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Closed companies: still a useful option?

by Gregory Buxton and Renee Hsu

We published an article last year highlighting the amendments to Taiwan’s Company Act (the “Act”) which came into effect on November 1, 2018.  The changes to the Act were extensive and, among other things, greatly enhanced flexibility in structuring Taiwan company fundraising and shareholder control arrangements. During the preparation of the amendments to the Act, a number of commentators questioned whether “closed companies”, created by legislation enacted in 2015, continued to be necessary as the amendments worked to bestow upon typical private companies many of the benefits previously only available to closed companies.

While we agree that these amendments to the Act do close the gap between the more commonly used private company and a closed company, there remain some significant advantages to using a closed company. Set forth below are some of these differences:

1. Shareholders may exercise voting rights by written resolution. Being able to execute written resolutions instead of holding an actual shareholders meeting makes it easier and more efficient to manage a closed company.

2. Restrictions on transfer of shares can be stated in the Articles of Incorporation.  As opposed to a standard private company which can only place restrictions in its Articles of Incorporation on the transfer of preferred shares, a closed company can, in its Articles of Incorporation, restrict the transfer of any type or class of shares. We note that shareholders of a standard private corporation can restrict the transfer of non-preferred shares by agreement; however such an agreement would not be publicly available and thus would not be binding on bona fide third party transferees. In addition, transfers made in violation of such an agreement would give rise to monetary damages but would not be void ab initio as they would be if such transfers were disallowed in the company’s constitutive document.

3. There are no preemptive rights for employees and existing shareholders. Under the Act, when a standard private company issues new shares, (i) a certain number of shares must be reserved for subscription by employees of the company and (ii) existing shareholders would have preemptive rights with respect to any shares not reserved for employees. There is no similar requirement with respect to closed companies.

4. Directors and supervisor voting arrangements can be tailored. The Act requires the shareholders of a standard private corporation to use cumulative voting when electing its directors and supervisors. However, a closed company may use straight voting or any other voting method that the company deems best suited to its particular needs so long as such a voting method is clearly set forth in the company’s Articles of Incorporation.

5. Equity capital may be contributed by service. Shareholders of a closed company can contribute equity capital in the form of services rendered to the company.  Such service contributions are not available to standard private companies. This attribute of closed companies makes them particularly attractive to startups whose founders may lack significant capital resources. It is important to note, however, that there are some limitations on the amount of equity capital which can be contributed as services to a closed company. Total service equity cannot exceed one half of the total shares issued with respect to a closed company whose paid-in capital is under NT$30 million. For a closed company whose paid-in capital is equal to or exceeds NT$30 million, service equity is limited to one half of the first NT$30 million worth of shares issued plus one quarter of any additional shares issued.

We continue to recommend considering closed companies when clients are evaluating which type of entity is appropriate for their businesses in Taiwan. Even after the recent amendments to the Company Act, closed companies retain a number of attributes that make them well-suited in certain circumstances.

For more information, please contact Greg Buxton at gbuxton@winklerpartners.com.

 

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