The Sale of All or a Substantial Part of the Business or Assets—in Conjunction with the Analysis of the Theory of Parity

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Article

The Sale of All or a Substantial Part of the

Business or Assets: In Conjunction with the

Analysis of the Theory of Parity

Wang-Ruu Tseng

*

ABSTRACT

In Taiwan, the sale of all or a substantial part of a firm’s assets or the business itself is regulated by both the Company Law and the Business Mergers and Acquisitions Law. When these two laws are cross referenced, the issue of consideration surfaces. The Company Law does not address the issue of consideration while the Business Mergers and Acquisitions Law emphasizes the role played by stock as one of the possible considerations in the acquisition of such assets or a business.

This paper draws on the differences among the sale of all or a substantial part of the assets/business, a merger and a division, as well as the general assumptions regarding the rights and obligations of the different parties involved. The remedies offered to dissenting shareholders, commonly known as appraisal rights, should be revisited simultaneously. The difficulties faced by the courts also include the validity of the resolution passed by the general meeting if the conditions for the requisite quorum or the method of resolution are not met. This problem also reveals the importance of the theory of parity, i.e., the demarcation of powers between the

* Professor of Law, College of Law, National Taiwan University. This article, which has

subsequently undergone considerable revision, was formerly presented at the Academic Conference on the “Business Mergers and Acquisitions Law” (jointly sponsored by Professor Han Chung-Mou’s Law Foundation, the Council for Economic Planning and Development, and the College of Law, National Taiwan University). I would like to thank the discussants as well as two anonymous reviewers for their most valuable comments and suggestions. The author, however, is solely responsible for the content of this paper and the views expressed therein.

** Editor’s note: This article was originally published in Chinese at National Taiwan University

Law Journal, Volume 35 Number 1, pp. 267-310 (2006). 95

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general meeting and the board of directors.

However, these issues are not attracting the attention of the legislature. The agenda of the general meeting is often loose, and shareholders are to a certain extent deprived of the right to information. The paper argues that when combined with the topic of the sale of the assets or the business, the theory of parity and the interests of shareholders should be simultaneously taken into account.

Keywords: The Transfer of All or a Substantial Part of the Business or Assets, Merger, Appraisal Right, Shareholders’ Proposal Rights, Theory of Parity

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CONTENTS

I. INTRODUCTION... 98

II. THE RELATIONSHIP BETWEEN “THE TRANSFER OF ALL OR A SUBSTANTIAL PART OF THE BUSINESS OR ASSETS” AND OTHER MERGER AND ACQUISITION BEHAVIOR... 99

A. The Fundamental Difference from a Merger... 99

B. Appraisal Rights ... 102

C. The Relationship between “the Transfer of All or a Substantial Part of the Business or Assets” and a Dissolution... 103

D. The Fundamental Difference from the Assumption (and Transfer) of Assets and Liabilities... 105

E. The Fundamental Difference from a Split-Up ... 107

III. THE ALLOTMENT OF SHARES OBTAINED FROM “THE TRANSFER OF ALL OR A SUBSTANTIAL PART OF THE BUSINESS OR ASSETS” ... 111

IV. THE REQUIREMENTS OF “THE TRANSFER OF ALL OR A SUBSTANTIAL PART OF THE BUSINESS OR ASSETS” ... 117

A. Where No Resolution in a General Meeting Is Passed... 117

B. Where a Resolution Has Been Passed in a General Meeting... 119

C. The General Meeting Special Resolution Regulation... 123

V. THE DIVISION OF POWERS BETWEEN THE GENERAL MEETING AND THE BOARD OF DIRECTORS... 125

A. The Limitations on the Company’s Capacity... 126

B. The Division of Powers Within the Organization — The Board of Directors vs. the General Meeting ... 128

C. “The Transfer of All or a Substantial Part of the Business or Assets” — The Limitations on the Powers of the General Meeting and Proposal Rights ... 136

VI. CONCLUSION... 139

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I. INTRODUCTION

“[The] transfer of the entire or a substantial part of the business or assets of a company” is one kind of acquisition behavior that does not receive a great deal of attention in the Business Mergers and Acquisitions Law. However, besides this kind of merger and acquisition activity having its own particular problems that deserve our careful attention, some of the other problems that arise involve different kinds of merger and acquisition activity, all of which need to be looked into.

The regulation with regard to “the transfer of all or a substantial part of the business or assets” appears in both the Company Law and the Business Mergers and Acquisitions Law. Article 185 of the Company Law refers to one type of basic change that occurs in the company’s organization. Paragraph 1, Subparagraphs 2 and 3 of that article respectively make mention of the following statements: “Transfer the whole or any essential part of its business or assets,” and “Accept the transfer of another’s whole business or assets, which has great bearing on the business operation of the company.” It is necessary for a special resolution proposed by the board of directors to be passed in the general meeting of shareholders by a special resolution for the proposal to take effect. The Business Mergers and Acquisitions Law in Article 27, Paragraph 1 stipulates that a notice of transfer can take the form of a publication thus reducing the obligation on the part of the debtors to provide notice. At the same time, Article 39 of the Business Mergers and Acquisitions Law focuses on the issue of “shares with voting rights” as being the consideration for “the transfer of all or a substantial part of the business or assets,” for which a tax credit is provided. In addition, both Article 186 of the Company Law and Article 12 of the Business Mergers and Acquisitions Law provide appraisal right safeguards to small numbers of dissenting shareholders, but in terms of their stipulations, they differ slightly.1 The regulation described above provides

the framework for the standards by which Taiwan deals with this kind of merger and acquisition behavior.

In relation to this regulation it is necessary to clarify a few points. First, Article 185, Subparagraphs 2 and 3 of the Company Law refer to the concept of the transfer of the business or assets of a company, and in regard to the real meaning of this provision (whether it means the general assumption of 1. Based on the Business Mergers and Acquisitions Law being a special law of the Company Act, the required condition of Article 12 of the Business Mergers and Acquisitions Law is that under these circumstances this article is given priority over Article 186 of the Company Act in terms of its application, and so there are scholars who point out that Article 12 of the Business Mergers and Acquisitions Law has already rendered Article 186 of the Company Act unfeasible. See Kuo-Chuan Lin, Ku Tung Tzu Yu Chuan Jang Yuan Tse (The Principles of the Free Transfer of Shares), 71TAI

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assets and liabilities or the sale of assets), it is necessary to thoroughly examine Articles 27 and 39 of the Business Mergers and Acquisitions Law. Secondly, as for the transfer of a company’s property or business in exchange for shares in another company, pursuant to both Article 39 of the Business Mergers and Acquisitions Law and Article 185, Paragraph 1, Subparagraph 2 of the Company Law, if such a transfer takes place, it needs to be asked on what basis the company can hand over the shares to the shareholders, how this in substance differs from a split-up, and whether or not same of the company’s assets are being returned to the shareholders, which would require a reduction in capital.

