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In-depth treatment of selected topics in Taiwan law for legal professionals

Enforcement of Chinese judgments and arbitral awards in Taiwan: the res judicata problem

Taiwan’s Supreme Court recently affirmed in Shending Law Firm v. Tien Chin Yu Machinery Mfg. Co., Ltd. Chinese judgments and arbitral awards do not have res judicata effect even if they are recognized by the Taiwanese courts. 104 Taishang Zi No. 33. In contrast, foreign judgments and arbitral awards (including those from Hong Kong and Macau) are routinely recognized and enforced.

Tien Chin Yu (“TCY”) is a Taiwanese manufacturer of flexographic printing and corrugator machinery. In 2003, it retained a law firm in Guangdong, China to act for it in litigation against a printing company in Dongguan.

The law firm’s engagement agreement provided that if TCY terminated the representation for any reason other than the law firm’s malfeasance or a breach of the agreement, TCY would have to return any funds advanced by the law firm plus 20% of the amount of TCY’s claim. According to TCY, the law firm failed to keep it informed during the course of the litigation. Although TCY eventually prevailed on some claims but not on others, it decided not to appeal and terminated the representation.

The law firm demanded its fees under the agreement’s 20% termination penalty and submitted the dispute to CIETAC’s South China Sub-Commission pursuant to the agreement’s arbitration clause. The law firm prevailed in the CIETAC proceedings and was awarded about US$110,000 in damages.

The Taoyuan District Court in northern Taiwan duly recognized the CIETAC award in 2009, rejecting TCY’s contentions that the award violated public policy in Taiwan.  After the Taiwan High Court upheld the District Court’s recognition of the Chinese arbitral award the law firm applied for compulsory enforcement of the award in the Taoyuan District Court’s enforcement division. In response, TCY filed an action asserting objections concerning the claim itself as established by the judgment (zhaiwuren yiyi zhi su) in the Taoyuan District Court’s civil division (this statutory cause of action has its roots in German law).

In general, an action objecting to the claim itself as established by the judgment is precluded from raising claims germane to the underlying action by Taiwan’s version of res judicata. This res judicata effect is well established for not only Taiwanese final judgments, but also recognized final foreign judgments and arbitral awards as well as. It bars the claimant from raising any claim that was or should have been raised by the time of final oral arguments. As a result, the judgment debtor in these circumstances is normally limited to raising objections based on new facts that arose after final oral arguments such as a post-judgment satisfaction.

However, TCY’s action attempted to raise defenses such as the illegality of the 20% penalty clause under Taiwan law and the unreasonableness of the legal fees. While the Taoyuan District Court and the Taiwan High Court dismissed TCY’s action on grounds that a Chinese arbitral award should have res judicata effect once it has been recognized by the Taiwanese courts, the Supreme Court held for TCY and remanded the case back the lower courts for a decision on the merits of TCY’s defenses to the underlying claim.

The Supreme Court reasoned that when the Taiwan Legislature enacted Article 74 of the the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, it intended that a judgment or arbitral award from China could serve as a writ of execution if recognized by a Taiwanese court but not as a  final judgment. In other words, a judgment or arbitral award from China is enforceable through the compulsory execution process but it does not have the same res judicata effect as a final Taiwanese judgment or arbitral award.

The Supreme Court based this distinction on a close reading of the statutory language used in Article 74 of the Act Governing Relations between the People of the Taiwan Area and the Mainland Area. This language differs from the language in the Civil Code and the Compulsory Execution Act applicable to from judgments and arbitral awards jurisdictions other than PRC that recognize Taiwanese judgments. Civil Code §402; Compulsory Execution Act §4-1. The Supreme Court inferred that Taiwan’s legislature intended the PRC’s legal system to be treated sui generis to protect the rights and interests of Taiwanese citizens in view of the special relationship with China and the differences between the two legal systems.

While the Supreme Court previously issued three judgments nearly a decade ago with similar holdings(96 Taishang Zi No. 2531, 97 Taishang Zi No. 2258, and 97 Taishang 2376), a number of lower courts including the Taiwan High Court have reached different conclusions in the interim. Shending Law Firm unequivocally rejects the theories of the lower courts and reaffirms that Taiwan does not recognize Chinese judgments and awards as having the same res judicata effect as those from other foreign jurisdictions including Hong Kong and Macau. Consequently, while enforcement of a Chinese judgment or arbitral award is still ultimately possible in Taiwan, the underlying claims are likely to be relitigated on the merits.

