Prior to a board election at its annual general meeting on Tuesday last week, Tatung Co deprived several shareholders — who together hold a 53 percent stake in the company — of their voting rights.
The company said the shareholders were denied the right to vote because they failed to report their acquisition of shares in compliance with the Business Mergers and Acquisitions Act (企業併購法) and because some of the foreign investors allegedly had Chinese financial backing.
Tatung management won all six board director seats and all three independent board director seats, although the situation is expected to turn into a drawn-out legal battle.
The process exposed many loopholes in the regulations, including the criteria for determining what is Chinese investment and who is responsible for making that determination.
All foreign investment in Taiwanese companies is regulated by a permit system. For non-Chinese foreign investment, reviews by the government follow the Statute for Investment by Foreign Nationals (外國人投資條例), which is rather loose. In principle, foreign investment is allowed and would only be refused under exceptional circumstances. However, Chinese funds must undergo strict review.
According to Article 73, Paragraph 1 of the Act Governing Relations Between the People of the Taiwan Area and the Mainland Area (臺灣地區與大陸地區人民關係條例): “Unless permitted by the competent authorities, any individual, juristic person, organization, or other institution of the Mainland Area, or any company it invests in any third area may not engage in any investment activity in the Taiwan Area.”
Article 93-1 of the act stipulates that “the competent authority may order the violator to cease or withdraw such investment or to rectify the violation within a specified time limit, and may suspend the violator’s shareholder rights.”
The problem is that Chinese funds are unlikely to be directly invested in Taiwan. More often than not, Chinese investments are channeled through a third country or area. Based on the act, the Ministry of Economic Affairs promulgated the Measures Governing Investment Permit to the People of the Mainland Area (大陸地區人民來台投資許可辦法) as the criteria for determining Chinese investment.
According to Article 3, Paragraph 2 of these measures, investment made by an enterprise through a third area would be considered “Chinese investment” if Chinese capital exceeds 30 percent of the enterprise’s total capital.
To close the loophole, the paragraph furthers states that if the investment is made by a company in a third area, over which China has controlling power, it would also be regarded as Chinese investment.
Nevertheless, there is a lack of objective criteria for determining what constitutes “controlling power.”
Any foreign investor who seeks to invest in Taiwan is subject to review by the ministry’s Investment Commission, which has the right to determine whether the foreign investment is “Chinese” or “non-Chinese.”
However, if the party involved seeks administrative relief, the right to make the final interpretation would fall on judges.
This logic also applies to Tatung’s board election. The company unilaterally determined that certain shareholders are backed by Chinese funds before the commission had determined the status of the investments or before a decision had been made by an administrative court.
By doing so, the company came very close to acting both as player and referee, and that casts doubt over the decision’s legitimacy.
Wu Ching-chin is an associate law professor at Aletheia University.
Translated by Chang Ho-ming
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