In addition, the passing of a special resolution in a general meeting of shareholders is a legal prerequisite in regard to such kinds of merger and acquisition behavior. However, if the general meeting does not pass such a resolution, or even if such a resolution is passed in the general meeting resolution but the procedures for convening such a meeting or the way in which the resolution is handled have their defects, and in the meantime the company’s managers on behalf of the company engage in “the transfer of all or a substantial part of the business or assets,” whatever the legal outcome, this issue merits a detailed discussion.2 The problems that arise concern not

only the effectiveness of the resolutions passed in the general meeting, the issue of agency without authority, but also constitute a violation of Article 71 of the Civil Code that renders them void. When considered in more depth, this issue probably involves the basic concept of the theory of parity between the board of directors and the general meeting as well as how this relates to Taiwan’s Company Law. How the boundaries of such a basic theory should be defined is in essence what this article seeks to examine.

II. THE RELATIONSHIP BETWEEN “THE TRANSFER OF ALL OR A

SUBSTANTIAL PART OF THE BUSINESS OR ASSETS” AND OTHER MERGER AND ACQUISITION BEHAVIOR

A. The Fundamental Difference from a Merger

A merger is the most frequently referred type in M & A.3 Such a merger 2. Contradictory opinions exist, however, in Taiwan, such as Supreme Court Decision, case no. 1974 Tai-Shang Tzu 965 and Supreme Court Decision, case no. 1991 Tai-Shang Tzu 434. For a related analysis, see infra.

3. It is perhaps at this point worth mentioning a line of thought that differs from the U.S. view. The U.K.’s Companies Act 1985 is unlike its counterpart in the U.S. where the Corporation Acts for each state include a complete set of regulations for merger procedures. On the contrary, in the U.K. the relevant laws are scattered among its Companies Act 1985, §§ 425-427A (Eng.), and its Insolvency Act 1986, §§ 110-111 (Eng.). The key feature of these laws is whether or not they are approved by the courts, and the appraisal rights are also not essential. On this, see PAUL L.DAVIES, GOWER AND

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can either take the form of a newly-established merged entity or else a consolidation (whereby one or more entities absorb another entity or entities). Regardless of which approach is adopted, the natural outcome of the merger is that one or more companies cease to exist. What does result, however, is that the shareholders of the dissolved company become the shareholders of the surviving or newly-established company. Conceptually, for the shareholders of the dissolved company, that does not mean the end of their investments, but rather that there is substantial continuity of their ownership interest in the surviving company.4

On the contrary, “the transfer of all or a substantial part of the business or assets”5 in terms of the original concept refers to selling behavior. The

acquired companies (in actual fact it is the companies whose assets have been acquired) are in most cases dissolved following the sale of the whole or a substantial part of the business or assets.6 The result is that the

shareholders in the end entirely disinvest from their prior indirect claim on the assets and earnings of the acquired company).7 That is, when the

company engages in the transfer of all or a substantial part of its business or assets, the consideration involved is concerned with the amount of cash to be received,8 and not with shares.

Now let us consider the situation where the consideration involves shares. In the case where the acquired company is dissolved and the principal method adopted is to use shares to compensate for the investment, the original shareholders will be in a similar plight to the shareholders of the company that has been dissolved because of the merger, i.e., the shareholders of the acquired company will prolong their former investment but in the 4. ROBERT C. CLARK, CORPORATE LAW 407 (1986).

5. Although the transfer of the business or assets of a company is one type of merger or acquisition method, in the U.K. the vast majority of mergers and acquisitions take place through public takeovers, and very few are the result of the business or assets of the company in question being transferred. There are two principle reasons for this. The first is that such a transfer involves the rights and interests of third parties and creditors. As for the former, when the transfer takes place, legally there is the power to terminate the contract or stipulate different conditions, and the U.K. Companies Act does not proscribe or restrict the exercise of such powers. In relation to the latter, appeals to the court for compensation or to obtain more safeguards for the company can also be anticipated. For this reason, making the arrangements for the transfer of a business or its assets will entail many additional costs and inconveniences. A further reason is that if the company engaging in such activity involves a public company, many information disclosures and expert opinions will be bundled together to conform to the Third and Sixth Council Directive of the European Union concerned with corporate mergers and split-ups, something that companies are also not keen to see. See DAVIES, supra note 3, at 799-800.

6. Assets are interpreted here to include tangible assets and intangible assets. However, intangible assets refer to paperless assets that have independent economic value, as clearly stated in Article 19 of the Regulation on Business Entity Accounting Handling. See Minstry of Economic Affairs (MOEA) Letter No. 09302069760 (2004) (in Chinese).

7. CLARK, supra note 4, at 403.

8. See Arndt Stengel, The New German Business Transformation Act, 6(3) INT’L.COMPANY

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form of another investment. This differs from the original concept which is based on trading taking place.

When looked at from the point of view of the acquiror, the consideration provided by the acquiring company in the event of the merger taking place consists primarily of the shares of the acquiring company itself or of another company. Strictly speaking, for this type of approach where shares form the basis of the consideration, the company in reality has not paid any assets. When looked at the other way round, if the same company wishes to use cash to acquire another company’s business or assets, then that company needs to pay an appropriate price.

From the point of view of the taxation laws, the distinction between a merger and “the transfer of all or a substantial part of the business or assets” of a company is even more meaningful/significant. When discussed in terms of the economic reality, following the merger, the shareholders of the dissolved company have only changed the content of their investment, but have not terminated their investment. That is, the exchange of the originally-held shares cannot be seen as involving the realization of capital gains, and so the result will be that taxes are deferred.9 On the contrary,

since “the transfer of all or a substantial part of the business or assets” by definition involves trading, the seller must first pay tax on the benefits generated by this transfer. Afterwards, following the dissolution of the company, because of the benefits received from the investment the shareholders will probably once again pay personal consolidated income tax, which will certainly not be advantageous for them. If we take the U.S. federal tax regulations as an example, if the company when it sells its principal assets plans to dissolve the company within the next 12 months, part of the profits obtained from the sale of such assets will be exempt from tax.10

From this we can learn that, if the consideration given in exchange for the transfer of a business or assets is in the form of shares, then the transfer of the acquired company (and its shareholders) in so far as it relates to the tax law should be closer to a merger and should not constitute a sale. This should be the reason for Article 39, Paragraph 1 of the Business Mergers and Acquisitions Law, which states: “If the shares with voting rights acquired by a company as a result of the transfer of its entire or substantial part of business or assets to another company is not less than 80% of the consideration of the entire transaction, and all the shares so acquired have been transferred to the shareholders, then any proceeds generated from the transfer of the business or assets are exempted from profit-seeking enterprise 9. See Internal Revenue Code (I.R.C.) § 368.

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income tax; and any loss incurred is prevented from deduction from the income.” The income from the sale of the company’s business or assets that is directly allotted to the shareholders is an exchange in terms of the content of the shareholders’ investment and a reduction in the company’s capital, and so it is not appropriate to tax this as corporate income tax.

If we extend this argument and draw further inferences, in both the Company Law and the Business Mergers and Acquisitions Law, the consideration involved in “the transfer of all or a substantial part of the business or assets” obviously includes property and shares in addition to cash. As to whether any differences exist between a consideration that consists of cash or property apart from cash and that which exists where shares are used, an attempt will be made to explain this in the paragraphs that follow.

