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