The result for the foreseeable future is that when faced with the increasingly common situation of a potential dispute with Taiwanese business partners in China whose assets are in Taiwan, practitioners should choose dispute resolution in an appropriate third jurisdiction or possibly in Taiwan itself if there is any possibility that the judgment or arbitral award must be enforced here. For the same reasons, it is also very important to realize that one is dealing with an entity whose principals or parent are based in Taiwan.

One caveat is that the third jurisdiction must always be checked to see if Taiwan will recognize judgments and arbitral awards from that jurisdiction. In the case of most (but by no means all) leading jurisdictions, Taiwan will recognize and enforce judgments and arbitral awards without excessive scrutiny on public policy grounds as was initially the case with the CIETAC award.

Deferred purchase price payment in Taiwan acquisitions

Your business team has discovered a company in Taiwan (the “Target”) which has an interesting new technology, a foothold in the China market, or some other asset or relationship which they feel would be a welcome addition to your company.  The business team has recommended that your company (“Foreign Co.”) acquire the Target.  So, now you must consider how best to structure this acquisition.  There are, of course, many and varied issues to consider when structuring any Taiwan acquisition.  This brief note focuses on only one (but an important one) of these issues:  deferred purchase price payment mechanisms (e.g., holdbacks, escrows, earn-outs, etc.).

Without going into detail, any foreign company wishing to acquire a company in Taiwan must apply to the Investment Commission (the “IC”) of the Taiwan Ministry of Economic Affairs for Foreign Investment Approval (“FIA”).  As part of the approval process, the IC needs to confirm that the seller is receiving fair value for its interest in the Target.  In and of itself, this appears to be a rather innocuous provision.  However, in practice the IC will not grant a FIA in a situation where the seller will tender its shares in Target at closing for (a) some amount of consideration at closing, plus (b) a conditional payment of additional consideration some time after closing.  In order to procure a FIA, the IC must find that the amount of consideration paid at closing is equal to the fair value of the Target shares tendered by the seller at closing.

The question then becomes how do you structure any kind of escrow arrangement, holdback or earn-out if the IC is not going to assign any value to conditional payments which may or may not be made post-closing?

The simplest and most common workaround is to set up a local, Taiwan acquisition vehicle.  Rather than purchasing Target directly, Foreign Co. sets up a local Taiwan company (“Taiwan Co.”) to acquire the Target.  When you set up Taiwan Co., you will still need to go through the FIA process.  But, the nature of the FIA review will be different than the review for an acquisition.  The review in connection with establishing Taiwan Co. will focus on whether Foreign Co. has adequately funded Taiwan Co. to carry out its expected business and operations in Taiwan.  This FIA process is relatively straightforward.  And, once the FIA is granted, Foreign Co. can then fund Taiwan Co. with sufficient amounts to acquire the Target.

Taiwan Co.’s acquisition of the Target would be further subject to another FIA review.  But, like the review in connection with Taiwan Co.’s initial funding, the FIA review of a domestic acquisition by a foreign-invested Taiwan enterprise would not include an examination of the consideration to be exchanged for the Target’s shares.  In effect, Taiwan Co. would be free to enter into a purchase agreement for shares of Target including any manner of escrow, holdback or earn-out provisions you felt necessary and advisable under the circumstances.

Benefits of offshore holding companies

A significant portion of Winkler Partners’ corporate practice involves advising international clients on how best to structure their businesses in Taiwan.  One of the first questions each international client typically asks when planning to enter the Taiwan market is:  What type of entity is appropriate for its purposes in Taiwan?  While this is a valid and important question, it may in some cases focus the structuring discussions too narrowly and thereby inadvertently overlook more advantageous structuring alternatives.

Assuming that the client needs a business entity in Taiwan in order to conduct its affairs here in accordance with Taiwan law, it is almost always worth considering establishing an offshore holding company to own and/or control  the Taiwan entity.  Set forth below is a list, although not exhaustive, of some of the key advantages that our clients have gained through the use of offshore vehicles in connection with their Taiwan corporate structures.

  1. Corporate Law Follows International Norms.  There are a number of provisions in Taiwan’s Company Act that restrict the ability of company promoters, directors, and managers to accomplish certain transactions that may seem relatively routine in their home jurisdictions.  For instance, Taiwan’s Company Act generally prohibits a company from repurchasing its own shares.  Taiwan company board meetings must be held in person or by video conference and resolutions must be passed by vote of the attending directors.  Signed written resolutions in lieu of such a meeting will NOT suffice.  Another Company Act provision stipulates that the original company promoter (i.e., the initial shareholder(s)) may not transfer shares of the newly established company for a period of one year following the company’s establishment.

