The battle for corporate control of Taisun Enterprise Co., Ltd. (“Taisun”) ("Taisun case") has been a hot topic this year. According to the data publicized by the Taiwan Stock Exchange, Long Bon International Co., Ltd. (“Long Bon”), the company to obtain the corporate control of Taisun, made multiple announcements before March 16, 2023 (i.e. the scheduled date of Taisun’s special shareholders’ meeting), releasing its pledged shares of Taisun. Around the same time, Mr. Zhan Jing-Chao, the chairman of Taisun who once pledged his shares of Taisun at the ratio of 91.21%, released those pledged shares at the amount of 4,800,000 on February 10, 2023, reducing the ratio of pledged shares to below fifty percent.

According to Article 197-1, Paragraph 2 of the Company Act, when the directors of a publicly traded company set a pledge on shares exceeding half of the number of shares they held at the time of appointment, the excess shares shall not have voting rights or be counted into the quorum. According to the legislative purpose of this provision: “  When there are financial difficulties in listed or over-the-counter companies, directors and supervisors often pledge their shares to protect the stock price, resulting in a higher ratio of pledged shares compared to regular companies. However, when the stock price decline, to prevent banks from demanding more collateral, directors and supervisors may borrow heavily to support the stock price, leading to a toxic cycle that rapidly deteriorates the company's financial situation and harms the interests of investors. To strengthen the capital market and corporate governance, it is necessary to enhance the control over directors and supervisors with excessively high pledge ratios, so as to prevent the manipulation of stock prices by company owners and over-expansion or excessiveness of credit by directors and supervisors.”

At a critical moment of fighting for corporate control, such as when there is a proposal to elect directors and supervisors at the shareholders' meeting, it is a common strategy for a director to release the pledged shares in large numbers or directly resign before the suspension of share transfer registration. According to the plain meaning of the above provision, a director who resigns or is dismissed does not hold the position of director at the time of the shareholders' meeting, and is therefore not subject to this restriction. The same applies to directors with a ratio of pledged shares below fifty percent. However, whether this should be considered an evasion of law is worth discussing.

The Ministry of Economic Affairs has stated that if on the final share transfer registration date, the ratio of pledged shares by the directors and supervisors exceeds half of the number of shares they held at the time of appointment, and such directors and supervisors resign during the book closure period/on the day of the shareholders’ meeting, exercise voting rights, or even get elected as directors or supervisors, in judicial practice, such action may be deemed as an evasion of law and Article 197-1, Paragraph 2 of the Company Act should still be applicable. The resolution made at the shareholders’ meeting may be revoked on the ground that the method of adopting the resolution is not legitimate. (see the letter from Ministry of Economic Affairs Letter dated June 4, 2012 No. Jing-Shang-Zi-10102418160)

In the past, the Supreme Court also held that the pledges made by directors before their election (i.e. before their term) should be included in the calculation, which has expanded the application scope of the above provision and sparked a lot of discussion. The court, starting from the legislative purpose, opined that regardless of whether the shares pledged by directors and supervisors are before or during their term, restricting the voting rights of the shares exceeding a certain proportion is in line with the law’s intention. Therefore, when calculating the shares pledged by directors and supervisors, the base for calculation should not be limited to those shares pledged during their term. (Supreme Court Civil Judgment No. 103-Tai-Shang-Zi-1732)

Back to the Taisun case, both sides did release a large amount of pledged shares before the scheduled shareholders' meeting and the calculation of the ratio of the pledged shares did raise controversy. Taisun applied for a temporary status quo injunction against Long Bon, arguing that Long Bon and its wholly-owned subsidiary should have their shareholdings and the pledged shares combined for calculation. Taisun requested the court to prohibit Long Bon and its subsidiary from exercising voting rights (including election rights) at the disputed shareholders' meeting.

The court held that the petitioner (i.e. Taisun) has clarified that the case had a disputed legal relationship that can be determined by litigation. Whether the shareholding of Long Bon and its subsidiary should be combined for calculation and whether releasing the pledged shares in large numbers constitutes an evasion of law are worth discussing. However, the court overruled the petitioner’s application, opining that prohibiting Long Bon and its subsidiary from exercising their voting rights in the disputed shareholders' meeting is tantamount to depriving them of some of their shareholders' rights, which brings a significant impact on their property rights. Besides, it is difficult for Long Bon and its subsidiary to recover their damages after the disputed shareholders' meeting (see Intellectual Property and Commercial Court Civil Ruling No. 112-Shang-Zhan-Zi-4). Although the court did not issue a temporary status quo injunction against Long Bon, it is evident that whether releasing the pledged shares in large numbers constitutes an evasion of law and how companies should operate during the battle for corporate control are all worth continued attention.

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