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Essential Legal Knowledge to be Possessed by the Directors
- Definition of, qualifications for, and basic rights of and responsibilities of the responsible person of a company
- Introduction
According to Article 8 of the Company Act, there are different types of “responsible persons”:
- Ipso facto responsible persons:
The directors of a company limited by shares are ipso facto responsible persons of the company.
- Responsible persons within the scope of duties:
Executive officers or liquidators, promoters, supervisors, inspectors, reorganizers or the reorganization supervisor of a company limited by shares, acting within the scope of their duties, are also responsible persons of the company. Where a government agency or a juristic person acts as a shareholder of a company, it may be elected as a director or supervisor of the company. However, a government agency or a juristic person elected as a director or supervisor must designate a natural person as its proxy to exercise the duties on its behalf because a juristic person is not an actor entity and only a natural person is (Paragraph 1, Article 27 of the Company Act). Any authorized representatives of a company may, owing to the change of his/her functional duties, be replaced by another person to fulfill the remaining term of office (Paragraph 3, Article 27 of the Company Act). To uphold the security of trading, any restriction placed upon the power or authority of the authorized representatives of a government agency or a juristic person shall not be set up as a defense against any bona fide third party (Paragraph 4, Article 27 of the Company Act). Where a government agency or a juristic person acts as a shareholder of a company, its authorized representative may also be elected as a director or supervisor of the company; and if there is a plural number of such authorized representatives, each of them may be respectively elected (Paragraph 2, Article 27 of the Company Act). However, when the government or a juristic person is a shareholder of a public company, then except with the approval of the Competent Authority, the provisions of Paragraph 2, Article 27 of the Company Act shall not apply, and the representative of such governmental or juristic person shareholder may not concurrently be elected or serve as a director or supervisor of the company, nor may the representative of any entity (including a foundation or association) that has a relationship of control or subordination with the governmental or juristic person shareholder be elected or serve as such (Paragraph 2, Article 26-3 of the Securities and Exchange Act, February 6, 2010 FSC Interpretive Letter No. Financial-Supervisor-Securities-Corporate-0990005875).
- Directors and board of directors
- Board of directors
The board of directors is a statutorily required collective executive body of a company limited by shares that is vested with the right to determine the execution of company business. The business operations of a company shall be executed pursuant to the resolutions to be adopted by the board of directors, except for matters the execution of which shall be effected pursuant to the resolutions of the shareholders’ meeting as required by the Company Act or the company’s articles of incorporation (Article 202 of the Company Act). The board of directors of a public company shall consist of at least five directors (Paragraph 1, Article 192 of the Company Act, Article 26-3 of the Securities and Exchange Act), who shall elect from among themselves a chairman who is chairman of the board and represents the company externally (Paragraphs 1, 2 and 3, Article 208 of the Company Act).
- Term of office of the directors
The term of office of a director should be appropriate. Under the Company Act, the term of office of a director shall not exceed three years, but he/she may be eligible for re-election (Paragraph 1, Article 195 of the Company Act). The term of office of a director shall furthermore be specified in the company’s articles of incorporation (Article 129 of the Company Act). However, in circumstances where other provisions are separately prescribed by the competent authority, such provisions shall prevail. Furthermore, if the board of directors does not convene the regular meeting of shareholders to elect directors and supervisors for a new term in accordance with provisions, the Competent Authority may ex officio set a deadline for the meeting to be held. If the meeting is not held by the deadline, the entire body of directors and supervisors shall ipso facto be dismissed from the time of expiration of the deadline (Paragraph 8, Article 36 of the Securities and Exchange Act).
- Qualifications of directors
- Qualifications
Directors are elected by the shareholders’ meeting from among persons with disposing capacity (Article 192 of the Company Act).
