On June 15, 2015, the Legislative Yuan passed three readings of an amendment to the Company Act, adding the option of a “close corporation”. The purpose of the legislation is to meet the needs of young entrepreneurs by creating a new type of corporation that provides more autonomy in the running of startup businesses. This legislation is modeled on the close corporation found in other countries, including the U.K. and the U.S., and is intended to attract domestic and international entrepreneurs to establish companies in Taiwan.
According to the newly-revised Company Act, the definition of a “close corporation” is a non-public offering company whose shares are held by not more than 50 persons, and whose Articles of Incorporation impose restrictions on the transfer of the shares. However, in view of potential future socio-economic changes and the actual needs of businesses, the central competent authority may as necessary increase the number of shareholders allowed in a close corporation and prescribe the method for calculating the number of shareholders and for qualifying individuals as shareholders of a close corporation.
In addition, the close corporation introduces a flexible scheme in corporate financing and management for startup companies, in contrast to traditional corporations. The close corporation should increase incentives for entrepreneurs to invest in Taiwan. Specifically, the main features of the close corporation include:
- More flexibility in corporate governance: for example, a close corporation may explicitly provide in its Articles of Incorporation for shareholders to exercise their voting powers by written consent (if all shareholders agree), rather than through the holding of shareholders’ meetings. In addition, a close corporation may explicitly provide in its Articles of Incorporation to allow for surplus earnings distribution (or loss allocation) at the halfway point of a fiscal year, thereby shortening the accounting period and enabling shareholders to understand quickly the business’s operating conditions.
- More flexibility in financing: a close coropration’s promoters may make contributions of equity capital in the form of cash as well as in the form of assets required in the business, technical know-how, service or goodwill. In addition,a close corporation may issue a placement of corporate bonds, convertible corporate bonds, and corporate bonds with warrants, thereby increasing the number of available methods for financing.
- More flexible arrangement of share ownership: for example, shareholders of a close corporation may enter into a voting agreement in writing to jointly exercise their voting rights or may form a voting trust. A close corporation may issue special shares with multiple voting rights or veto power over specific matters, and so on. Such arrangements will allow the promoters and shareholders of startup companies more flexible arrangement of share ownership.
The close corporation encourages the development of startup enterprises and provides a more flexible option for entrepreneurs. It should be an exciting new option for companies operating in Taiwan. However, the competent authority has yet to determine the rules governing the taxation of a close corporation and its shareholders (as well as whether there will be tax inventives or credits). The actual operation of the close corporation deserves to be watched closely.