Newsletter
Family Business Succession Planning and Company Act Series-Close company and family succession
I. Introduction
The close company was first introduced in the 15 June 2015 amendment to the Company Act. Legislators stated the following in the reasons for amendment: "To encourage development of Small and medium-sized enterprises (SMEs), foster a more favorable business environment, meet various needs of technology startups, and create more room for corporate autonomy, the close company is hereby introduced as a corporate institution from the US and UK, allowing SMEs adopting this corporate form to have more flexibility in making equity arrangements and conducting business operations."
Compared with the regulations governing a typical/general company limited by shares, those stipulated for a close company are more flexible in terms of type of contribution, transfer of equity, form of shareholders’ meeting, special shares giving shareholder’s voting right, and the number of times earnings are distributed. The amendment gives SMEs more room for maneuver in decision-making and operations, placing them in a position better to meet market demands.
II. Expanded application of the institutions designed for close company
In the amendment to the Company Act on 6 July 2018, the numerous new and experimental institutions designed for a close company were adapted for a typical/general company limited by shares. For instance, it used to be mandatory to hold an in-person shareholders’ meeting; after the amendment, video conferencing becomes a viable alternative. Additionally, there is the application of special shares giving multiple voting rights and the possibility of increasing the number of times earnings are distributed. However, the 2018 amendment did not make contribution by service and restrictions on transfer of shares applicable to a company limited by shares. These two features make a close company distinct from a typical/general company limited by shares, providing SMEs with an advantage in strengthening their equity structure and the relative ease with which they can raise funds, and helping SMEs stay flexible in implementing tactics in response to industry shifts.
Table 1
Comparison of key differences between ''a close company'' and ''a typical/general company limited by shares'' pursuant to the Company Act now in force
|
Type of company |
Close company |
Typical/General company limited by shares |
|
Type of contribution |
Cash, other assets, technical know-how, |
Cash, other assets, and technical know-how (Paragraph 3 of Article 131 of the Company Act) |
|
Regulations on shareholder |
No more than fifty (50) shareholders (Paragraph 1 of Article 356-1 of the Company Act) |
Two or more promoters (Paragraph 1 of Article 128 of the Company Act) A single government shareholder or a single juristic person shareholder (Paragraph 1 of Article 128-1 of the Company Act) |
|
Transfer of shares |
Restrictions on transfer of shares provided in Articles of Incorporation (Paragraph 1 of Article 356-5 of the Company Act) |
Transfer of shares may not be prohibited or restricted by Articles of Incorporation (Article 163 of the Company Act) |
|
Number of times earnings are distributed |
|
A company may explicitly provide in its Articles of Incorporation that the earnings distribution or loss off-setting proposal may be proposed at the close of each quarter or each half fiscal year. (Paragraph 1 of Article 228-1 of the Company Act) |
III. Close company as an instrument for family succession
The provisions stipulated for a close company in the Company Act soon captured the attention of family businesses in Taiwan. For the purposes of effecting succession and sustainable operations, family businesses often establish a holding company to achieve the goals of centralizing equity, holding assets, and providing family members with management roles (serving in the capacity of director or supervisor, or running the business) Before the amendment to the Company Act, however, transfer of shares of a company limited by shares cannot be prohibited or restricted by any provision in the company’s Articles of Incorporation. This made it likely for first-generation family members of the family business to impartially decide on a ratio of shares to forming a stable decision-making body. But when the second- and third-generation family members enter the family business and obtain their shares of the stock, the balance in the decision-making structure will likely collapse. If family members have conflicting views on the direction in which the family business is run, and if a consensus cannot be reached, it is possible for some of the members to sell their shares to outside parties. In dire circumstances, a family business may change hands, a situation that is least appealing to business owners.
The 2015 amendment to the Company Act provided that a close company may prohibit or restrict transfer of shares by the company’s Articles of Incorporation. Family businesses have since found this particular regulation useful. It is stipulated, however, that a close company may not have more than fifty (50) shareholders. A family business greater in size with more shareholders may find it difficult to operate under this regulation.
Subsequently, the 2018 amendment to the Company Act relaxed various regulations for a non-public offering company, in particular the issue of special shares with various attributes (e.g. shares with multiple voting right; golden shares with veto power over specific matters; and special shares guaranteeing a director’s seat, those prohibiting or restricting the right of being elected as a supervisor, and those with restrictions on transfer of special shares) to restrict transfer of shares and strengthen management control. Shareholders of a family business seeking to jointly exercise their voting rights should be aware that shareholders of a non-public offering company may reach a voting agreement in writing to jointly exercise their voting rights or form a trust agreement on shareholders’ voting power to bring together like-minded shareholders in the family business to reach the required number of votes. The above illustrates the diverse range of methods—and their flexibility—that can be adopted to facilitate the succession of family businesses in Taiwan, which can establish the appropriate company form to attain its goal on the basis of its business purposes.
IV. Conclusion
Alternation of generation is an inevitable trial to the business owners. They are always in a dilemma while they try to come up with the way for devolution. Fortunately, after the stipulation for the provisions for a close company in Company Act, the business owner could achieve the transfer of power to the next generation by restricting the transfer of shares—help to prevent equity from falling into the hands of outsiders. In addition to in a startup’s early stages of development, putting in place such restrictions can prevent upheaval of company tactics caused by frequent changes of shareholders. For family business succession, such restrictions can ensure that voting shares rest in the hands of only a select few individuals, allowing the family business to be run by the family in a long-term, sustainable manner.