B. Appraisal Rights

If we take the dissolution of a company as an example, when the company is dissolved, the Company Law only imposes certain requirements on the resolution passed by shareholders. Once the decision to dissolve the company is passed, based on the premise that the minority interests serve the majority interests in shaping a company’s intention (the majority rule), the dissenting shareholders are not given recourse to appraisal rights. Under such circumstances, following the dissolution, the company’s shareholders likewise receive a cash payment, and so the appraisal rights do not have any real significance.

On the contrary, when a merger takes place, it is unreasonable for the company to force shareholders to exchange the content of their original investment in line with principles based on majority decisions. Although the minority shareholders are unable to prevent the company from merging, the company cannot also decree that the minority shareholders accept shares in another company in order to continue their investment, and it is for this reason that there are appraisal rights.11 If the principal consideration obtained for “the transfer of all or a substantial part of the business or assets” consists of shares, so that the principle is the same as in the case of a merger, 11. Because the shareholders of a company limited by shares are in most cases not limited to one individual, when deciding whether or not the merger or acquisition is effective, if the sole owner standard is adopted to explain this, it is necessary to provide an explanation to the company that does not just consist of one shareholder. Based on the principle of fairness, it is necessary to give the dissenting minority shareholders rights that provide certain safeguards. There are two different approaches used: the first is to give them the power of veto, and the second is to give them appraisal rights. From the point of view of economic efficiency, the latter is better than the former. See Yedidia Z. Stern, A General Model for Corporate Acquisition Law, 26 IOWA J. CORP. L. 675, 688 (Spring, 2001).

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the minority shareholders should then have the right to request cash and to refuse shares.12

To sum up, in light of the thories regarding the dissolution and merger of companies, that Article 186 of the Company Law and Article 12 of the Business Mergers and Acquisitions Law give dissenting shareholders appraisal rights is problematical. When the consideration in regard to “the transfer of all or a substantial part of the business or assets” takes the form of cash, and the transfer takes place as planned, the company’s subsequent dissolution is an integral part of the overall buying and selling plan. Such a case is similar to a dissolution and is not a merger; and in theory there is no legimacy to provide dissenting shareholders with appraisal rights.13

Although Article 186 of the Company Law stipulates that if the general meeting at the same time resolves to dissolve the company, the shareholders do not have appraisal rights, based on the stipulation of that article where it says “[the shareholders’ meeting] also adopts a resolution for dissolution. If the company only subsequently adopts a resolution for dissolution, then whether or not the shareholders lose their appraisal rights will not be without doubt. Secondly, even if the company at the same time adopts a resolution to dissolve itself, it is still not clear whether it can force the shareholders to accept shares in another company. In addition, Article 12 of the Business Mergers and Acquisitions Law is unlike the proviso of Article 186 of the Company Law, and in this regard the Business Mergers and Acquisitions Law should be viewed as a special regulation. It is for this reason that in this context Article 12 referred to above should be applied prior to the Company Law; or on the contrary, the Company Law is meant to make up the defects of the Business Mergers and Acquisitions Law.

C. The Relationship between “the Transfer of All or a Substantial Part of

the Business or Assets” and a Dissolution

In the case of “the transfer of all or a substantial part of the business or assets” where the consideration is not limited to cash, a further issue is raised. In Taiwan it has already practically been pointed out that “the

12. Within the Delaware General Corporation Law, § 271 is concerned with the company’s transfer of a major part of the property. Regardless of the type of consideration used, the dissenting shareholders are not given appraisal rights. However, if pursuant to § 262(c) the articles of incorporation stipulate that the shareholders be given appraisal rights, then the related regulations regarding appraisal rights may then be used.

13. In the U.S.’s Model Business Corporation Act, revised through 2002, § 13.02(b)(3) has a similar regulation. In addition, appraisal rights provide dissenting shareholders with a way of escape. For related theories, please refer to Shu-Ching Chiu, Hsien Chin He Ping Tui Ku Tung Chuan Yi Pao Chang Chih Yen Tao(Shang) (A Study on How Cash-out Mergers Safeguard Shareholders’ Rights (Part 1)), 127 CHI PAO YUEH KAN (TAIWAN SECUTITIES CENTRAL DEPOSITORY M.) 3, 13-18 (Jun. 2004) (in Chinese).

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so-called transfer of the essential part of the company’s business or assets as per Paragraph 1, Subparagraph 2 of Article 185 of the Company Law refers to the transfer of that part of the business or assets that is sufficient to prevent the company’s business operations from being successful.”14

Accordingly, once the company pursuant to law disposes of the principal business or assets, which in reality constitutes the statutory cause of dissolution, at such a juncture, it is only by amending the articles of incorporation that the company is spared the fate of dissolution. When compared with the original explanation of the “transfer of the whole or a substantial part of the company’s business or assets,” this practical understanding will in most cases continue to give meaning to the company’ s dissolution. It will also conform to the explanation of the major differences between a merger and “the transfer of all or a substantial part of the business or assets” given above.

In practical cases, there is also a relatively more relaxed view. That is, it is not what prevents the company’s business operations from being successful that is important, but that, within the company’s inventory of essential property that has been acknowledged in the general meeting, there is property that has been transferred which constitutes the property referred to in this article.15 However, after the Company Law was amended in 2001,

the inventory of essential property was no longer the property recognized in the general meeting, and thus it would appear that such property is unsuitable for meeting these criteria. In addition, there are also scholars who, in referring to Article 6, Paragraph 1, Subparagraph 3 of the Fair Trade Law, propose both qualitative and quantitative criteria.16 What is worth attaching

importance to, however, is the application of this law in the case involving the dispute between Taiwan SOGO and Breeze Development Co., Ltd. over the sale of shares in Pacific SOGO Department Store, Ltd.17

In the Business Mergers and Acquisitions Law, the consideration in relation to “the transfer of all or a substantial part of the business or assets” appears to take various different forms, and the concept of selling property changes its form accordingly. If the company is not willing to dissolve, it is admissible. In particular, Article 39, Paragraph 2 of the Business Mergers and Acquisitions Law provides a definition for “the substantial part of the business or assets,” and stipulates that “the income of the latest three years

14. Supreme Court Decision, case no. 1992 Tai-Shang Tzu 2696. 15. Supreme Court Decision, case no. 1998 Tai-Shang Tzu 1998.

16. See LEN-YU LIU,KUNG SSU FA LI LUN YU PAN CHUEH YEN CHIU(SAN) (STUDIES ON

COMPANY LAW THEORIES AND JUDGMENTS (III)) 213-15 (May 2002) (in Chinese); Chih-Cheng Wang, Chi Yeh Ping Kou Fa Chih Chih Chi Chu Kou Tsao (The Basic Structure of the Business Mergers and Acquisitions Legal System), 4 CHUNG CHENG TA HSUEH FA HSUEH CHI KAN (NAT’L

CHUNG CHENG U. L.J.) 91, 98-99 (Apr. 2001) (in Chinese).

