new supervisors cannot be effected in time after expiration of the term of office of existing supervisors, the existing supervisors shall continue to perform their duties until the new supervisors elect assume their office as supervisors. However, the competent authority may order, ex officio, the company to conduct the re-election of supervisors within a given time limit. If election of new supervisors is still not effected within the prescribed time limit, the existing supervisors shall be discharged ipso facto upon expiry of the time limit (Company Act §217). As such, the term of supervisors is the same as that of directors under the Company Act.
- Qualifications
- Qualification
Article 216, Paragraph 4 and Article 192, Paragraphs 1 and 3 of the Company Act governing disposing capacity are applicable to supervisors mutatis mutandis. Therefore, a shareholder has disposing capacity if a natural person, and a person with limited disposing capacity, though allowed to operate business with the permission of the legal representative, still may not serve as supervisor.
- Disqualification
The first part of Paragraph 4, Article 216 of the Company Act is applicable to supervisors mutatis mutandis, as provided by Article 30. The details of the six subparagraphs of said article are as mentioned above thus not to be elaborated here. Meant to protect public interest, the relevant provision is therefore applicable to directors and supervisors mutatis mutandis. Moreover, no supervisor may serve concurrently as a director, managerial officer or other staff/employee of the company (Company Act §222). As the legislative purpose, it is anticipated that supervisors can exercise powers in an impartial manner.
- Election
- Election body
- Election of supervisors of the initial term
Same as directors, supervisors of the initial term are elected by the promoters if the company is incorporated by way of promotion (Company Act §131I, second part) and by the inaugural meeting if the company is incorporated by the offer method (Company Act §146I, first part).
- Election of supervisors after the establishment of the company
Supervisors after the establishment of the company are elected by the shareholders' meeting. It may not be stipulated in the articles that the right to election of supervisors be exercised by other body of the company or a third person or that consent from a third person be required for the resolution of the shareholders' meeting on the election of supervisors to become valid.
- Election resolution
Resolutions on the election of supervisors are governed by provisions applicable to directors (Company Act §227) and are mentioned above thus not elaborated here.
- Authority
- Supervisory authority
- Investigate the incorporation of the company
Directors and supervisors elect shall, upon election by the inaugural meeting, immediately investigate the matters identified in Article 145 truthfully and report to the inaugural meeting, if the company limited by shares is incorporated by the offer method (Company Act §146I).
- Investigate the business and financial condition of the company
A supervisor shall oversee the business execution of the company, and may investigate its business and financial condition, examine the accounting books and documents, and request the board of directors or officers to make reports thereon (Company Act §218I). This is one of the major supervisory powers of a supervisor.
- Audit the accounting statements and records of the company
Supervisors shall audit the various statements and records prepared for submission to the shareholders' meeting by the board of directors and report their findings and opinions at the meeting of shareholders (Company Act §219I). Such statements and records refer to business reports, financial statements, and proposals for the distribution of surplus earnings or set-off of losses prepared by the board of directors at the close of each fiscal year (Company Act §228I), and shall be forwarded by the board to supervisors for their auditing not later than the 30th day prior to a general meeting of shareholders; supervisors may request the board of directors to provide in advance the financial statements and records for auditing (Company Act §228I and III).
- Request the board or directors to cease violating acts
Supervisors of a company may attend the meeting of the board of directors to their opinions. In case the board of directors or any director commits any act, in carrying out the business operations of the company, in a manner in violation of the laws, regulations, the Articles of Incorporation or the resolutions of the shareholders' meeting, the supervisors shall forthwith advise, by a notice, to the board of directors or the director, as the case may be, to cease such act (Company Act §218-2).
- Investigate non-cash capital contribution in the event of an issue of new shares by the company
When a company issues new shares and such shares are subscribed to by existing shareholders or particular persons by agreement rather than issued to the public, in the event the capital contribution is made in the form of assets, the board shall request a supervisor for inspection and comment and report to the competent authority for approval after the contribution (Company Act §274II). Therefore, in the event a company issues new shares and non-cash capital contribution is made, a supervisor shall examine whether the price or appraisal standard of the property commensurate with the number of shares granted by the company and whether any abuse is involved, and shall provide its comments to the competent authority for reference in its decision making.
- Examine the financial statements and records prepared upon the assumption of office of a liquidator
The liquidator shall, after having assumed office, examine the financial condition of the company, prepare the financial statements and inventory of property, and deliver them to the supervisors for examination (Company Act §326I).
- Right to represent the company
- Engage in lawsuits or negotiations with directors on behalf of the company
In case of a lawsuit between the company and a director, the supervisor shall act on behalf of the company, unless otherwise provided by law; and the meeting of shareholders may also appoint some other person to act on behalf of the company in a lawsuit (Company Act §213). Pursuant to Article 223 of the Company Act, the supervisor shall act as the representative of the company in case a director of a company engages in negotiations with the company on his own account or for any other person.
