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Closely-Held Company

Lihuei Mao/Samuel Jhu

On June 15, 2015, the Legislative Yuan approved the amendments to the Company Act. A special section on "Closely-Held Company" ("CHC") was added to Chapter 5 (Company Limited by Shares) as a result of the amendments and the purpose is to encourage the growth of startups and small and medium enterprises and to accommodate the unique needs of tech startups. The amendments aim to create more autonomy for such companies and to increase the flexibility in share ownership arrangement and business operations of CHC.
Key features of the amendments are as follows.
1.    Definitions
CHC refers to non-public company with no more than 50 shareholders and with restrictions on share transfer.
2.    Establishment
(1)   Share subscription of first issue: The promoters of a CHC should subscribe all the shares of the first issue.
(2)   Contribution of capital: In addition to cash, the contribution of capital may be in the form of property which is necessary to the company, technical know-how, service and credit.
(1)   Restriction on the transfer of shares: In order to maintain the 'lock-out' feature of a CHC, restrictions on share transfer shall be specified in the articles of incorporation or the share certificates of the company. In the absence of a share certificate, such restrictions must be specified in the relevant transaction documents.
(2)   Par value: To increase flexibility for the promoters and shareholders in terms of share ownership arrangement, a CHC may decide to issue either par value shares or no-par value shares.
(3)   Preferred Shares: In addition to existing types of preferred shares as prescribed in Article 157, the amendments added more types of preferred shares including "golden shares" (shares with multiple voting right or veto right) and those that allow one preferred share to be converted into several ordinary shares.
4.    Shareholders meeting
(1)   Convening of the shareholders meeting: In addition to convening a physical meeting, a shareholders meeting may be conducted through video conferencing or other means as announced by the competent authority. Also, if agreed by all of the shareholders, a resolution can be approved by the shareholders in writing without actually convening a meeting.
(2)   Shareholders' voting agreement: With reference to Paragraphs 1 and 2 of Article 10 of the M&A Act, the shareholders of a CHC may enter into shareholders' voting agreements or agreements for shareholders' voting trust.
5.    Accounting 
Under the current Company Act, the distribution of surplus earnings or the offsetting of losses of an ordinary company limited by shares will be conducted after the end of each fiscal year. Pursuant to the amendments, the distribution of surplus earnings or the offsetting of losses of a CHC can be conducted after the end of each half fiscal year.
6.    Offering and issuance of securities
(1)   In principle, a CHC cannot issue or offer securities publicly. However, it should be permissible if the public issuance or offering is conducted through equity crowdfunding operated by licensed securities firms.
(2)   A CHC may offer corporate bonds, convertible bonds as well as equity warrant bonds through private placement.
(3)   When issuing new shares, in addition to cash, property which is necessary to the company, technical know-how, service and credit, the contribution of capital may be made by offsetting any debt of the company. In addition, when a CHC issues new shares, the requirements for the retention of current employees and the pre-emptive rights of original shareholders, which are prescribed in Article 267 of the Company Act, shall not apply.
7.    Organizational restructuring
(1)   A CHC may pass a special resolution to change its status to a non-CHC.
(2)   A private non-CHC may change its status to a CHC if approved by all of its shareholders.
After the amendments, we can expect a new dimension to the structures of companies in Taiwan, and investors will have more investment options.
The Corporate and Investment Practice Group of Lee and Li would be more than happy to assist our clients in planning the optimal investment structure according to their requirements. Should you have any queries, please contact us anytime.