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of the transferor business is at an amount not less than 50% of the total operating income for each respective fiscal year; and the substantial part of assets refers to the assets to be transferred as having a value of not less than 50% of the total assets at the time the transfer takes place …” Similarly, the Supreme Court’s early practical understanding appears to have already lost its basis. By regarding the Business Mergers and Acquisitions Law as a special law compared to the Company Law, an appropriate interpretation should be as follows: when the transfer of all or a substantial part of the business or assets is already likely to affect the company’s continued operation, at such a time, the outcome of selling the business or assets will as a consequence in most cases follow the dissolution of the company. If the consideration takes the form of cash or other property, this will constitute a type of trading behavior. On the contrary, if the company is still likely to continue to operate, its operations can then be continued. Unless shares account for a considerable proportion of the consideration and these are assigned to shareholders, such trading will come within the scope of the company’s enterprise income tax calculations. In other words, the inevitable link between “the transfer of all or a substantial part of the business or assets” and the company’s dissolution will no more exist.18

D. The Fundamental Difference from the Assumption (and Transfer) of

Assets and Liabilities

Generally speaking, except as otherwise specified in the contract, “the transfer of all or a substantial part of the business or assets” does not mean that the acquiring company will because of this be responsible for or assume the acquired company’s liabilities.19 This is also one of the main differences

between the merger referred to above and “the transfer of all or a substantial part of the company’s business or assets.”

However, in practice different opinions have been expressed. For example, company A claimed that company B should be responsible for the commission fee owe to A by company C on the basis that B has assumed the 18. The U.S.’s Model Business Corporation Act §12.01 U.S.C. (2000) is of the opinion that if the transfer or disposition of all or a substantial part of the corporation’s assets occurs in the usual and regular course of business, then this is within the authority vested in the board of directors. However, § 12.02 of the same Act states that if the above situation does not apply, and that, following the transfer or disposition, the corporation will be left without a significant continuing business activity, then the approval of the shareholders in a general meeting is required. This so-called significant continuing business activity refers to the business activity retained that accounts for 25% of total assets at the end of the most recently completed fiscal year, as well as more than 25% of either total income from continuing operations before tax or revenues from continuing operations in that same fiscal year. For this reason, only something less than this standard will constitute a threshold requiring the approval of the general meeting.

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liabilities of C by way of “the transfer of all or a substantial part of the business or assets.” B argued that C does not in accordance with Article 185, Paragraph 1 of the Company Law transfer the whole or a substantial part of the business or assets, and so the problem of assuming the assets and liabilities does not arise. The court opinied: “Based on the Company Law being a special law within the Civil Law, Article 305, Paragraph 1 of the Civil Law stipulates that the assumption of the assets or liabilities from the property or enterprise of a person falls within the same category as the transfer of all or a substantial part of the business or assets of a company limited by shares referred to in Article 185, Paragraph 1, Subparagraph 2 of the Company Law. For this reason, the assumption and disposition or transfer of the business or assets of a company limited by shares should first be based on the application of the Company Law.”20 Since the two fall

within the same category, “the transfer of all or a substantial part of the business or assets” has the same legal effectiveness as the assumption of assets and liabilities. However, in this paper we hold a contrary opinion.21

First of all, the focal point of “the transfer of all or a substantial part of the business or assets” concept is on buying and selling. Although it is one kind of acquisition technique, the acquiring company need not take responsibility for the acquired company’s liabilities, which is without doubt one of its special features, and is also one of the advantages of such a decision. This view does not rule out that the acquiring company may resort to a special contract to assume the assets and liabilities, but it is not an inherent characteristic.22 Secondly, in Article 27 of the Business Mergers

and Acquisitions Law, “general assumption or transfer” and “transfer or acquisition of business or assets” are provided separately, and thus should be interpreted as two different things.

For these reasons, the assumption or transfer of assets and liabilities closely resembles a merger. However, the transfer of all or a substantial part 20. Supreme Court Decision, case no. 1990 Tai-Shang Tzu 2247. Scholars have adopted similar opinions, for example, Yi-Chou Wu, Kung Ssu Fen Ke Yu Ying Yeh Jang Yu Erh Chih Chih Fen His Pi Chiao (A Comparative Analysis of a Split-up and the Transfer of a Business), 54(1) FA LING YUEH

KAN (THE LAW M.) 4, 5 (Jan. 2003) (in Chinese).

21. In interpreting the issue of acquiring the company’s business liabilities through a transfer, Minstry of Economic Affairs (MOEA) Letter No. 16276 (1979) (in Chinese) refers to “the transfer of the entire or a substantial part of the business or assets (not including liabilities) of the company is already clearly stipulated in Article 185, Paragraph 1, Sub-paragraph 2 of the Company Act …,” and for this reason the Ministry of Economic Affairs does not believe that Article 185 is fundamentally concerned with the assumption or transfer of assets and liabilities.

22. The loan contracts or bonds between the company and the financial institution should at times be stipulated more clearly in the company’s articles. When in the future the company sells the entire or a substantial part of its business or assets, such contracts must make provisions for the acquiring company to be willing to assume the assets and liabilities of the company being acquired. See PRIVATE

PLACEMENTS 2005, CORPORATE LAW AND PRACTICE COURSE HANDBOOK SERIES, PLI, 392-96 (2005).

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of the business or assets, without any special agreement, is not concerned with the transfer of debt.

In addition, it needs to be noted that the wording of the Financial Holding Company Law and the Financial Institutions Merger Law is not entirely consistent with that of the Company Law and the Business Mergers and Acquisitions Law. Article 24 of the Financial Holding Company Law defines the term “Transfer of Business” as the sale of an entire business and its major assets and debts to another company, with the price paid in acquiring newly-issued shares of the company being equal to the net book value of such assets and liabilities. As for the concept of the transfer of a business, under this law this includes the transference of liabilities. Article 13 of the Financial Institutions Merger Law states that in the case where a bank in the form of a company limited by shares under certain conditions acquires the credit departments of ailing farmers’ and fishermen’s associations, the shareholders’ appraisal rights as per Article 185 of the Company Law are not necessarily applicable. This regulation, in terms of being a special regulation in relation to mergers and acquisitions among financial institutions, consistently includes liabilities within the scope of the transfer of a business or its assets. However, citing Articles 185-188 of the Company Law is actually inappropriate, the reasons for this having already been explained in the above discussions.23

E. The Fundamental Difference from a Split-Up

A split-up basically refers to the situation where the company is broken up into a number of independent operating entities. Pursuant to Article 317-1 of the Company Law and Article 4, Paragraph 4 of the Business Mergers and Acquisitions Law, what the company that is split up pays is “all its independently operated business or any part of it”24 in exchange for shares

23. Removing the applicability of Article 185 and beyond of the Company Law is likely to violate the safeguarding of the interests of minority shareholders. In relation to this, see Shao-Ling Liu, Tsai Ching Kai Ke Yu Hsien Fa Chih Yueh-Yi Tu Li Tung Shih, Chin Jung Chieh Kuan Yu Chin Jung Ping Kou Wei Chung Hsin (Financial and Economic Reforms and Constitutional Restraints — With Independent Directors, Financial Supervision and Financial Mergers at the Center), in HSIEN FA

CHIEH SHIH CHIH LI LUNYU SHIH WU(SSU) THEORY AND PRACTICE IN INTERPRETATIING

CONSTITUTIONAL LAW IV 115, 176-79 (Te-Chung Tang ed., May 2005); Shao-Ling Liu, Chin Jung Fa Chin Kai Ke Te Kuan Nien Yu Tiao Chan (The Reform of the Financial Legal System: Concepts and Challenges), 62TAI WAN PEN TU FA HSUEH TSA CHIH (TAIWAN L.J.) 112, 123 (Sep. 2004); Shao-Ling Liu, Wo Kuo Ping Kou Fa Chih Te Jui Pien Yu Chien Chan (The Changes in and Outlook for Taiwan’s Mergers and Acquisitions Law), 32 CHING SHE FA CHIH LUN TSUNG (SOCIOECONOMIC

LAW AND INSTITUTION REV.) 1, 25 (Jul. 2003) (in Chinese).

