In order to avoid conflicts of interest arising from shareholders exercising their voting rights for matters  in which they have personal interests and may harm the Company's interest, Article 178 of the Company Act stipulates that shareholders having personal interests shall not vote. If they do so, according to Article 180 of the Company Act, their voting rights shall not be counted in the number of votes of shareholders present at the meeting.

As to what constitutes "personal interest", the Ministry of Economic Affairs (hereinafter “MOEA”) indicates that there should be a "specific and direct" interest which may possibly be harmful to the Company's interest, and which involves the facts of a particular case, any controversy related thereto should be decided by the judicial authorities. That said, the definition of "specific and direct" interest is still abstract. If the resolution of the shareholders' meeting violates Article 178 of the Company Act, the participating shareholders may initiate a lawsuit to revoke such resolution in accordance with Article 189 of the Company Act. In addition, the same abstention requirement also applies to the resolution of the Board of Directors, which is indeed noteworthy.

The following are some examples that worth further discussion:

Type I: Company A holds shares of Company B for the purpose of merging with Company B, and Company A appoints its representative to be elected as a director of Company B. When the Board of Directors of Company B discusses whether to merge with Company A, shall Company A or its assigned directors abstain from voting?

This is the scenario explicitly covered by Article 18, Paragraph 6 of the Business Mergers and Acquisitions Act (hereinafter “M&A Act”). The legislative intent for this provision is that, since the purpose of mergers and acquisitions is mostly to strengthen the competitiveness of the company, there is no harm to the interests of the company; further, in order to faciliate the merger, this type of "buy first, merge later" situation is quite normal and thus there is no need for abstention.

Type II: If Company A (which owns shares in Company B) and Company B are engaging in an acquisition, share exchange, or division, may Company A or its assigned directors vote when the Board of Directors of Company B discusses such matters?

This is also the scenario explicitly covered by Article 27, Paragraph 7, Article 28, Paragraph 5, Article 29, Paragraph 7, Article 30, Paragraph 4, and Article 35, Paragraph 13  of the M&A Act. Thus, there is also no need for abstention.

A court ruling has also elaborated the reasoning in the context of share exchange, stating that it is Company B whose rights and obligations will be directly affected. Therefore,  Company A and its representative are only indirectly affected by the share exchange, and there is no need for abstention.

Type III: Company A and Company B are going to merge, if a common shareholder or director C holds shares of both Company A and Company B, may such common shareholder or director C vote when Company B discusses such motions?

The M&A Act does not specifically cover this situation. However, some courts have held that the spirit of Article 18, Paragraph 6 of the M&A Act should be considered, and thus there is no need to abstain in this scenario (see Taiwan High Court 96-Zhong-Shang-Zi-145and Taiwan High Court 108-Shang-Geng-Yi-Zi-97 ).

As can be seen from the above, for the purpose of facilitating mergers and acquisitions and enhancing business efficiency, and considering the practices of mergers and acquisitions, the abstention rule under the Company Act is often excluded in the context of mergers and acquisitions. In this respect, the Interpretation No. 770 of the Judicial Yuan indicates that there are legitimate reasons for Article 18, Paragraph 6 of the M&A Act; however, it also mentions that, to protect of rights and interests of the shareholders, those shareholders and directors with personal interests are still advised to explain in a timely manner the important contents of such personal interests, the reasons for or against the merger and acquisition resolution, and the pros and cons of the merger and acquisition to the company.

Under the current practice, companies preparing for a merger or acquisition often use the bulletin on the Market Observation Post System to timely disclose information about the directors with personal interest involved in the merger or acquisition. The purpose of doing so is to ensure that sufficient information is provided to shareholders in the event of a merger or acquisition, in order to comply with the Interpretation No. 770 of the Judicial Yuan.

Therefore, on top of whether directors and shareholders should abstain from matters related to a merger and acquisition, the timely provision of adequate information to shareholders is also an issue that deserves more attention.

(The article is originally in Chinese which can be found here)