The petitioner Yuli Enterprise Co., Ltd. (whose representative is Ming-Feng Lai) originally held 700 thousand shares in Taiwan Fixed Network Co., Ltd. (hereinafter "Former TFN"). Former TFN convened its regular shareholders' meeting of 2007 on June 29, 2007, and resolved to merge with Taishin International Telecommunication Co., Ltd. (hereinafter “Taishin”) on December 28 of the same year, with Taishin consolidating Former TFN by merger for a price of NTD 8.3 cash per share. Former TFN was the dissolving company while Taishin was the surviving company. After the merger, Taishin changed its name to Taiwan Fixed Network Co., Ltd. (hereinafter “New TFN”). During the merger, the petitioner’s shares were converted into cash in the amount of NTD 5.81 million, which was deposited in Fubon Securities Co., Ltd. The petitioner filed a lawsuit to request New TFN to return its stock and appealed after being rejected. The case became final after the Supreme Court Civil Judgment 102-Tai-Shang-2334 (2013) (hereinafter the “final and irrevocable judgment”) denied the appeal.
The petitioner claimed that Article 4, Subparagraph 3 of the Business Merger and Acquisition Act, which provides that “merger refers to an act wherein any and all companies involved pursuant to this Act or any other applicable law are dissolved, and a newly incorporated company or any company surviving the merger from all the companies involved generally assumes all rights and obligations of the dissolved companies, with …… cash …… as the consideration” (hereinafter “Contested Provision I”) and Article 18, Paragraph 5 of the said Act as promulgated on February 6, 2002 (hereinafter “Former Act”), which provides that “where any company holding the shares of another company participating in the merger, or the company or its assigned representative(s) is elected as a director of another company participating in the merger, the company or its assigned representative(s) may exercise voting rights in the resolution of the merger by such another company” (hereinafter “Contested Provision II”) as applied by the final and irrevocable judgment are inconsistent with Articles 7, 15, 22, and 23 of the Constitution and petitioned this Court to interpret the Constitution. Since the petition satisfies the elements as provided in Article 5, Paragraph 1, Subparagraph 2 of the Constitutional Court Procedure Act, it shall be admitted. We accordingly award this Interpretation with the following reasons.
Article 15 of the Constitution provides that people’s property rights shall be protected, with the objective of ensuring that people may, according to the sustaining status of their property, exercise their right of use, profit, and disposal and be free from infringement by public authorities or third parties. Shares of a company in themselves possess some property value: when the business of a company is profitable, shareholders have the opportunity to participate in the distribution of dividends; shareholders holding common shares also have the right to participate in the voting to indirectly participate in the management and governance of the company; when the company is dissolved, shareholders further have the right to be distributed the residual property (see Articles 232, Paragraph 1, 179, and 330 of the Company Act). Accordingly, corporate shares held by people are entitled to the protection of property right under Article 15 of the Constitution.
Mergers are one of the legitimate ways for businesses to seek development and promote operational efficiency. In light of that, legislators, in principle, possess considerable legislative discretion to permit businesses to conduct voluntary mergers provided that these businesses protect the rights and interests of shareholders not approving the merger. Where a business merger significantly affects the rights and interests of shareholders not approving the merger, however, such as forcing the shareholders not approving the merger to lose their shares by compulsory share acquisition or permitting the shareholders and directors as provided in Contested Provision II to exercise voting rights in the resolution of the merger by other companies involved in the merger, to balance the adequate protection of shareholders not approving the merger and the pursuit of development and promotion of efficiency by businesses, legislators shall at least allow shareholders not approving the merger to timely obtain information related to the interest relationship of interested shareholders and directors and establish an effective mechanism for remedying the rights to ensure the fairness of the consideration for shares so as to honor the objective of Article 15 of the Constitution to protect people’s property right.