24. As to whether a business with independent operations refers to a company that has turned its business into a complete and independent operating entity (including the assets and liabilities) as a means for the “surviving company” (i.e., the one that absorbs the split-up) or the newly-established company (i.e., the newly-established split-up) to provide funds to pay for it, and that company or that

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in the surviving company or the new company to be incorporated that succeeds the business of the split company. If it is a company to which the shares are allotted, the split-up is generally referred to as a “split-up of things” (which is actually similar to an investment). By contrast, if the shares in the company that is split up are assigned to shareholders then the split-up is a “split-up of people.” Following the amendments to the Business Mergers and Acquisitions Law in 2004, one part of the shares may be assigned to the company and another part may be assigned to the shareholders (Article 33, Paragraph 1, Subparagraph 4). As to whether the company that is split up is dissolved following the split-up, anything is possible.

When a split-up is discussed under U.S. law, three different kinds are distinguished. The first kind is simply a split-up. This so-called split-up refers to a company being split up into two or more parts. In terms of the method adopted, different parts of the company’s assets are transferred to two or more either already existing or newly-established companies in exchange for shares. After the dissolution takes place, the shares obtained are apparted among shareholders. The second kind is a spin-off. The difference between this and the first kind of split-up is that the company that is split up has not been dissolved, and the shares that it obtains are allocated in accordance with their dividends among the shareholders. The third kind is a split-off. Similarly, the company that is split up has also not been dissolved. Like the second kind of split-up, the shares are allocated among the shareholders, but where this approach differs from the second type of split-up lies in the fact that the shareholders of the company that is split up must hand over a part of the shares in the company that is split up that they originally held in exchange for the shares in the acquiring company.25 From

this we can learn that the three different types of split-up under U.S. law are all similar to what is referred to in Taiwan as a “split-up of people.”

The Sixth Council Directive26 of the EU contains regulations regarding

a corporate split-up. From these regulations it can be seen that they only have what can be referred to as a “split-up of people.” The company that is split up is in principle dissolved following the split-up, unless the member state has a regulation that allows the company that is split up to continue to survive. In addition, if the split-up does not take place in any predetermined ratio (i.e., the shares acquired due to the split-up are not apparted in accordance with the ratios of the shares held by the shareholders), the company’s shareholders obtain new shares or newly-established shares issued by a third company, then another company should assume the assets and liabilities of these independent business operations. Please refer to Minstry of Economic Affairs (MOEA) Letter No. 09102168750 (2002) and MOEA Letter No. 09202012500 (2003) (in Chinese).

25. See H.G. HENN &J.R. ALEXANDER, LAWS OF CORPORATIONS 1010-18 (3d ed. 1983). 26. 82/891/EEC, O. J. 1982 L 378/47.

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dissenting shareholders basically do not have appraisal rights.27

As for the shareholders in the company that is split up, the approach adopted is a “split-up of people.” Regardless of whether or not the company is dissolved, its shareholders’ investment does not cease, and like a merger proceeds with a change in the content of the investment. From a taxation point of view the split-up should enjoy a deferred status. When a “split-up of things” is adopted, strictly speaking it is the compostion of the company’s assets that changes, and all that takes place is that the original operations are changed into shares in a third company. For these reasons, this kind of split-up and a split-up of people both require that a certain resolution be passed in a general meeting, to the extent that the dissenting shareholders are given appraisal rights. It should be noted that this differs from the sale by the company of assets in the ordinary course of business, and instead involves the basic reorganization of the company. From a procedural point of view, special requirements are involved.

The process of splitting up likewise involves the problem of the “transfer of business,” only that such business by nature needs to be independent, a point that is very similar to “the transfer of all or a substantial part of the business.”28 The significant difference is still the consideration

that lies at the core: when the splitting up takes place, the consideration paid for by the existing or the newly incorporated company must take the form of shares. However, it is typical for cash to be used as the consideration in “the transfer of all or a substantial part of the business or assets.”

When “the transfer of all or a substantial part of the business or assets” stops with the original trading situation and cash or other property apart from shares is used as the consideration, the difference between this and a split-up is easy to see. However, when “the transfer of all or a substantial part of the business or assets” involves the exchange of shares in the acquiring company, it is as if the difference between them becomes indistinct or weak. At this time, the best way to distinguish this lies in whether or not the “acquisition takes places under transfer is based on the general assumption of assets and liabilities.” In the process of splitting up, the transferee company must in one instant absorb the assets and liabilities of that business. For this reason, a split-up must of itself combine the assumption of assets and liabilities with a transfer. On the contrary, even if the consideration in “the transfer of all or a substantial part of the business or assets” takes the form of shares, but that this is only one of many forms that the consideration

27. 82/891/EEC, O. J. 1982 L 378/49, Article 5.

28. If all of the business is involved, then there is independence. If a substantial part of the business is involved, then it must account for more than 50% of the overall business revenue in the last three years. This should therefore be interpreted as being characterized by independent business operations.

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can take, by nature the consideration is not inherently different. Although the difference in tax cannot be neglected, these two different types of merger approach can still be distinguished.

To take the analysis a step further, let us suppose that the consideration in relation to “the transfer of all or a substantial part of the business or assets” not only comprises shares but goes so far as to include the transfer of the entire assets and liabilities and that the assumption of the assets and liabilities is stipulated in a special contract.29 However, the company when

planning a reorganization must select a reorganization approach, i.e., it must first decide on either a split-up or else adopt “the transfer of all or a substantial part of the business or assets.” There are two reasons for this: the first is that creditors are protected differently, and the second is that the channels through which shares are allotted among shareholders are also different. Each of these reasons is explained in turn as follows.

First of all, in terms of the orientation of a split-up, based on the transferee company’s assumption of a certain part of the liabilities of the company that is split up when assuming its assets and liabilities, as for the creditors that remain in the company that is split up or that is incorporated into the transferee company, the relationship is very significant, and for this reason it is then necessary to implement procedures to protect the creditors.30

When a “transfer of all or a substantial part of the business or assets” takes place, the problems that arise due to the different kinds of consideration are likely to have very important tax implications. To the acquired company’s shareholders, this is also likely to be very important. However, to the company’s creditors, this relates to a change in the composition of the company’s assets, and at this stage there will not be any requests for special protection.31 If later there is a reduction in capital, the system for protecting

creditors will proceed based on its own momentum.