    By establishing an offshore holding vehicle, the shareholders can govern their relationship to each other and to the corporate entity offshore of Taiwan.  Most of the more common offshore jurisdictions (e.g., the British Virgin Islands, the Cayman Islands, etc.) allow:  (i) directors to pass written resolutions without convening a meeting; (ii) original promoters to sell their interests freely; and (iii) the company to repurchase its own shares, subject to reasonable restrictions.

    In addition to being generally more permissive in the types of allowable corporate transactions, many offshore jurisdictions such as the British Virgin Islands and the Cayman Islands allow companies established there to tailor their organizational documents (i.e., Memorandum of Association and Articles of Association).  In most cases, corporate legislation in these jurisdictions is subject to the specific provisions of a company’s organizational documents, meaning that the offshore company has the power to “opt-out” of undesirable or unnecessary statutory default provisions.

  2. Tax and Legal Liability Advantages.  If the client is contemplating expatriating profits from Taiwan back to its home office (or some other affiliate outside of Taiwan), we typically consider establishing a branch office here in Taiwan.  The primary advantage of having a Taiwan branch (instead of a Taiwan subsidiary) is that the Taiwan tax authorities do not require the 20% withholding on amounts transferred by a branch office back to its home office as they do in respect of amounts paid as dividends or otherwise from a Taiwan subsidiary to its offshore parent.  However, as a branch is not a separate juridical person for legal purposes, the home office is considered to be doing business directly in Taiwan, and therefore, it may be directly liable for all debts and liabilities of its branch here.  Having an offshore vehicle interjected between the ultimate home company and the Taiwan branch provides the tax advantages of the branch structure while maintaining the legal liability shield associated with a subsidiary.

  3. More Attractive to Investors.  If a client were considering seeking additional investment for its Taiwan operations, using an offshore holding company can increase the attractiveness of the investment to potential investors.  Some offshore jurisdictions, unlike Taiwan, do not require shares to have a par value.  Being able to issue no par value shares allows the board complete flexibility in setting the share price to prospective new investors.  This flexibility, coupled with the comfort foreign investors typically have with the corporate governance and minority shareholder protections in the more common offshore jurisdictions, increases the client’s ability to raise necessary additional investment.

Again, the items listed above are by no means an exhaustive list of the benefits that an offshore vehicle may provide.  And, the use of an offshore vehicle may not be appropriate in all circumstances.  However, it is an option that in most cases should at least be considered when structuring an organization’s legal presence in Taiwan.

Technical examination officers at Taiwan’s IP Court

Technical Examination Officers ( “TEO“) are officers of the court who assist judges at the Taiwan Intellectual Property Court (“IP Court“) in litigation involving complex technology.

There are currently 13 TEOs at the IP Court with expertise in fields such as electrical engineering, chemistry, and biotechnology. Most are patent examiners on secondment from the Taiwan Intellectual Property Office.

Taiwan’s Legislature authorized the appointment of TEOs when it established the IP Court in 2007. Intellectual Property Court Organization Act §15(1).  Taiwan’s TEOs are modeled on the judicial researchers at the Japan’s Intellectual Property High Court and the technical examiners at the Korean Patent Court.

Acting under instructions from a judge, a TEO “makes judgments about technology, collects technical information, and analyzes and gives opinions about technology.” Organization Act §15(3). In particular, a TEO can analyze and organize the issues in party briefs to clarify the issues in dispute and refer the Court to learned treatises in the field. Intellectual Property Case Adjudication Rules §13(1)(a).

A TEO may also “participate in the litigation.” Organization Act §15. This means that on instructions from a judge, a TEO can appear in court and question parties, their counsel, and witnesses or give opinions for the court’s reference on technical issues. Intellectual Property Case Adjudication Act §4;  Adjudication Rules §13(1)(c).

In more complex cases, a TEO may be ordered  by the IP Court to produce intermediate and final reports on technical issues. Adjudication Rules §16. While the parties do not have access to these reports, the IP Court will disclose opinions it has received on “specialized technical information” to the parties and give an opportunity to respond before using such opinions as the basis for its judgment. Adjudication Rules §16

As fact finders, the IP Court judges are not bound to adopt the views of the TEO and in complex cases, the IP Court will usually also appoint an neutral expert witness to evaluate the technology in dispute. Furthermore, the statements of TEOs may not be offered by the parties as evidence of facts in dispute. Adjudication Rules §18.