Pursuant to Article 4, Subparagraph 3 of the Business Merger and Acquisition Act, in mergers between companies limited by shares, the price paid by the surviving or newly-incorporated company to the shareholders of dissolving companies is not limited to the shares issued by itself but may include cash. Hence, Contested Provision I, which allows shareholders approving the merger to act against the will of shareholders not approving the merger to use cash as consideration to compulsory acquire their shares (hereinafter “cash-out merger”), will deprive shareholders not approving the merger of their share rights. In addition, pursuant to Contested Provision II, in mergers involving companies limited by shares, the following avoidance rules under the Company Act are exempted: in respect of the avoidance of the shareholders’ meeting resolution of companies limited by shares, Article 178 of the Company Act provides that, “a shareholder who has a personal interest in the matter under discussion at a meeting, which may impair the interest of the company, shall neither vote nor exercise the voting right on behalf of another shareholder.” In respect of the board meeting of companies limited by shares, Article 206, Paragraph 2 of the Company Act at the time of the merger in the petitioned case (that is, the amended Company Act promulgated on July 19, 1966) applies mutatis mutandis the avoidance rule for shareholders’ meeting by providing that, “The provisions of Article 178…… shall apply mutatis mutandis to the resolutions set forth in the preceding Paragraph.” Resolutions set forth in the preceding paragraph refer to Paragraph 1 of the said Article, which provides that, “Unless otherwise provided for in this Act, resolutions of the Board of Directors shall be adopted by a majority of the directors at a meeting attended by a majority of the directors.” Pursuant to Contested Provision II, which exempts the avoidance rule, the shareholders and directors provided in Contested Provision II may participate in the resolution of the shareholders’ meeting and board meeting of other companies involved in the merger. These businesses holding the shares may thus utilize their advantage of holding a relative majority of shares to approve a cash-out merger against the will of shareholders not approving the merger and deprive the share rights of the latter. Although the purpose of Contested Provisions I and II is to facilitate businesses to conduct organizational restructuring by mergers and acquisitions and enhance the operational efficiency of businesses (see Article 1 of the said Act), to enhance the operational capacity of companies, and strengthen the competitiveness of companies (see The Legislative Yuan Gazette 91(10): 300), they not only cause the shareholders not approving the merger to lose their property right as embodied in shares themselves but also limit the ways of investment and property management of these shareholders, which further deprive them of the right to directly or indirectly participate in corporate affairs to enjoy associated interests and opportunities by virtue of their shareholding of a specific company. This significantly affects the rights and interests embodied by their shares.
The avoidance rules for corporate shareholders and directors when participating in voting is an important principle in corporate governance. Their purpose is to ensure that corporate shareholders and directors, when participating in decisions, will not harm the legitimate interest of the company and other shareholders in their own interests. Considering, however, that mergers are typically to enhance the operational capacity of the company and strengthen the competitiveness of the company, they are less likely to harm the company’s interest. In addition, acquiring shares before a merger is also common in domestic and international merger and acquisition practice, when a company holds a certain amount of shares of the other company involved in the merger in order to facilitate the passage of the resolution of the company involved in the merger (see the Legislative Yuan Gazette mentioned above). Hence, it is not completely without legitimate grounds for Contested Provision II to allow shareholders and directors mentioned therein to participate in the merger resolution of the other company involved in the merger. Accordingly, the key does not lie in whether interested shareholders and directors shall recuse themselves but in whether related rules provide adequate protection for the interests of shareholders not approving the merger.
In respect of adequate information, if the shareholders and directors mentioned in Contested Provision II are the majority and have an absolute advantage regarding the cash-out merger decision, how to ensure that their participation in such merger resolution is in the best interest of the company becomes extremely important. Laws shall at least allow shareholders not approving the merger to timely obtain information related to the essential contents of the positive and negative impact of the merger on the company, the essential contents of the personal interest related to interested shareholders and directors, and the grounds for approving or disapproving the merger resolutions. The Former Act, however, did not provide any related rules for them. In addition, the applicable Company Act when the petitioned case took place also failed to allow the shareholders losing their shares due to a cash-out merger to timely obtain information related to the positive and negative impact of the merger on the company and the interest relationship of the shareholders and directors mentioned in Contested Provision II at a reasonable period of time before the related meetings are convened.