Secondly, because the system of the split-up is such, the inevitable result of the allotment of the shares to the shareholders in the company that is split 29. That is, scholars believe that this at the same time is likely to constitute both Article 185 and a split-up, and that the choice is determined based on each individual case and the company’s needs. Please refer to Len-Yu Liu, Kung Ssu Fen Ke Yu Ying Yeh Jang Yu (Corporate Split-ups and Business Transfers), 54 TAI WAN PEN TU FA HSUEH TSA CHIH (TAIWAN L.J.) 133, 139 (Jan. 2004) (in Chinese).

30. Apart from the procedures involving typical safeguards such as allowing the raising of objections among creditors in Article 32, Paragraph 5 of the Business Mergers and Acquisitions Law, paying off debts beforehand and furnishing an appropriate security, Paragraph 6 of the same Article requires that the existing or newly-incorporated recipient company, unless the liabilities existing before the division may be severed, shall within the scope of contributions made by the recipient company assume the joint and several responsibility of discharging the liability incurred by the divided company prior to the division.

31. However, there are still scholars who are of the opinion that the rights of creditors should be safeguarded. On this, please refer to Ming-Jye Huang, Chi Yeh Ping Kou Fa Chih Chien Tao Yu Hsing Ssu(Hsia) (A Detailed Examination of the Business Mergers and Acquisitions Law (II)), 97 YUEH TAN

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up will be a “split-up of people,” and the allotment of shares will be completed in accordance with the procedures for the split-up. On the contrary, the consideration obtained in “the transfer of all or a substantial part of the business or assets” belongs to the company. If the company desires to allocate the shares among the shareholders, theoretically speaking such an allotment constitutes a distribution of company assets to the shareholders. In other words, when this is not easy to do under the capital maintenance principle, apart from needing to implement procedures to safeguard creditors as well as the necessity and likelihood of implementing a reduction in capital, there are still disputes regarding the way in which the reduction in capital should be allocated. This will be discussed further in Part III.

To sum up, even if because of the many kinds of variables these two merger and acquisition approaches are likely to be hardly any different, according to the Company Law and the Business Mergers and Acquisitions Law they constitute two independent and different models. Thus the procedures to be implemented will still be different, and for this reason the board of directors will need to be decisive when referring to them. As to whether or not it is likely that reality standards can be adopted, it is not our intention to discuss this at the present stage.

III. THE ALLOTMENT OF SHARES OBTAINED FROM “THE TRANSFER OF ALL OR A SUBSTANTIAL PART OF THE BUSINESS OR ASSETS”

Although Article 185 of the Company Law does not clearly specify the types of consideration received in relation to “the transfer of all or a substantial part of the business or assets,” Article 39, Paragraph 1 of the Business Mergers and Acquisitions Law stipulates that “shares with voting rights” may possibly be one type of consideration. As to the reason why shares are used as consideration, this has already been discussed earlier in this paper.

What needs to be asked, however, concerns the means by which the shares obtained by the acquired company should be allotted among shareholders. It is believed that two different approaches can be adopted: the first involves an appropriation of the surplus, and the second a capital distribution. With regard to the appropriation of the surplus, if there are gains from the business or assets of the acquired company, then there is a surplus on the disposal of assets, which constitutes a capital surplus. However, pursuant to the Company Law, the capital surplus or reserve is to be mainly used to make good the deficit (or loss) of the company (Article 239, Paragraph 1). If the intention is to capitalize the capital reserve, then only two kinds of income, namely, income from the issuance of shares at a

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premium and income from gifts received may be regarded as capital reserve, and so the surplus from the disposal of assets is not included therein. In other words, the selection of the way in which the surplus is appropriated must be ruled out.

If one looks at this from the angle of capital distribution, the Ministry of Finance’s Department of Taxation has already provided the following explanation:

(1) Business Mergers and Acquisitions Law Article 39 … The so-called substantial part of business refers to the income of the latest three years of the transferor business amounting to not less than fifty percent of the total income from operations for each respective fiscal year; that is, it is necessary to achieve this standard in each of the last three years. If in one of these years the standard is not reached, then this article should not be applied to exempt the company from business income tax …. (2) If the company, pursuant to Article 185, Paragraph 1,

Subparagraph 2 of the Company Law, transfers the immovable property of any essential part of the business in exchange for transferee company shares with voting rights (equal in value to the market prices for the immovable property) and that company has not transferred all of the shares it has obtained to the shareholders, without Article 39 of the Business Mergers and Acquisitions Law being applied, then the gain or loss from the company’s transfer of immovable property should be dealt with in accordance with the Income Tax Law and related regulations.

(3) is similar to (2). If the company transfers all of the shares it receives to the shareholders, then the explanations for the related taxes are as follows:

1. Securities transactions tax-related part: … If this conforms to Article 34, Paragraph 1, Subparagraph 3 of the Business Mergers and Acquisitions Law, this part can be exempt from securities transactions tax. Until the company transfers all of the shares it receives to the shareholders, this does not constitute the trading of securities, and the problem of levying securities transactions tax does not arise.

2. Income tax-related part: (1) If the company transfers the property of an essential part of the business and conforms to Article 39 of the Business Mergers and Acquisitions Law, it can be exempted from profit-seeking enterprise income tax. Until such time that the accounts are dealt with, this should

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be handled in accordance with the Business Accounting Law and related regulations. (2) If the company transfers all of the shares it receives to the shareholders, the rights of its shareholders are correspondingly reduced. In such instances, the company should in accordance with Article 168 of the Company Law implement a reduction in capital. The shares that are transferred by the company to the shareholders represent a repayment of capital by the company, and there is no need to levy a tax on shareholders’ income.32

There are several points regarding the Ministry of Finance’s interpretation as described above that deserve our careful attention. First, from points (1) and (2) of the interpretation its can as a whole be inferred that the shares that are obtained in exchange for the transfer of a company’s business or its assets are in a procedural sense first obtained by the company, regardless of whether after this takes place the shares are allocated among its shareholders, a process that differs from a split-up. In a split-up involving people, the way in which the overall merger and acquisition is designed is that the shareholders of the company that is split up directly acquire the shares, but in such instances this is not necessarily the case.

Secondly, when all or a substantial part of the business or assets is transferred in exchange for shares with voting rights, it is not necessary for the shares to account for eighty percent of the total consideration, nor is it even necessary for the shares to account for sixty percent of the consideration. The content and composition of the consideration are left to be determined by the contractual freedom of the acquired company and the acquiring company. However, if 80% is not achieved, it is unlikely that the company will be exempt from profit-seeking enterprise income tax. If 60% has not been achieved, it will not be exempted from securities transactions tax.