Between 2008 and 2012, TEOs were assigned to a total of 1,636 cases. 1,070 of those cases were civil matters, 550 were administrative and sixteen cases were criminal. TEOs provided assistance with mechanical technologies in 48% of these cases, IT in 26%, and chemistry in 8%.

Although the role of TEOs has been controversial in patent litigation and the subject of a number of Supreme Court cases, our experience has been that TEOs serve as able assistants to the judges on the IP Court.

Setting up a business in Taiwan: the basics

Taiwan ranks highly on both the World Economic Forum’s Global Competitiveness List and the World Bank’s Ease of Doing Business List.[1] With strong air, trade and freight links to China, Japan, Southeast Asia, and Silicon Valley, Taiwan is a convenient hub for doing business with the rest of Asia and abroad. It also has a sophisticated domestic transportation system. Taiwan is home to a robust research and development sector, advanced domestic infrastructure, a stable political climate and a free press, a sound legal framework, and a dynamic and educated workforce. These factors have recently led an increasing number of international businesses to choose Taiwan as their regional headquarters or regional hubs.[2]

Companies wishing to establish business operations in Taiwan typically form one of the following: a Representative Office, a Branch, a Limited Company, or a Company Limited by Shares. Set forth below is a brief introduction to each of these business forms and their typical business use.

Representative Office

Many foreign entities prefer to set up a Representative Office in Taiwan prior to making the more substantial commitment involved in establishing a branch or a subsidiary. Establishing a Representative Office is one of the easiest ways to establish a business presence in Taiwan. However, a Representative Office is very restricted in terms of the activities it can undertake. A Representative Office may operate in Taiwan only as the agent of its overseas principal and is not considered a separate legal entity. It may not engage in profit-seeking commercial activities nor act as principal in any domestic business transaction. A Representative Office is also not allowed to sell goods or provide services in Taiwan. Typically, a Representative Office functions as a sales or purchasing agent for international businesses which have no other presence in Taiwan. Representative Offices are also used to provide technical support and training as well as to oversee quality control in Taiwan.

Branch

A foreign company may also establish a Branch to conduct business in Taiwan. Like a Representative Office, a Branch is not considered an independent legal entity, and so does not need to have shareholders, directors, or supervisors, as would be the case with a subsidiary. The cost of corporate secretarial maintenance for a Branch, therefore, is lower than that of a subsidiary. The major benefit of establishing a Branch over a subsidiary is that all after-tax profit may be legally remitted to the home company overseas without incurring additional withholding taxes in Taiwan. The primary drawback of a Branch is that it is a legal extension of its foreign home company, and therefore the home company remains legally liable for all acts of the Branch. Branches are most appropriate in situations where considerable funds are to be expatriated to the foreign home company from Taiwan. Branches are also sometimes preferred in large public infrastructure projects as the Taiwan government and often commercial counterparties would like to have legal recourse to the assets of the foreign home company.

Limited Company

In addition to Representative Offices and Branches, which are merely local extensions of the foreign home company, foreign companies may also establish a legally distinct subsidiary in Taiwan. The simplest form of subsidiary is a Limited Company. Taiwan Limited Companies are similar in structure to US limited liability companies. Taiwan Limited Companies are organized by one or more members, with each member, in general, being only liable to the extent of his or her individual capital contribution. A Limited Company, as opposed to a Company Limited by Shares (described below), has more flexibility in terms of structuring its corporate governance. This flexibility, however, comes at the cost of a significant impediment to transfer of interests in a Limited Company. If a director of a Limited Company wishes to transfer his or her interest in such company, the transfer must be consented to by all other members of the company. Any other member of a Limited Company who wishes to transfer his or her interest in such company must have the transfer consented to by a majority of other members. Many foreign companies choose to set up their Taiwan subsidiaries as Limited Companies, if such subsidiaries are to be wholly-owned for the foreseeable future.

Company Limited by Shares

International investors and business people choose to set up a wholly-owned subsidiary as a Company Limited by Shares if there is the possibility of selling some part of their interests in the Taiwan subsidiary. A Company Limited by Shares is similar in form to a US corporation. Shareholder liability is limited to the amount of each shareholder’s capital contribution. A Company Limited by Shares is subject to certain corporate structural requirements: it must have shareholders (at least two individual shareholders or one juridical person shareholder), directors (at least three) and a supervisor (at least one). A Company Limited by Shares can, unlike a Limited Company, become a public company in Taiwan.