- Disqualifications
- To protect public interest and company interest, a person under any of the following circumstances may not serve as a director, or if already serving in such capacity, shall ipso facto be dismissed: (Paragraph 5, Article 192, and Article 30, of the Company Act):
- Having committed an offence as specified in the Statute for Prevention of Organizational Crimes and subsequently convicted of a crime, and has not started serving the sentence, has not completed serving the sentence, or five years have not elapsed since completion of serving the sentence, expiration of the probation, or pardon;
- Having committed the offence in terms of fraud, breach of trust or misappropriation and subsequently convicted with imprisonment for a term of more than one year, and has not started serving the sentence, has not completed serving the sentence, or two years have not elapsed since completion of serving the sentence, expiration of the probation, or pardon;
- Having committed the offense as specified in the Anti-corruption Act and subsequently convicted of a crime, and has not started serving the sentence, has not completed serving the sentence, or two years have not elapsed since completion of serving the sentence, expiration of the probation, or pardon;
- Having been adjudicated bankrupt or adjudicated of the commencement of liquidation process by a court, and having not been reinstated to his or her rights and privileges;
- Having been dishonored for unlawful use of credit instruments, and the term of such sanction has not expired yet;
- Having no or only limited disposing capacity; or
- Having been adjudicated of the commencement of assistantship and such assistantship having not been revoked yet.
- A supervisor shall not serve concurrently as the director of the company (Front section, Article 222 of the Company Act).
- A civil servant shall not serve concurrently as the director of a private company (Paragraph 1, Article 13 of the Civil Servant Service Act).
- A commissioner of the Control Yuan shall not serve concurrently as the director of a private company (Judicial Yuan Interpretation No. 81).
- A military serviceman on active duty shall not serve concurrently as the director of a company (Articles 24, 13 of the Civil Servant Service Act).
- Legislators or commissioners of the Control Yuan shall not serve concurrently as the director of a state-owned enterprise (Judicial Yuan Interpretation No. 24).
- Election of directors
- Electoral body
- Electoral body for the first-term directors
If a company is established by means of promotion, the first-term directors will be elected by the promoters (back section of Paragraph 1, Article 131 of the Company Act). If a company is established by means of offering, the first-term directors will be elected at the inaugural meeting (front section, Paragraph 1, Article 146 of the Company Act).
- Electoral body after the establishment of the company
After a company is established, the directors will be elected at the shareholders’ meeting, and the company’s articles of incorporation shall not contain clauses that mandate the election of directors to another entity or any third party, or clauses that require the resolutions adopted in the shareholders’ meetings concerning elected directors be consented by any third party.
- Resolution on elected directors
To make sure that director candidates supported by minority shareholders have a chance to be elected, the Company Act prescribes a cumulative voting system. That is, 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 (shares held * number of directors to be elected = votes held by the shareholder). The total number of votes per share may be cast for one candidate or split among two or more candidates. A candidate to whom the ballots cast represent a larger number of votes shall be deemed a director elect (Article 198 of the Company Act). The cumulative voting system applies to the election of directors after the company has been established, as well as the election of first-term directors.
- Election method
If a company adopts the candidate nomination system for election of the directors of the company, the adoption of such system shall be expressly stipulated in the Articles of Incorporation of the company, and the shareholders shall elect the directors from among the nominees listed in the roster of director candidates. However, a public company that reaches certain conditions of scale, number of shareholders, shareholder structure, or other essential factors provided by the competent authority in charge of securities affairs shall be required to adopt the candidate nomination system and such adoption shall be expressly stipulated in the Articles of Incorporation of the company. Furthermore, the Financial Supervisory Commission on 25 April 25, 2019 ordered all TWSE and TPEx listed companies to adopt the candidate nomination system for election of directors and supervisors beginning from 2021
- Obligations of a director
- Obligations arising from a mandate
The relationship between a director and a company is a non-gratuitous mandate. Thus a director shall exercise due diligence as a good administrator in the performance of company business (Article 535 of the Civil Code). Otherwise, the director will be held liable for damages sustained by the company as a result.
- Non-competition obligation
- Content of non-competition
A director is a member of the board and participates in company operations. If a director were to conduct activities that are within the scope of company business whether on behalf of himself/herself or others and freely compete with the company, there is reasonable concern that the director might take advantage of his/her position to make personal gains or gains for others at the cost of company interest. To prevent such conflict of interest, directors of a company have the obligation not to engage in business that may be competitive vis-a-vis the company.