Third, the shares that are allotted to the shareholders are conceptually defined as a “return of share capital,” and hence the company should implement a reduction in capital, and thus need not levy income tax on the shareholders. As for this last point, it can be argued here that this differs from U.S. federal tax law. As was pointed out above, issuing another company’s shares to the shareholders in lieu of cash is really a kind of change in the content of the investment, but the investment is not the end of the story. That is, although at the current stage the tax is not levied, in the future, when these shares received in exchange are sold, they will still face the problem of capital gains. For this reason, they are not exempt from tax,

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and it is only a matter of the tax being deferred.

As to a distribution of share capital involving a reduction in capital, this is essentially a reduction in capital. The reason for this is that it is necessary to implement a reduction in capital. Apart from following the procedures for a reduction in capital in order to safeguard the company’s creditors, i.e., Articles 168 and Article 281 of the Company Law apply the provisions of Articles 73 and 74 of the same Act, mutatis mutandis, so that certain procedures are implemented to safeguard the creditors, the main reason for this reduction in capital is that the company shall not give the company’s assets to its shareholders (either in their entirety or in part). In deliberating over the legislative intent of Article 15, Paragraph 1, and Article 185, Paragraph 1, Subparagraph 2 of the Company Law, as well as the equality of shareholders and the capital maintenance principle, although the Company Law does not expressly prohibit the company from giving its assets to its shareholders, to do so would go against the legal reasoning of the above articles.33 That is, the acquired company needs to reduce its capital to act

upon the principles that are consistently emphasized throughout the Company Law.

The Ministry of Economic Affairs has successively had two interpretations that are related to this. First of all, the so-called term “to transfer to” found in Article 39 of the Business Mergers and Acquisitions Law refers to all of the shares acquired by the company being transferred to the shareholders pursuant to this article, with the rights of these shareholders also being correspondingly reduced. In such circumstances, the company should pursuant to Article 168 of the Company Law implement a reduction in capital.34 This interpretation makes it clear that the allotment of the shares

in this way will give rise to the result that the originally-held part of shares will be eliminated. Secondly, “when implementing a reduction in capital, the amount of the approved reduction shall be in accordance with the proportions of the shares held by each shareholder, and such distribution will be limited to cash … if compensation is made using assets other than cash, then because of the difficulties involved in estimating their values, it will be very easy to damage the rights of both the company and the creditors, and so the company’s capital principle will be violated. That is, if the company reduces its capital and the amounts of the distribution to the shareholders are in accordance with their shareholding ratios, it shall not reimburse the shareholders with any assets other than shares or cash.”35

33. Minstry of Economic Affairs (MOEA) Letter No. 092006005180 (2003) (in Chinese). 34. Minstry of Economic Affairs (MOEA) Letter No. 09102222910 (2002) (in Chinese). 35. Minstry of Economic Affairs (MOEA) Letter No. 090021717720 (2001) (in Chinese). In addition, Minstry of Economic Affairs MOEA Letter No. 09202025650 (2003) (in Chinese) provides a similar opinion: “A company that reduces its capital may only use cash to reimburse its shareholders.

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The above two interpretations are not substantially different, for they only describe a reduction in capital from two different angles. When a company decides to reduce its capital, this is likely to take the form of a “formal” reduction in capital or a substantial reduction in capital. The former does not involve the return of any property, and purely involves the shares held by the shareholders, whether or not this is a reduction in their face values, or a reduction in their numbers of shares, or a merging of their shares, in order to achieve the objective of reducing capital, and is not in any way related to the topic discussed in this paper. If a substantial reduction in capital takes place, then the company must pay a certain amount of money in exchange for the resulting reduction in or the lowering of the face value of the shares in accordance with the numbers of shares held by the shareholders.36 This gives rise to disputes as to whether the company should

resort to the use of property other than cash when reimbursing shareholders. On the other hand, because “the transfer of all or a substantial part of the business or assets” in exchange for shares gives rise in real terms to a reduction in capital when the shares are transferred to the shareholders, it is required, before the shareholders are paid back, that the company follow the procedures for a reduction in capital. Thus, when under normal circumstances a reduction in capital takes place, this means that the use of property other than cash in making a distribution is prohibited. There is thus some doubt as to whether shares can be used to make a distribution when there is a reduction in capital as the result of “the transfer of all or a substantial part of the business or assets.” Thus further explanation is needed as to how to validate this kind of difference.

The easiest way to explain this is to state that the Business Mergers and Acquisitions Law is a special law of the Company Law. Since the Business Mergers and Acquisitions Law allows the acquired company to transfer shares to its shareholders, we can see that this is a special regulation regarding the means by which shareholders should be reimbursed following a reduction in capital. However, this type of explanation tends to be too simple, for Article 39, Paragraph 1 of the Business Mergers and Acquisitions Law does not refer to a reduction in capital, but is merely a necessary condition for the shares being transferred to the shareholders to be exempt Please refer to the MOEA’s Letter No. 09002177720 (2001/08/20) from which it can be inferred that a company, when reducing its capital, shall only pay back its shareholders using cash, and shall not use shares or other forms of property to pay them back. In relation to amounts paid back using the shares of companies listed on the stock or OTC exchanges, please refer to the stipulations of the above letter.” However, the MOEA has adjusted its holding in Minstry of Economic Affairs MOEA Letter No. 09700511280 (2008) (in Chinese) so that under certain circumstances, assets (including shares) distribution is permitted.

36. However, the law has clear stipulations in regard to the cancellation of shares or a merger. In relation to this, please refer to WEN-YEU WANG,KUNG SSU FA (CORPORATION LAW)451-52 (2d ed., Aug. 2005) (in Chinese).

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from profit-seeking enterprise income tax.

As to why the Ministry of Economic Affairs restricts the form of the distribution to shareholders in relation to a reduction in capital to cash, the main reason for this, apart from the company’s and the creditors’ rights as referred to in the MOEA Letter, may actually be that the shareholders’ interests is the major consideration. When the company is incorporated or increases its capital afterwards, the funding provided by shareholders mostly takes the form of cash, and there is no dispute as to how the value of such funds is determined. Although Article 156, Paragraph 5 of the Company Law broadens the types of funds used to contribute to the company’s equity capital to encompass certain other items besides cash, these other non-cash items must conform to certain valuation and policy procedures. On the contrary, among the regulations related to a reduction in capital currently in force, there are none that especially make such a provision or provide such relief. For the same reason, using cash to reimburse the shareholders is the most likely way of avoiding the inappropriate result where the majority shareholders allocate assets that are actually valued at relatively low prices among the minority shareholders. For this reason, if one starts with the most basic reasoning of the Company Law, when the company can form a consensus, apart from behavior that violates the law, any other behavior will do.37 Of course, such behavior also includes the way in which the property

is distributed. However, the likelihood of this kind of situation occurring in practice is extremely small (for the company to reach a consensus is really not easy), so that making the allocation using cash is the most appropriate method that can be used.