[1] See, Invest in Taiwan website: <<http://investtaiwan.nat.gov.tw/eng/show.jsp?ID=3&MID=2>>

[2]See, Starting a Business in Taiwan website: <<http://www.startabusinessintaiwan.tw/additional-resources/22-an-overview-of-taiwan/103-advantages-doing-business-taiwan>>

Food Safety: A Legal Perspective

WP partners Peter Dernbach, Gary Kuo and paralegal Michael Fahey recently contributed an article to the American Chamber of Commerce in Taipei (AmCham)’s monthly TOPICS magazine. The article takes a look at the recent set of food scandals that have shaken the public’s faith in Taiwan’s food industry, examining it from a legal perspective.

The article summarizes previous food scandals that have occurred in Taiwan, dating back to the bran oil tragedy in 1979, which claimed the lives of over fifty people and caused significant physical harm to many others.

The article goes on to analyze the key litigation following the 2011 plasticizer scandal and the 2013 olive oil scandal. Peter and Gary explain the successful criminal prosecutions in both cases, the failure of a class action in the olive oil case, and the constitutional issues that led the Ministry of Health and Welfare to roll back massive fines imposed by local governments.

The article concludes that while Taiwan has made significant and admirable strides in its legal system since the 1979 bran oil tragedy, it will need to do much more to ensure that the country’s vibrant culinary culture and consumer health are adequately protected.

The entire article is available on AmCham’s website.

Taiwan’s Personal Information Protection Act: one year on

After nearly two years of delay, Taiwan’s Personal Information Protection Act took effect in October 2012. Partner Chen Hui-ling contributed this analysis of the PIPA’s implementation in its first year to Privacy Laws & Business International Report (127).  She analyzes civil and criminal cases and comments on enforcement and the prospects for data breach class actions in Taiwan.

The article can be downloaded here.

International experts: immediately end fisheries bycatch to save Taiwan’s pink dolphins

Endangered Species Research has published “Impacts of fisheries on the Critically Endangered humpback dolphin Sousa chinensis population in the eastern Taiwan Strait” authored by a team of international experts from institutions in Canada, New Zealand, Hong Kong, and Taiwan.  The paper is the result of an applied workshop held under the auspices of the Eastern Taiwan Strait Sousa Technical Advisory Working Group (ETSSTAWG), an international group of scientists dedicated to providing science-based advice in support of protecting one of the world’s most endangered cetaceans. Winkler Partners and a number other Taiwan NGOs and government agencies supported the applied workshop and field research in Taiwan.

The paper concludes that to ensure recovery of the Critically Endangered subpopulation of <100 Sousa Chinensis in the Eastern Taiwan Strait

…mortality due to human causes should be reduced to <1 individual every 7 y[ears]. Fisheries bycatch is the most serious threat to these dolphins and needs to be eliminated as soon as possible to avoid extinction. Preventing the use of trammel nets, other gillnets, and trawling through their habitat would be the single most effective conservation measure for ETS Sousa in the short term.

Winkler Partners’ managing partner Robin Winkler is listed as a co-author.

The paper can be downloaded here.

Setting up a business in Taiwan for international investors

There are a number of ways for foreign businesses to operate in Taiwan. Taiwan’s Company Act allows investors to set up four kinds of companies:

  1. unlimited companies,
  2. unlimited companies with limited liability shareholders,
  3. limited companies,
  4. and companies limited by shares.

Foreign investors generally choose limited companies and companies limited by shares when they set up subsidiaries in Taiwan.

The Company Act also recognizes foreign companies and allows them to set up branches and representative offices in Taiwan. There are significant tax advantages setting up a branch. As a result, it is quite common for foreign companies to set up either a branch directly under the home office or to first set up a subsidiary in a third country and then set up a Taiwan branch of that subsidiary.

In general there are no restrictions on the nationality on directors, managers, or representatives and it is not necessary for directors to have residence or work authorization in Taiwan. Certain industries do restrict nationality or cap equity and special rules apply to citizens of the People’s Republic of China.

After considering limited share companies, limited companies, branch offices, and representative offices in somewhat more detail, we briefly treat the issues of work, residence, and taxation. This discussion is only a summary and is intended to prepare a potential investor to discuss the correct choice of entity with legal and tax counsel.