- Retain lawyers and accountants on behalf of the company
In handling the business in Article 218, Paragraph 1 and Article 219, Paragraph 1 of the Company Act, the supervisors may appoint lawyers and accountants on behalf of the company to conduct examination (Company Act §218II and §219II).
- Institute actions against directors for the company at the request of minority shareholders
Shareholders who have been continuously holding 3% or more of the total number of the outstanding shares of the company over one year may request in writing the supervisors to institute an action against a director for the company (Company Act §214I).
- Power to convene shareholders' meetings
- Active convention
Subject to the condition that the board of directors does not or is unable to convene a meeting of shareholders, the supervisors may, for the benefit of the company, call a meeting of shareholders when necessary (Company Act §220).
- Passive convention
Shareholders who have been continuously holding three per cent of total number of the outstanding shares of a company for a period of one year or longer may apply to the court for appointment of inspector to inspect the current status business operations, the financial accounts and the property of the company. The court may, when it deems necessary based on the report made by the inspector, order the supervisor(s) of the company to convene a meeting of shareholders. (Company Act §245I and II).
- Obligations
- Obligations arising out of mandate
The relationship between a supervisor and a company is a non-gratuitous mandate. A supervisor therefore shall perform its duties with the care of a good administrator to the company (Civil Code §535), or it is deemed to have committed subjective negligence and shall indemnify the company against damage suffered. The same applies to acts performed beyond its authority. (Civil Code §544I)
- Obligation to report shareholding
Pursuant to Article 277 of the Company Act, which is governed by Article 197 mutatis mutandis, a supervisor elect shall declare to the competent authority the number and amount of the shares of the company being held by it at the time it is elected. In case a supervisor of a company whose shares are issued to the public transfers, during its term of office as a supervisor, more than one-half of the company's shares being held by it at the time it is elected, it shall be discharged ipso facto.
- A supervisor may not serve concurrently as a director, managerial officer or other staff/employee of the company (Company Act §222).
- Liabilities
- Liability to the company
In case a supervisor, in its performance of duties, violates any laws or regulations or the articles, or is negligent of its duties, thus causing damage to the company, it shall be liable for indemnifying the company (Company Act §224). By being negligent of its duties, this means the supervisor fails to perform its supervisory duties with the care of a good administrator. Further, when a supervisor is liable for damages to the company or a third party and a director is also liable, such supervisor and director shall be joint debtors (Company Act §226). When a meeting of shareholders resolves to institute an action against a supervisor, the company shall institute such action within 30 days from the date of adoption of such resolution (Company Act §225I). The person who represents the company in the action instituted may be appointed by the shareholders' meeting from persons other than the directors (Company Act §225II).
- Liability to a third party
As mentioned above, a supervisor is a responsible of a company within the scope of its duties. Article 23 of the Company Act is accordingly applicable to it, which stipulates that a supervisor who, in its performance of duties, violates any laws or regulations thus causing damage to any other person shall be liable jointly and severally with the company for indemnifying such other person. In case a supervisor is liable for damages to a third party and a director is also liable, such supervisor and director shall be joint debtors (Company Act §226).
- Audit committee
A public offering company shall establish either an audit committee or a supervisor., provided the competent authority may order it to establish an audit committee in lieu of a supervisor in view of the company's scale, type of operations, or other essential considerations (Securities and Exchange Act §14-4I). The audit committee shall be composed of the entire number of independent directors and consist of not less than three persons, one of whom shall be the convener, and at least one of whom shall have accounting or financial expertise (Securities and Exchange Act §14-4II). For a company that has established an audit committee, the provisions regarding supervisors in the Securities and Exchange Act, Company Act, and other laws shall apply mutatis mutandis to the audit committee (Securities and Exchange Act §14-4III).
- Remuneration committee
A company whose stock is listed on the stock exchange or traded over-the-counter shall establish a remuneration committee (Securities and Exchange Act §14-6). Pursuant to the Regulations Governing the Appointment and Exercise of Powers by the Remuneration Committee of a Company Whose Stock is Listed on the Stock Exchange or Traded Over the Counter, members of the remuneration committee shall be appointed by resolution of the board of directors, number three or more, meet certain professional qualification requirements together with at least five years' work experience, and satisfy requirements of independence; the professional qualification requirements and requirements of independence for such members are consistent with those for independent directors. Article 7, Paragraph 1 of the above regulations further provides expressly that the remuneration committee shall exercise the care of a good administrator in faithfully performing the official powers listed below:
- Prescribe and periodically review the performance review and remuneration policy, system, standards, and structure for directors, supervisors and managerial officers.
- Periodically evaluate and prescribe the remuneration of directors, supervisors, and managerial officers.
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