On July 1, 2015, an amendment (Amendment) to the Company Act (公司法) of Taiwan took effect to establish a new category of company under the new Chapter 13, called “closely-held company limited by shares” (閉鎖性股份有限公司, hereinafter, a 'close company'), aiming to provide start-up companies with a degree of flexibility when dealing with the limitations of a company limited by shares (股份有限公司) under the Company Act.
Features – 'Non-Public' and 'Close' A close company is defined as a non-public company with no more than 50 shareholders, the articles of incorporation of which stipulate restrictions on transfers of its shares (Section 356-1). To maintain its 'non-public' status, a close company must be a company that has not attained 'public company status' and the number of its shareholders must be kept below 50, though this may be adjusted by the Ministry of Economic Affairs (MOEA), central governing authority for affairs under the Company Act in the future pursuant to social and economic status of the country and practical needs. It should be noted that:
In addition, to maintain its 'close' feature, the Amendment requires that there be a transfer restriction stipulated in the articles of incorporation. Such transfer restriction must be recorded on the share certificates, and if the company does not issue share certificates, on the documents delivered to transferees. The transferee must request that the company provide a copy of its articles (Section 356-5). The extent of this transfer restriction will be discussed below under 'Transfer Restriction'.
Capitalization – Type of Contributions and Abolishment of Par Value Requirement Under the Company Act before the Amendment, shares of a company limited by shares could only be paid for by cash, a monetary claim against the company, proprietary technology, intellectual property, or assets needed by the company, depending on the characteristic of that shareholder. For a start-up company, there will often be a founder who renders services or an angel investor who extends credit to the company. However, such contributions could not be categorized under any of the foregoing types.
The Amendment provides that for a close company, shares can also be paid for by services rendered or credit extended to the company, in addition to cash, assets needed by the company, and technology. The Amendment would therefore allow a founder who renders services or an angel investor who extends credit line needed by the company to become a shareholder of a close company (Section 356-3).
To prevent a close company from being short of cash or valuable assets, the Amendment also prohibits shares paid for by rendering services or extending credit from exceeding a certain percentage of the total issued shares. The percentage will be announced by the MOEA in the future.
The Amendment also abolishes the par value requirement. A close company can now have no par value and, therefore, not have a capital reserve account (Section 356-6). It also provides a close company with flexibility regarding equity incentive schemes by having a lower subscription price or strike price for shares.
Flexibility on 'Control' and 'Economic' Terms for Investments To draw interest from potential investors to provide financing to a start-up company, a company would normally provide potential investors with certain incentives from an economic and/or control perspective. However, a company limited by shares has little or no flexibility to tailor these terms for potential investors.
The Amendment, on the other hand, would allow a certain level of flexibility for a close company to draw interest from potential investors. Several terms commonly requested by U.S. Silicon Valley VCs in preferred stock financing include:
Debt Financing Under the Company Act before the Amendment, a non-public company cannot offer convertible bonds convertible into shares or bonds vested with subscription rights. The total amount of corporate bonds cannot exceed the net amount of all assets in hands of the company after deducing all liabilities and intangible assets, and the total amount of unsecured corporate bonds shall not exceed one-half of the aforesaid net amount.
However, convertible bonds and bonds with subscription rights are very useful debt financing for start-up companies. The Amendment therefore allows a close company to issue convertible bonds or bonds with subscription rights and excludes a close company from the aforementioned financial criteria (Section 356-11). Please note, however, that the restrictions which prohibit a company with poor financial record from issuing unsecured bonds (Sections 249) or a company in default of its indebtedness or with poor net income from issuing corporate bonds (Section 250) still remain for a close company.
Directors and Supervisors Under the Company Act, there should be a board of directors consisting of at least three directors, and also a supervisor who is charged with the duty of overseeing the actions carried out by the directors. The Amendment aims to simplify the structure of the governing body by allowing a close company to have only one to two directors without forming a board of directors. Each of the directors will have the authority to represent the close company. Also, a close company can have no supervisor at all, and each shareholder that is not a director will have the right to supervise the directors (Section 356-3).
Transformation between Company Limited by Shares and Close Company The Amendment allows a company limited by shares to transform itself into a close company with the approval of all shareholders of such company. For such transformation, the company must send notices to its creditors and make a public announcement to allow creditors to make objections (Section 356-14).
Conversely, a close company may also transform into a company limited by shares with the approval of a majority of shares at a shareholders’ meeting attended by shareholders representing at least two thirds of the total issued shares. Also, if such a company later becomes unqualified to be a close company (i.e., by having more than 50 shareholders or becoming public), it must apply for a transformation into a normal company limited by shares (Section 356-13).
Notes:  經濟部九一、一、二四商字第09102004470號
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