Subsidiary: Company Limited by Shares

A company limited by shares is the Taiwan corporate form that most closely resembles a U.S. corporation. Shareholder liability of a company limited by shares is in principle limited to the shareholder’s investment. In 2013, however, Taiwan’s Legislative Yuan amended Article 154 of Taiwan’s Company Act. The revision makes it possible, at least in theory, for creditors to hold shareholders liable for company obligations beyond the amount of their share ownership under certain ‘serious’ circumstances. This amendment was intended to bring Taiwanese law in line with the notion of corporate veil piercing in other jurisdictions such as the United States, the United Kingdom and Germany. As of this writing however, the Taiwanese courts have not indicated what circumstances would be serious enough to justify piercing the corporate veil. Given this erosion of strict limited corporate liability, the main remaining benefit of a company limited by shares is that it is the only type of company that can go public. Requirements for a company limited by shares include the following:

  1. Foreign Investment Approval from the Investment Commission of the Ministry of Economic Affairs (IC).
  2. At least two individual shareholders or one corporate shareholder.
  3. At least three directors and one supervisor (the supervisor has audit rights for all company affairs, financial and operational).
  4. One of the directors must be appointed chairperson. The chairperson has the right to represent the company in matters involving third parties.

Shares must be issued within three months of incorporation if the capitalization is more than NT$500 million (approximately US$15 million). Share transfers are unlimited, except that promoters’ (founders) shares may not be transferred within one year of company establishment.

The minimum paid-in capital requirement was abolished in April 2009. In practice, the competent authority will approve the incorporation application if the paid-in capital is greater than the cost of establishment.

Repatriated shareholder funds must be in the form of dividends, which are taxed at a rate of 20% unless the country of the shareholder entered into double taxation agreement with Taiwan and the agreement provides a beneficial tax rate.

The corporate income tax rate is about 17% of net income.

Subsidiary: Limited Company

The form of a limited company (similar to a “closed corporation”) places restrictions on share transfers, thereby permitting certain shareholders to control the company. Requirements for a limited company include the following:

  1. Foreign Investment Approval from the IC.
  2. At least one individual or corporate shareholder.
  3. One to three directors. A corporate shareholder may be elected as a director itself or may appoint a representative to be elected as a director.

If there is more than one director, one may be chosen as chairperson of the company, who will then be the legal representative of the company.

If no chairperson is chosen from among multiple directors, then all directors will be considered legal representatives.

A shareholder may not transfer his contribution to the capital of the company to another person(s) without the consent of a majority of all other shareholders. The directors may not, without the unanimous consent of all other shareholders, transfer their contribution to the capital of the company.

The minimum paid-in capital requirement was abolished in April 2009. In practice, the competent authority will approve the incorporation application if the paid-in capital is greater than the cost of establishment.

Repatriated shareholder funds must be in the form of dividends, which are taxed at a rate of 20% unless the country of the shareholder entered into double taxation agreement with Taiwan and the agreement provides a beneficial tax rate.

The corporate income tax rate is about 17% of net income.

Branch Office

Although technically a dependent of the foreign parent, a branch office of a foreign company is for many practical purposes an independent company. Income tax for a branch office is about 17% of net income. The major benefit of a branch, compared to establishment of a subsidiary, is that all after-tax profit may be remitted out to the parent company without additional taxes. Certain branch offices may apply for work permits for foreign nationals to act as the branch manager and/or responsible person. Some of the requirements for a branch office include the following:

  1. The branch manager must have Taiwanese domicile or residence (the legal representative and the branch manager may be the same person).
  2. Operating capital must be remitted before establishment.

The minimum amount of operating capital was abolished in April 2009.  One important practical consideration is that a representative of the parent company will usually need to come to Taiwan to open a preparatory account for the future branch in person.

Representative Office

While a representative office may operate in Taiwan on behalf of an overseas principal, it may not engage in profit-seeking commercial activities or act as principal in any domestic business transactions.  Representative offices may:

  1. procure and inspect goods for the overseas principal,
  2. sign contracts on behalf of the overseas principal,
  3. bid on projects for the overseas principal,
  4. and handle the principal’s legal affairs in Taiwan.

A representative office is not permitted to obtain a Uniform Invoice Number since it is not allowed to sell goods or provide services in Taiwan. Your customers in Taiwan therefore may not be willing to do business with a representative office.

Representative offices shall be registered with the Ministry of Economic Affairs.

Note that individuals signing contracts governed by Taiwanese law on behalf of the overseas principal shall be jointly and severally liable with the principal.

