Article 209, Paragraph 1, of the Company Act in Taiwan[1] (the “Provision”[2]) is generally considered to have imposed a non-compete restriction (a “Non-Compete Restriction”) on a director of a company limited by shares (a “Director”) because the Provision requires a Director to fulfill certain requirements before carrying out an activity (either for the Director himself or on behalf of another person) within the scope of business of a company where that Director serves (the “Company”).[3]  A Director’s activity will likely be considered an activity within the scope of the Company’s business (a “Competing Activity”) when such activity falls within the scope of business (1) prescribed in the Article of Incorporation of the Company;[4] and (2) which the Company is doing, including the business that the Company (i) has prepared to do, or (ii) has stopped doing for the time being.[5]  The Company Act imposes such a Non-Compete Restriction on a Director to protect the interest of the Company and the Company’s shareholders.[6]  As a board member of the Company, a Director has access to critical information of the Company.[7]  A Competing Activity carried by a Director likely gives rise to a conflict of interest that will cause harm to the Company.[8]
 
A Director carries out a Competing Activity without complying with the requirements set forth in the Provision does not consequently render the Director’s Competing Activity null and void.[9]  In that case, the shareholders’ meeting of the Company may, by adopting a resolution, assert its right to disgorge the Director’s gains stemming from the Director’s Competing Activity to the Company.[10]  However, this disgorgement remedy does not apply to the Director’s gains stemming from the Director’s Competing Activity for more than a year ago.[11]
 
The following requirements must be met to lift the Non-Compete Restriction on a Director:
(1) Disclosure: a Director discloses, along with an explanation, the critical parts of his Competing Activity to the shareholders’ meeting of the Company; and
(2) Permission: following the Director’s aforesaid disclosure, the shareholders’ meeting of the Company adopts a resolution permitting the Director to carry out the disclosed Competing Activity (i.e., a resolution lifting the Non-Compete Restriction on the said Director; a “Resolution”).[12]
 
The Disclosure requirement of the Provision ensures that a Director discloses sufficient information of his Competing Activity in advance to help the Company’s shareholders make an informed decision as to whether to lift the Non-Compete Restriction on the said Director.[13]  To meet this Disclosure requirement, a Director must disclose, along with an explanation, the critical parts of his Competing Activity “specifically” to the shareholders’ meeting of the Company “before” the Director carries out any Competing Activity.[14]
 
When the said Company is an issuer publicly issuing securities in Taiwan (an “Issuer”), the Securities and Exchange Act has set forth additional requirements relating to the aforesaid Disclosure requirement.  In convening a shareholders’ meeting of an Issuer for a Resolution, Article 26-1 of the Securities and Exchange Act[15] (1) requires that the material contents of a proposal for lifting a Non-Compete Restriction on a Director (a “Proposal for Lifting”) must be specified together with an explanation in the notice of shareholders’ meeting; and (2) prohibits an ad hoc motion (an extempore motion) for lifting a Non-Compete Restriction on a Director.[16]  Article 26-1 of the Securities and Exchange Act prohibits an ad hoc motion for lifting a Non-Compete Restriction on a Director to protect the right and interest of the Issuer’s shareholders.[17]  This is because lifting a Non-Compete Restriction on a Director is of great consequences to the operation of an Issuer.[18]  The prohibition of an ad hoc motion for lifting a Non-Compete Restriction on a Director aims to discourage the wheeling and dealing that will likely undermine the right and interest of the Issuer’s shareholders.[19]
 
The Permission requirement of the Provision is met when a Resolution is “adopted by a majority of the Company’s shareholders present who represent two-thirds or more of the total number of [the Company’s] outstanding shares.”[20]  This threshold may be adjusted in the case of a Resolution adopted by a shareholders’ meeting of an Issuer.[21]  When the total number of shares represented by shareholders present at a shareholders’ meeting of an Issuer does not meet the aforesaid threshold, a Resolution “may be adopted by [] two-thirds [or more] of the voting powers of the shareholders present at a shareholders’ meeting who represent a majority of the total number of issued shares” of the Issuer.[22]  Nevertheless, a higher threshold for a Resolution set in the Articles of Incorporation of a Company shall govern if the Articles of Incorporation of a Company does have set a threshold for a Resolution higher than the Resolution threshold set forth in Article 209 of the Company Act.[23]
 
Moreover, a Resolution that “generally” lifts the Non-Compete Restriction on a Director and adopted “after” a Director carries out a Competing Activity does not meet the Permission requirement of the Provision.[24]  As a result, such a Resolution does not constitute a lift of the Non-Compete Restriction on a Director.[25]  Nonetheless, depending on the actual circumstances in each case, there stands a possibility that an aforesaid Resolution might be construed as a waiver by the shareholders’ meeting of the Company to assert its right to disgorge a Director’s gains stemming from the Director’s Competing Activity to the Company.[26]
 
In the opinion of the courts in Taiwan, the Provision is an imperative provision of law.[27]  A court in Taiwan will likely find a Resolution null and void if the said Resolution is contrary to the legislative purpose of the Provision.[28]  For instance, courts in Taiwan have held that a Proposal for Lifting which states nothing further but only “generally” lifting the Non-Compete Restriction on a Director renders it impossible for shareholders to assess the risk of lifting the Non-Compete Restriction on the said Director because shareholders are unable to figure out the content of the Director’s Competing Activity.[29]  As a result, a Resolution adopted in such circumstances is contrary to the legislative purpose of the Provision, rendering such a Resolution null and void.[30]
 
To sum up, a Director desiring to have his Non-Compete Restriction lifted should be aware of the followings:
(1)  the Director should disclose, along with an explanation, the critical parts of his Competing Activity “specifically” to the shareholders’ meeting of the Company;[31]
(2)  the Director must obtain permission from the shareholders’ meeting of the Company “before” the Director carries out any Competing Activity;[32]
(3)  when a Director carries out a Competing Activity without complying with the requirements set forth in the Provision, the shareholders’ meeting of the Company may, by adopting a resolution, assert its right to disgorge the Director’s gains stemming from the Director’s Competing Activity to the Company;[33]
(4)  in convening a shareholders’ meeting for a Resolution, the material contents of a Proposal for Lifting must be specified together with an explanation in the notice of shareholders’ meeting;[34]
(5)  the adoption of a Resolution generally requires a majority of the Company’s shareholders present who represent two-thirds or more of the total number of the Company’s outstanding shares;[35]
(6)  in the case of the adoption of a Resolution by a shareholders’ meeting of an Issuer, such a Resolution may be adopted by two-thirds or more of the voting powers of the shareholders present at a shareholders’ meeting who represent a majority of the total number of issued shares of the Issuer;[36]
(7)  a Resolution that “generally” lifts the Non-Compete Restriction on a Director and adopted “after” a Director carries out a Competing Activity does not constitute a lift of the Non-Compete Restriction on a Director;[37] and
(8)  courts in Taiwan will likely find a Resolution null and void if the said Resolution is contrary to the legislative purpose of the Provision.[38]
 
 

This article, including the information contained herein, has been prepared only for educational and general information purposes to contribute to the understanding of the subject matters addressed herein.  This article does not and is not intended to constitute, offer, or convey individual legal advice, legal opinion, or any other professional advice on any subject matters covered herein.  Please obtain specific legal advice before acting on any matters discussed herein.  While the author makes every attempt to ensure that the information enclosed herein is accurate, the author disclaims any liability for any omissions or errors that may be contained in this article.