- Waiver of the non-competition obligation
If a director explains to a meeting of shareholders the essentials of activities within the scope of company business that he/she plans to engage in outside the company on behalf of either himself/herself or others, then the shareholders’ meeting may consider and grant a waiver to the director’s obligation of non-competition by a special resolution adopted by a majority of shareholders who represent two-thirds or more of the total outstanding shares; or, if stricter criteria for such vote are specified in the articles of incorporation, such stricter criteria shall govern (Paragraphs 1 and 2, Article 209 of the Company Act).
- Violation of the non-competition obligation
In case a director engages in any activity either for himself/herself or on behalf of another person in violation of the non-competition obligation, the meeting of shareholders may, by a resolution, consider the earnings in such an act as earnings of the company (Paragraph 5, Article 209 of the Company Act). This no longer applies, however, after one year has lapsed since the realization of such earnings by the director.
- When a director discovers any possibility that the company will suffer substantial damage, the director shall report to the supervisors immediately (Article 218-1 of the Company Act).
- Obligation to declare shares held
Each director shall, after having been elected, declare to the competent authority the number of shares of the company held at the time of election (fore part, Paragraph 1, Article 197 of the Company Act). Upon creation or cancellation of a pledge on company shares held by a director, a notice of such action shall be given to the company, and the company shall, in turn and within 15 days after the date of such pledge creation/cancellation, have the change of pledge over such shares reported to the competent authority and declared in a public notice, unless otherwise provided for in rules or regulations separately prescribed with respect to public companies by the authority in charge of securities affairs. If a director of a public company has created a pledge on shares of the company held by the director in an amount exceeding half of the number of company shares held by the director at the time of the director's election, the voting power of that excess portion of pledged shares shall not be exercised and that excess portion shall not be counted in the number of votes of shareholders present at the meeting (Article 197-1 of the Company Act).
- Responsibilities of a director
- Responsibility towards the company
The Company Act stipulates that the responsible person of a company shall conduct company business in good faith and exercise due diligence of a good administrator, and if he/she has acted contrary to this provision, he/she shall be liable for the damages sustained by the company there-from (Paragraph 1, Article 23 of the Company Act). In case the responsible person of a company does anything for himself/herself or on behalf of another person in violation of the above provisions, the meeting of shareholders may, by a resolution, consider the earnings in such an act as earnings of the company unless one year has lapsed since the realization of such earnings (Paragraph 3, Article 23 of the Company Act). The board of directors is the executive body of a company. Circumstances in which a director violates his/her obligations in the execution of company business and causes injury to the company can general be divided into the following three categories:
- Acting in accordance with the resolution of the board of directors:
When the board of directors adopts a resolution that violates laws or regulations, or the company’s articles of incorporation, or violates a resolution adopted in a shareholders’ meeting and causes injury to the company, directors who are involved in the decision-making shall be held liable for damages. However, dissenting directors whose dissent can be proven by minutes or written statements are not held liable (Article 193 of the Company Act).
- Failure to act in accordance with resolutions of the board of directors:
Directors are board members and shall observe the resolutions adopted by the board in the performance of their duties. Thus, if a director fails to exercise due diligence of a good administrator by failing to conduct business in accordance with resolutions of the board of directors, he/she should be found liable for damages sustained by the company (Article 544 of the Civil Code).
- Overstepping a director’s authority
Because of the non-gratuitous mandate between a director and a company, a director shall be held liable for damages sustained by the company from an act of his/hers that oversteps his/her authority (Article 544 of the Civil Code).
- Responsibility towards third parties
The Company Act provides that if the responsible person of a company (a director is the responsible person of a company limited by shares) has, in the course of conducting company business, violated any provision of the applicable laws and/or regulations and thus caused damage to any other person, he/she shall be liable, jointly and severally, for the damage to such other person (Paragraph 2, Article 23 of the Company Act).
- A non-director of a 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 shall be liable for the civil, criminal and administrative liabilities as a director in this Act, provided, however, that such liabilities shall not apply to an instruction of the government to a director appointed by the government for the purposes of economic development, promotion of social stability, or other circumstances which can promote public interests (Paragraph 3, Article 8 of the Company Act).