In respect of an effective mechanism for remedying the rights to ensure a fair price, since laws allow shareholders and directors mentioned in Contested Provision II not to recuse themselves but to participate in the shareholders’ meeting and board meeting of the cash-out merger, which deprives the shareholders not approving the merger of their share rights, they shall ensure the fairness of the consideration to prevent shareholders and directors from arbitrarily determining the price by virtue of their majority votes. When the companies of the petitioned case merged, Article 12, Paragraphs 1 and 2 of the amended Business Merger and Acquisition Act as promulgated on May 5, 2004, provide that when companies conduct mergers and acquisitions, in the circumstances prescribed in that Paragraph, shareholders may petition the company to purchase their shares at the fair price at that time, applying mutatis mutandis Articles 187 and 188 of the Company Act. Article 187, Paragraph 2 of the Company Act as referred to, in turn, provides that, “in case an agreement on the price of shares is reached between the shareholder and the company, the company shall pay for the shares within ninety days from the date on which the resolution was adopted. In case no agreement is reached within sixty days of the date on which the resolution was adopted in accordance with Article 185, the shareholder may, within thirty days from the date on which the sixty-day period expired, apply to a court for a ruling on the price.” Hence, under the amended Business Merger and Acquisition Act as promulgated on May 5, 2004, there are some basic remedy rules to ensure the fairness of the price. Such court ruling mechanism, however, only applies to shareholders who actively apply for the stock buy-back and does not apply to shareholders not approving the merger who are unwilling to be bought out but who are deprived of their share rights by the cash-out merger.
In sum, the Business Merger and Acquisition Act before the amendment promulgated on July 8, 2015, failed to allow shareholders who lose their share rights as a result of a cash-out merger to timely obtain information related to the positive and negative impact of the merger on the company and the interest relationship of the shareholders and directors mentioned in Contested Provision II. It also failed to establish an effective mechanism for remedying the rights to ensure the fairness of the consideration for purchasing the shares. To that extent, Contested Provisions I and II are inconsistent with the objective of Article 15 of the Constitution to protect people’s property right.
In respect of the petitioned case, although the Business Merger and Acquisition Act at the time of the merger was deficient in the mechanism for ensuring that shareholders not approving the merger obtain timely information, it is, in reality, difficult to award remedies for that part in the individual case. In respect to ensuring the fairness of the price, however, the petitioner shall be entitled to some level of remedies. As will be illustrated later, the amended Business Merger and Acquisition Act promulgated on July 8, 2015 (that is, the current Business Merger and Acquisition Act) has established a more complete protection mechanism for the fairness of the price when shareholders actively apply for the purchase. These rules may be referred to when pursuing remedies in an individual case. The petitioner may, within 2 months upon the service of this Interpretation, state clearly its asserted fair price in writing and petition for a ruling of price from the court. The court shall order New TFN to submit the financial statement of the company as audited and attested by a certified public accountant and the explanation letter appraising the fair price. Related procedures shall follow mutatis mutandis Article 12, Paragraphs 8 to 12 of the current Business Merger and Acquisition Act.
Last but not least, although Article 5, Paragraph 3 of the current Business Merger and Acquisition Act provides that “in the merger and acquisition by a company, a director who has a personal interest in the transaction of merger and acquisition shall explain to the board meeting and the shareholders’ meeting the essential contents of such personal interest and the grounds for approving or disapproving the merger and acquisition resolution,” it does not require the director to explain the personal interest of the shareholders represented by him/her at a reasonable period of time before the convention of the board meeting and shareholders’ meeting so as to allow other shareholders to obtain related information timely. In addition, when the information provided by the interested shareholder and director is inadequate, other shareholders do not have an effective mechanism to urge them to provide complete information under the current Business Merger and Acquisition Act. Moreover, Article 12, Paragraph 1, Subparagraph 2, First Sentence of the current Business and Merger Act provides that, “if any of the following events occur in the course of the merger and acquisition by a company, the shareholder may request the company to buy back her shares at the then fair price: ……2. In case of any merger proceeded under Article 18 of this Act by a company, the shareholder of the surviving or dissolved company has expressed her objection, in writing or verbally, with a record before or during the meeting and waived her voting right." Paragraph 6, First Sentence of the said Article further provides that, “in case no agreement is reached within 60 days since the resolution of the general meeting was made, the company shall apply to the court for a ruling on the fair price against all the dissenting shareholders as the opposing party within 30 days after that duration.” Paragraphs 7 to 12 of the same Article further provide rules for the procedures related to the price ruling and the allocation of expenses to protect shareholders not approving the merger. Hence, the current Business Merger and Acquisition Act has provided a more complete protection mechanism to ensure the fairness of the price. Such court ruling mechanism, however, only applies to shareholders who actively apply for the stock buy-back and does not apply to shareholders not approving the merger who are unwilling to be bought out but who are deprived of their share rights by the cash-out merger. To that extent, the current Business Merger and Acquisition Act is not completely appropriate, which is identified altogether here.
*Translated by Yueh-Ping YANG