Taiwan: boardroom battle leaves shareholders bothered and bewildered

Lax disclosure regime keeps shareholders in the dark over power play at rare metals refiner. ACGA’s Taiwan & Malaysia Research Director Neesha Wolf unpicks the antics to find a familiar CG foe at play.

When Solar Applied Materials Technology (“Solar Tech”) announced that its chairman had been replaced in November 2021 without warning, the given facts were brief: the name of his successor, the effective date and the reason behind the move a generic “re-elect the chairman.” In fact, the balance of power on the board had shifted.

Over the next few weeks, it emerged that two factions were vying for control of the rare and precious metals refiner listed on the Taipei Exchange (TPEx) which counts chipmaker behemoth TSMC (Taiwan Semiconductor Manufacturing Co.) as one of its customers.

In one corner was incumbent chairman Ma Jian-yong, leading the company faction. In the other was Wang Jiong-fen, chairman of Taiwan Steel Company which was seeking to add Solar Tech to its stable of recent targets. Taiwan Steel together with other allied companies (dubbed the “Taiwan Steel group”) have amassed control of 13 companies in the last few years, including alloy manufacturer Gloria Material Technology, chemical maker Taiwan Styrene Monomer and data network firm D-Link. It has been able to do so with shareholdings of as little as 2% or 3% via a series of abrasive legal strategies. In Solar Tech’s case one of the steps taken was to take advantage of what ACGA views as a major flaw on Taiwan’s statute books—legal entity directors, and the ability of corporate shareholders to swap out board members at any time.

Piecing the puzzle together bit by bit

The power play came to light in fragmented fashion: a brief company announcement about a board meeting on 5 November 2021 where the chairman had been replaced, coupled with an equally short notification that legal entity director Yu-jing Company suddenly changed its representative on the Solar Tech board mid-meeting. Before the change, its appointee was the vice president of Gerard Metals SA, previously a substantial shareholder until it wound down its position over the summer. Yu-jing changed its representative to Wang, the chair of Taiwan Steel. This shifted the balance of power on the board from the company faction to the Taiwan Steel camp literally mid-meeting. Another director then brought forward a provisional motion to elect a new chairman and Wang was purportedly appointed.

Two independent directors responded by calling separate EGMs to be held three days apart in late December. Only one EGM—to be held on 27 December—was announced by the firm on the stock exchange website, although the bourse also listed the rival 24 December EGM on its calendar. Chaos ensued as the warring factions refused to admit defeat, leaving the company with two competing chairs, management teams and EGMs. The case moved to the Commercial Court on 8 December which provisionally ruled against the calling of both EGMs. Taiwan’s Ministry of Economic Affairs, which handles registration of all companies, stepped in on 20 December, declaring the election of a new chairman at Solar Tech as void, allowing Ma to remain at the helm.

The sparse disclosure made by the company gave readers no indication of the importance of the changes in director and chairman. Shareholders were not told of the larger battle for control, or the shifting balance of power on the board. When Yu-jing changed its representative there was no information on Wang’s qualifications, or that he represented Taiwan Steel. The disclosure gave only the barest minimum of facts with no context or indication of the implications. It was also only disclosed as a done deal.

This is typical of what shareholders will find on the stock exchange disclosure system. The rules in Taiwan require timely material information disclosure, but this usually takes the form of tick boxes, or one-word or one-sentence answers after the fact. Companies dutifully meet these disclosure requirements and the regulator enforces them, but it lacks any narrative for readers to make sense of the situation. In short, the system operates on the assumption that readers will just “know” the context.

With such a paltry official record, shareholders are left to get their information elsewhere and they largely rely on the media. While Taiwan benefits from independent journalism, it is not without its faults. As noted in CG Watch 2020, “pay-to-play” reporting is common and the threat of legal action by disgruntled subjects of unflattering media articles can severely limit coverage. Dozens of newspaper articles were published on the Solar Tech case, some with obvious bias toward one side or another. Hysterical half page advertisements purchased by both sides appeared on the front pages of the major local dailies. Nothing appeared in English media leaving foreign investors (who reportedly hold 5% of the company) in the dark.

Musical chairs made easy

Such large-scale disruption at Solar Tech was made possible by Yu-jing switching its representative on the board under Taiwan’s legal entity director system, which ACGA has advocated against for many years.

Under Taiwan law, board positions can be held by natural persons, but more commonly they are held by companies and other legal entities, which can then change the natural person representing them as a board director at any time. In Taiwan it is often the case that boards are composed almost entirely of legal entity representatives from any kind of company, with the independent directors being the only natural person directors elected in their own name. Even the natural person serving as chair can change suddenly without an election if the legal entity holding the position decides to change their representative.

The system enables power struggles where legal entity directors have just a small stake in the company, leading to an uneven battle. In the case of Solar Tech, as of this writing, we understand Yu-jing to hold just 1,140 shares in its own name. There are more than 591m Solar Tech shares in issuance. Meanwhile, the company faction holds a reported 18%. Taiwan Steel and its associates reportedly have a 10% stake, but the company is only required to publicly disclose the 0.39% held in its sole capacity. Retail shareholders reportedly hold around 55%. (Getting shareholding figures requires patience and some persistence: the stock exchange website—both the English and Chinese versions—is not user-friendly and its functionality leaves much to be desired. Also, disclosure does not readily show holdings to the ultimate beneficiary level.)

It was never disclosed why, how or when Yu-jing Co (which ironically is reportedly wholly-owned by a single person) switched its representative to the chair of Taiwan Steel. The market was given no opportunity to respond to that change before it almost resulted in a new chairman of the board. It has however already shifted the balance of power on the board in Taiwan Steel’s favour.

Back-seat regulators

Interested shareholders might hope that the regulator would insist they were kept clearly in the picture but they would be disappointed. Regulators in Taiwan adopt a strictly non-interventionist mantra, usually leaping to a ubiquitous refrain of “We follow the rule of law” at the first sign of trouble. Indeed, at a legislative meeting on 22 November, lawmaker William Tseng, previous chair of the Financial Supervisory Commission (FSC) reportedly went so far as to remind current FSC chair Dr Thomas Huang to not intervene in the Solar Tech case, arguing that the FSC should not publish information about the Taiwan Steel group, particularly to the outside world. The regulator has by and large followed this advice, despite remarks by Huang at the same legislative meeting on underhanded tactics used by a “certain group” to gain control of a number of companies.

Such a non-interventionist approach however only works if the market has the tools it needs to do its job and at the top of that list is the need for timely, complete and reliable information and to be able to respond by buying or selling shares, and voting.

No such opportunity was given in this case. The regulator needs to make a decision about what kind of market it wants Taiwan to be. If it wants to stay non-interventionist with a reliance on the rule of law, then it will need a better disclosure system where issuers and investors are responsible for providing full, timely and complete disclosure in narrative detail.

It will also need to provide the opportunity to vote for every single natural person that serves on the board of directors by doing away with the legal entity director system. Otherwise, there are no checks and balances on this market and regulators dare not take their hands off the wheel.