- Powers and authority of the board of directors
- Board of directors is empowered to decide the execution of company business:
The business operations of a company shall be executed pursuant to the resolutions adopted by the board of directors, except for matters the execution of which shall be effected pursuant to the resolutions of the shareholders’ meeting as required by the Company Act or the company’s articles of incorporation (Article 202 of the Company Act).
- Internal supervision
The board of directors is empowered to supervise the actual execution of company business by the chairman, vice chairman or managing director(s). To put into effect the power of the board of directors with respect to internal supervision, the Company Act empowers the board of directors to appoint and dismiss the chairman, vice chairman and managing director(s) (Paragraph 1, Article 208 of the Company Act).
- Powers and authority of the board of directors as enumerated in the Company Act
- Aside from providing a general description of the power of the board of directors in Article 202, the Company Act also enumerates powers and authority of the board in other clauses, mainly, to decide the appointment, discharge and the remuneration of the executive officer (Subparagraph 3, Paragraph 1, Article 29), to propose a motion that will bring material change to the company’s operation or property to the shareholders’ meeting (Paragraph 5, Article 185), to call and convene the shareholders’ meeting (Article 171), to elect the chairman, vice chairman and managing directors among themselves (Paragraphs 1 and 2, Article 208), to distribute cash dividends as authorized by the articles of incorporation of a public company (Paragraph 6, Article 240), to offer corporate bonds and request subscribers to pay up (Articles 246 and 254), to issue new shares (Paragraph 2, Article 266), and to apply to the court for reorganization of the company (Article 282).
- Obligations of the board of directors
- Obligation to call shareholders’ meetings
Unless it is otherwise provided by the Company Act, calling shareholders’ meetings is a power of the board of directors (Article 171 of the Company Act). The board of directors is also obligated to call a special shareholders’ meeting in any of the following two circumstances:
- In case the loss incurred by a company aggregates to one half of its paid-in capital, the board of directors shall make a report to the next meeting of shareholders (Paragraph 1, Article 211 of the Company Act).
- When the number of vacancies in the board of directors of a company equals 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. However, in the case of a company whose shares are issued to the public, the special meeting of shareholders for electing succeeding directors shall be convened by the board of directors within 60 days (Paragraph 1, Article 201 of the Company Act). When all independent directors have been dismissed, the company shall convene a special shareholders meeting to hold a by-election within 60 days from the date on which the situation arose (Paragraph 6, Article 14-2 of the Securities and Exchange Act).
- Obligation to report to the shareholders’ meeting
According to the Company Act, the board of directors has the obligation to report to the shareholders in any of the following circumstances:
- In case the loss incurred by a company aggregates to one half of its paid-in capital;
- In case of a public company, after the distribution of cash dividends as authorized by the articles of incorporation;
- After issue of corporate bonds, reporting the reasons for the issuance of the corporate bonds as well as other relevant matters.
- Obligation to file bankruptcy for the company
In case the assets of a company are insufficient to set off its liabilities, unless proceeding in accordance with Article 282 of the Company Act, the board of directors shall apply to the court for declaration of bankruptcy (Paragraph 2, Article 211 of the Company Act).
- Obligation to notify shareholders of the dissolution of company
When a company is to be dissolved, the board of directors shall forthwith notify each of the shareholders and make a public announcement if bearer shares have been issued, unless the company is dissolved due to bankruptcy.
- Meetings of the board of directors
- Meaning
The board of directors is a meeting body where any decisions made by the board must be effected by convening a meeting, i.e. the meeting of the board of directors. The board meeting shall be called by a person empowered to convene according to an established procedure.
- Convening
- Meetings of the board of directors shall be convened by the chairman of the board, except for the first board meeting of each term of the board of directors which shall then 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 proceeding term, and a resolution was adopted not to discharge the directors of the preceding term until the expiration of the term of their offices, then the first meeting of the newly elected directors shall be convened within 15 days after the expiration of the term of office of the directors of the proceeding term (Paragraphs 1 and 2, Article 203 of the Company Act).