Residence and Work Authorization

Many companies will want to sponsor foreign nationals for work and residence authorization. For example, a company or a branch must have at least NT$500,000 in capital to sponsor a foreign national as a manager during its first year of operation. Thereafter, the company must generate at least NT$3 million in revenue to maintain the foreign manager’s work and residence rights. The capital and revenue requirements for employees are NT$5 million and NT$10 million thereafter. Representative offices can often successfully sponsor their representative in Taiwan for work and residence authorization without being held to the minimum capital or revenue requirements.

Taxation

The tax consequences of the structure will vary and effect many important commercial concerns such as how orders will be placed (i.e., by home or local entity), payment, whether royalties are involved and so on. These should be discussed carefully in the early stages of planning the investment and business.

In general, transactions in Taiwan are subject to 5% VAT including import transactions. Most Taiwanese businesses will withhold 20% from payments for services to foreign entities or natural persons for income sourced in Taiwan because the Taiwanese business can be held liable for the unpaid business income taxes of its counterpart.

Taiwan’s tax authorities will review and audit transfer pricing arrangements.

Other Concerns

The foregoing is only a summary and there are specific issues for specific industries. For example, many industries such as telecommunications, media ventures, or hotels, require special licenses. Also, it can be quite time consuming (especially from overseas) to attend to the numerous basic administrative steps of notarization and legalization of documents, company name reservation (all must have Chinese language names), opening of a bank account, obtaining a registered address and so on.

It usually helps to have someone “on the ground” to help with these since Taiwan does not have shelf corporations and it is usually not possible to operate a virtual office without physical premises. It will usually take an organized investor two or three months to set up an entity in Taiwan.

Derivative Shareholder Litigation in Taiwan

Although Taiwan’s Company Act permitted shareholder derivative actions in 1977, few if any were filed before the Securities and Futures Investor Protection Center gained standing to bring them in 2009. Four years on, we outline the rules for shareholder derivative litigation in Taiwan, give a status report on shareholder derivative actions brought by the Center, and identify a few legal and practice issues for the future.

Company Act

Fiduciary duties

Directors are a corporation’s responsible persons. Unless the law or the company’s articles of incorporation provide otherwise, the board of directors is the locus of corporate decision-making power.  A corporation’s directors owe duties of loyalty and the care of a good administrator to the corporation. If he breaches these duties and causes the company to suffer a loss, the director is liable to the company for its loss. [Taiwan] Company Act § 214.

To bring a claim against a director for breach of his fiduciary duties, a shareholder may notify the corporation’s supervisor of the claim in writing if the shareholder has held at least 3% of the corporation’s shares for at least one year. After receiving notice from the shareholder, the supervisor can decide whether or not to bring an action against the director. If the supervisor does not file a complaint against the director within 30 days, the shareholder may file a derivative action against the director on behalf of the company. Company Act § 214.

High threshold

In addition to the one year 3% holding requirement, the court can also order the shareholder to post a bond on a motion by the defendant director. If the shareholder loses and thereby causes the company to suffer a loss, the shareholder is liable.  The high threshold and potential risk of a shareholder derivative action deterred shareholders from bringing derivative actions for many years after the cause of action became available.
As a result, wrongdoing by directors and corporate officers has traditionally been a matter for Taiwan’s criminal justice system. However, even if a director or officer’s acts constitute criminal breach of trust, individual shareholders are not considered to be the direct victims of the breach under Taiwanese law. Consequently, a shareholder has no standing to bring a private prosecution for breach of trust or to file a criminal complaint with the prosecutor.

Lower threshold for Investor Protection Center

In 2009, the Legislature created standing for the Securities and Futures Investor Protection Center to bring shareholder derivative actions against directors and supervisors who materially injure the company, violate the law, or the company’s charter. To bring a action against a board member, the Center must first notify the company’s supervisor of the claim. If the supervisor fails to act on the claim within 30 days, the Center may institute proceedings against the board member.   Securities Investor and Futures Trader Protection Act § 10-1.

Lower threshold

Unlike ordinary investors, the Investment Protection Center is not required to meet the one year 3% shareholding requirement to institute proceedings against a director or supervisor. Even more importantly, the Center is exempt from being required to provide security and from paying courts costs (usually about 1.5% of the claim) in advance if the amount of the claim is for more than NT$30 million (c. US$1 million). In practice, the Center becomes a shareholder before bringing a shareholder derivative action by acquiring at least 1,000 shares due to a scholarly debate over whether it can bring an action without being a shareholder.

