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The newly amended Article 167 Paragraph 3 of the Company Law provides that a subordinate company (a company in which another company holds a majority of the total issued voting shares or total capital) may not purchase shares in its controlling company or accept them in pledge. This is intended to prevent a controlling com-pany from making improper use of crossholdings between itself and a subordinate company.
In recent legal interpretations, the Ministry of Economic Affairs (MOEA) has attempted to further clarify how this restriction on cross-ownership is intended to work in practice:
In an interpretation dated 17 December 2001, the MOEA stated that after the entry into force of the amended Company Law, a subordinate company would violate Article 167 Paragraph 3 of the law if it held overseas convertible bonds or overseas depository receipts issued by its controlling company, and exercised its right to convert them into shares in the con-trolling company. Therefore the MOEA took the view that a subordinate company could not hold overseas convertible bonds or overseas depository receipts issued by its controlling company. However, in a resolution passed at its 1 April 2002 meeting to discuss points of doubt regarding the Company Law and the Corporate Mergers and Acquisitions Law, the MOEA changed this position. It stated that until such time as the right to convert a con-vertible bond is exercised, the bond remains a bond rather than a share, and the Company Law does not forbid a subordinate company from holding bonds issued by its controlling company. Therefore, under the amended law, if a subordinate company merely buys or sells the convertible bonds of its controlling com-pany on the market, without converting them, it does not violate Article 167 Paragraph 3. But if it converts such bonds, then it does violate the provision.
In an interpretation dated 5 March 2002, the MOEA stated that if, before the amended Company Law took effect, a subordinate company already held shares in its controlling company, and after the amendment took effect the controlling company issued new shares for cash, the subordinate company could not subscribe to such an issuance. But if shares are issued free of charge due to the conversion into capital of dividends, bonuses or capital reserves, then the subordinate company may lawfully receive such shares.