- Convening procedure
In calling a meeting of the board of directors of a public company, a notice setting forth therein the subjects to be discussed at the meeting shall be given to each director and supervisor no later than 7 days prior to the scheduled meeting date. However, in the case of an emergency, the board of directors’ meeting may be convened at any time (Article 204 of the Company Act, Paragraph 2, Article 3 of the Regulations Governing Procedure for Board of Directors Meetings of Public Companies). A meeting notice must be sent in writing and specify the subjects to be discussed at the meeting. Telephone or verbal notice of an upcoming board of directors’ meeting is not allowed (Ministry of Economic Affairs July 17, 2009 Letter No. Jing-Shang-09802090850). However, the notice may be given by means of electronic transmission, after obtaining prior consent from the recipient(s) thereof (Paragraph 2, Article 204 of the Company Act, Paragraph 3, Article 3 of the Regulations Governing Procedure for Board of Directors Meetings of Public Companies).
- Holding a meeting
- The chairman of the board of directors shall preside over the meeting of the board of directors (Paragraph 3, Article 208 of the Company Act). Each director shall attend the meeting of the board of directors in person, unless it is otherwise provided for in the articles of incorporation that a director may be represented by another director. In case a director appoints another director to attend a meeting of the board of directors on his/her behalf, he/she shall, for each board meeting, issue a written proxy and state therein the scope of authority with reference to the subjects to be discussed at the board meeting. In case a meeting of the board of directors is conducted via video conferencing, directors taking part in such a video conference shall be deemed to have attended the meeting in person. A director residing in a foreign country and who is unable to attend every board meeting in person, may appoint in writing a shareholder residing domestically as his/her proxy to attend the meetings of the board of directors on a regular basis. However, the appointment of the proxy, and any change thereto, shall be registered with the Ministry of Economic Affairs (Article 205 of the Company Act).
- Further specific provisions regarding the content of deliberations of board meetings of public companies, meeting procedures, matters required to be recorded in the meeting minutes, public announcement, and other matters for compliance can be found in the Regulations Governing Procedure for Board of Directors Meetings of Public Companies.
- Resolutions
There are two kinds of resolutions made by the board of directors: (1) a general resolution adopted by a majority of directors present at a meeting attended by a majority of the directors (Paragraph 1, Article 206 of the Company Act); (2) a special resolution adopted by a majority of directors present at a meeting attended by at least two-thirds of directors.
A director who has a personal interest in the matter under discussion at a board meeting shall explain to the board meeting the essential contents of such personal interest (Paragraph 2, Article 206 of the Company Act). Additionally, a director who has a personal interest in the matter under discussion at a meeting, which may impair the interest of the company, shall not vote nor exercise the voting right on behalf of another director. Where the spouse, a blood relative within the second degree of kinship of a director, or any company which has a controlling or subordinate relation with a director has interests in the matters under discussion in the meeting of the preceding paragraph, such director shall be deemed to have a personal interest in the matter (Articles 206, and 178 of the Company Act).
- Minutes
All directors are bound by the resolutions adopted by the board of directors. To preclude disputes at a later date, minutes shall be taken of the proceedings at the meeting of the board of directors (Article 207 of the Company Act). The minutes shall be detailed and accurate, and shall bear the signature or seal of both the meeting chair and the minutes taker. A copy of the minutes shall be distributed to each director and supervisor within 20 days after the meeting and the minutes shall be well preserved as important company records during the existence of the company (Article 17 of the Regulations Governing Procedure for Board of Directors Meetings of Public Companies).
- Restriction or prohibition against competition and dual agency
Articles 209 and 32 of the Company Act are general provisions on non-competition by insiders. Article 51 of the Securities and Exchange Act provides a special provision where a director, supervisor, or executive officer of a securities firm shall not serve concurrently in any position at another securities firm. This provision aims to ensure that insiders of securities firms shall focus on their business operation and prevent conflict of interest. However, when there is an investment relationship, a director, supervisor, or executive officer may serve concurrently as the director or supervisor of the invested securities firm with the approval of the competent authority (Article 51 of the Securities and Exchange Act).
- Exercise of the right of disgorgement against directors, supervisors, executive officers and major shareholders and prohibition of insider trading, and the duty of directors, supervisors, executive officers and major shareholders to file reports of and publicly disclose changes in their shareholding and pledges on their shareholding (see the Compliance Brochure for Directors and Supervisors of TWSE/TPEx-Listed and Emerging Market Companies)
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