From this it can be inferred that, if the assets used to reimburse the shareholders are characterized by homogeneity, and they are divisible in terms of quantity, then the difference between such assets and cash from the point of view of those to whom the assets are allocated no longer exists. Put simply, as the company allots the shares and corporate bonds of the same company that are by nature assets that are completely the same among the shareholders, the outcome referred to above whereby there will be an inappropriate allocation will not arise. That is, what this means is that cash serves as a kind of example. Everything that can achieve the same results as cash should have no need to be prohibited. The Ministry of Economic Affairs has recently adjusted its interpretation regarding this issue based on such thoughts (MOEA Letter No. 09700511280 (2008)). The only thing that needs to be considered is that it seems that the law does not force the shareholders to receive something other than cash when a company 37. See Robert Goddard, The Re Duomatic Principle and Sections 320-322 of the Companies Act 1985, J. BUS. L.121, 121-22 (Jan. 2004).

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implements a reduction in capital. However, this has nothing to do with fairness, but instead gives rise to the problem whereby shareholders are forced to accept different investment contents. This point has already been discussed in detail above and the issue of appraisal rights arises due to such a situation.

IV. THE REQUIREMENTS OF “THE TRANSFER OF ALL OR A SUBSTANTIAL

PART OF THE BUSINESS OR ASSETS”

According to the Company Law, if a company wishes to transfer all or a substantial part of its business or assets, it is necessary for a resolution to be adopted by a majority vote at a meeting of the Board of Directors that is attended by at least two-thirds of the directors (Article 185, Paragraph 5). Subsequently, the reason for or subject of the general meeting to be convened should be indicated, and a special resolution in the general meeting should be adopted by means of a vote. This regulation, when discussed from the point of view of the forming of the company’s intention, without doubt makes it clear that if the company wishes to engage in a major transaction, it is necessary for this procedure to be followed for it to take effect.

However, in practice there are likely to be two kinds of situation. The first is where the company does not act in accordance with this procedure, and the chairman represents the company in transferring all or a substantial part of its business or assets. The other situation is where, in spite of the company passing the resolution in its general meeting, mistakes are likely to be made in the process of passing the resolution. For example, when making a proposal, the board of directors may not pass a special resolution, or the general meeting may only pass an ordinary resolution. If any of the above situations occur, the kind of influence that “the transfer of all or a substantial part of the business or assets” may have is well worth discussing.

A. Where No Resolution in a General Meeting Is Passed

In relation to resolutions regarding “the transfer of all or a substantial part of the business or assets” of a company that have not been passed in a general meeting of shareholders, the Supreme Court has already accumulated a considerable number of judgments. What is frequently seen in practice is the situation where the counterparty to the company’s transaction requests that the company in accordance with the law make payment through the transfer of certain property, and where the company frequently regards such property as its principal property. However, the company makes the transfer without having a resolution for that purpose adopted in a general

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meeting of shareholders, which increasingly leads to counterarguments. In practice the opinions expressed in the judgments may each consist of one of two main kinds.

Judgments that fall within the first category mostly express the following views: “The company shall, in relation to the different activities listed in Article 185, Paragraph 1 of the Company Law, obtain the approval of the shareholders for each item. Otherwise, such acts will not take effect,”38 “… the company itself is not restrained by them”39 or “… a

special resolution that has not been passed in a general meeting is not effective in relation to the appellant (the company) …,”40 and so on. When

looked at in terms of the meanings of the words, it would appear that this means that such acts are invalid. The general meeting resolution defined in Article 185 of the Company Law is an essential requirement for transferring the essential part of the assets of a company.

Another kind of practical view concerns that of further explaining the words “not taking effect” as: “With the chairman representing the company to the outside world, the general meeting is the company’s supreme decision-making body, and for this reason the chairman represents the company to conclude …, Pursuant to Article 185 of the same law … for the resolution to take effect, it needs to be adopted by a majority vote at a meeting of the shareholders, of which those in attendance represent two-thirds or more of the total number of the company’s outstanding shares. If the board chairman has not acted on the basis of such a special resolution passed in the general meeting and represents the company in concluding a contract …, as to whether what he does takes effect, although the Company Law is not clear on this, Article 170, Paragraph 1 of the Civil Code stipulates that ‘a juristic act done by a person having no authority to act as an agent is ineffective against the principal unless ratified by the principal.’ By this is meant that a contract concluded by the chairman representing the company that has not been approved by a special resolution passed in a general meeting of shareholders will, in relation to the company, not take effect … Since this is an act that does not take effect, if it is ratified after taking place then from the time it occurs it takes effect.”41

The main thrust of the second kind of explanation is that “the general meeting is the supreme organ of a company limited by shares, so that if the general meeting has not in accordance with the law decided to transfer all or a substantial part of the business or assets of the company, the executive

38. Supreme Court Decision, case no. 1980 Tai-Shang Tzu 3362. 39. Supreme Court Decision, case no. 1991 Tai-Shang Tzu 434. 40. Supreme Court Decision, case no. 1997 Tai-Shang Tzu 1893.

41. Judicial Yuan Letter, case no. 1990 Ting-Ming (1) Tzu 914 and Taipei District Court Decision, case no. 2002 Chung-Su Tzu 2465.

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organ of the company, i.e., the board of directors delegates the authority to the company’s president who enters into this company’s business dealings with third parties, assets and trading contracts, it is difficult to recognize these acts as being the acts of the company, and so the company is not responsible for the actions.”42

Based on its special feature of being a legal person, the company in essence is unable to make its own decisions. However, according to Taiwan’s Company Law there are basically two groups that can take responsibility for the company and shape its will: the general meeting and the board of directors (Article 202 of the Company Law).43 As for the forming of the

intention concerned with “the transfer of all or a substantial part of the business or assets,” this is interpreted as being within the domain of the general meeting. However, it cannot be denied that a resolution being passed in a general meeting is based on the proposals initiated by the board of directors, which means that the board of directors is not completely without any role to play.44

As a result, there are two possible interpretations. The first is that the regulation of the general meeting’s special resolution is mandatory. If not abided by, the act will of course be void. The other interpretation is: if it is only that the company’s will is not validly formed, which means that the principal does not have anything to express, regardless of whether it is a representative or agent, neither is able to restrain the principal, but can only be accorded the status of a “agent without authority,” and this will revert to the situation where the validity remains undetermined. Summing up these practical opinions, when related judgments use the expression “not effective to the company,” this means that the validity of the juristic act is uncertain. At this stage, the second interpretation is preferred, but in what is written below this paper will further discuss how powers are divided within the company in order to discuss this issue in detail.

B. Where a Resolution Has Been Passed in a General Meeting

When a company convenes a general meeting to vote on “the transfer of all or a substantial part of the business or assets,” yet it so happens that this

42. Supreme Court Decision, case no. 1988 Tai-Shang Tzu 1918.

43. However, in regard to substance, the chairman in relation to certain types of ordinary business has the power to shape the will of the company. Although the managers are an auxiliary body involved in the execution of the company’s business, in relation to the handling of such business, they actually have the discretionary authority. This can perhaps be included as part of the shaping of the company’s intention. The same applies to the responsible persons of other companies.

44. After the regulations governing the rights of shareholders to initiate proposals were passed, whether or not the transactions of Article 185 of the Company Act should be based on proposals initiated by shareholders and how these proposals should be handled merit further discussion.

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