Policy objectives

The Center describes the public policy objectives of its standing to bring shareholder derivative litigation as protecting shareholder interests, supervising corporate management to ensure that the duty of loyalty is met, and advancing the stable development of the securities market.  Four years on, investors, corporate directors, and their insurers are all interested in how actively the Center has been in bringing derivative shareholder litigation.

Cases

The Investor Protection Center released its 2012 Annual Report in March of 2013. According to the Annual Report, the Investor Protection Center had instituted 18 shareholder derivative actions by the end of 2012. However, little information is available about the nature of the claims, the defendants, or the progress of the litigation. This lack of information contrasts sharply with the Center’s class action securities litigation, which can be tracked in some detail because the Center maintains a detailed and regularly updated a list of ongoing and successful securities class actions on its website.

Although the Center does not disclose the names of companies and defendants involved in proceedings, the Center’s board has passed resolutions to bring derivative shareholder actions against the following companies:

  1. BAFO Technologies Corporation (formerly Taiwan First Line Electronics Corp): false financial reports
  2. Gold Sun Technology Co., Ltd. (formerly Master Advanced Co., Ltd.): irregular transaction
  3. Capital Securities Corporation: transaction constituting breach of duty of loyalty
  4. Former director(s) of Yuanta Securities: money laundering and transactions involving breach of duty of loyalty
  5. Achem Technology Corporation: embezzlement by director(s)
  6. Free Power Energy Co Ltd: False financial statements
  7. Sirtec International Company Ltd: asset stripping by director(s)
  8. Enlight Co., Ltd. : diversion of funds and embezzlement by director(s)
  9. Elements Innovation Co Ltd (formerly Hermosa Optoelectronics Corp.): diversion of funds and embezzlement by director(s)
  10. Tatung Co. and Tatung University: real estate transactions

The Center’s website does not disclose whether complaints were in fact filed or the outcomes of the cases.

A bit more information can be gleaned from MOPS, Taiwan’s equivalent to EDGAR. For example, Achem Technology Corporation brought an action against its directors and supervisor seeking compensatory damages for breach of their fiduciary duties. Although the Center was not the complaining party, it joined the litigation later. On 28 September 2012, the Taipei District Court issued a judgment finding that the defendant directors and supervisor had bought real estate for NT$345 million. The price paid clearly exceeded the market price and the transaction took place despite the company’s financial difficulties. Achem prevailed and the defendant directors were ordered to pay compensatory damages. 99 Chongsu Zi No. 430). The case is now before the High Court on appeal.

Another case disclosed on MOPS involved Sirtec International’s Chairman and CEO Wu Chun-liang.  Wu and Sirtech employees set up a paper company. Sirtec placed fake orders with the company and transferred funds out of Sirtech to the paper company. The transfers from Sirtech were flagged by Cathay United Bank and reported to the Bureau of Investigation’s Anti-Money Laundering Center. After an investigation, the Bureau turned the case over to the New Taipei City Prosecutor’s Office which indicted Wu for criminal breach of trust charges on which he was eventually convicted. 99 Chongsu Zi No. 3.

Instead of immediately bringing a civil case against Wu, the Center waited until the criminal charges had been brought before filing a shareholder derivative action as a supplementary civil suit. On 16 April 2013, the Center settled with Wu for US$41 million.  This strategy is very common in other civil cases in Taiwan because there is no discovery.

With the exception of these two cases, little is known about the Center’s other resolutions to bring shareholder derivative litigation. Some cases may have been filed and are still pending but since Taiwan does not allow public docket searches, there is no way to track them. Others may have been privately settled by the directors and the company.  This lack of transparency make it very difficult to evaluate how aggressively the Investors Protection Center is in bringing shareholder derivative litigation or to analyze the outcomes of such litigation.

Despite an unfortunate lack of transparency, it is clear that the Center is at least using its new standing to bring shareholder derivation actions against the board members of listed Taiwanese companies. As the cases make their way through the courts and judgments are issued, three issues merit special attention. The first issue is whether Taiwan will adopt a version of the business judgment rule to shield directors. Directors have attempted to invoke the business judgment rule in other litigation over fiduciary duties, but the courts are split on whether it should be applied and how. The second issue is whether the Center will adopt a strategy of waiting for prosecutors to indict directors on criminal charges before bringing supplemental shareholder derivative actions as it did in the Sirtec case.  The third and final issue is how often the Center is willing to settle and on what terms.

 

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