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CONFLICT OF INTEREST IN SHARE EXCHANGE DECISIONS
If Company A is a shareholder or director of Company B, and Companies A and B plan to transact a share exchange, may Company A vote on a shareholders' or board resolution of Com-pany B regarding the share exchange?
The Corporate Mergers and Acquisitions Act (CMAA) provides that when two companies merge, if one of the two companies holds shares in the other, or if the former has appointed a di-rector to the board of the other, the former company may vote on a resolution of the other regarding the merger despite that its own interest is involved in such transaction.
However, in an interpretation dated 3 June 2002, the Ministry of Economic Affairs held that this provision does not apply to share exchanges al-though in draft amendments to the CMAA, the MOEA proposes to apply it mutatis mutandis to share exchanges.
In order to resolve the disputes that arise over this issue in practice, on 21 December 2006 the MOEA convened a meeting at which it con-cluded that the issues of directors' and share-holders' conflict of interest and abstention from voting on resolutions regarding share exchanges should be governed by the relevant provisions of the Company Act. These provisions apply only to cases in which there is a situation of "personal interest" that is "likely to be detrimental to the company's interests".
Since the CMAA requires directors to act in the best interests of all shareholders, exercise due care, and seek the opinion of independent experts as to the reasonableness of the share exchange ratio and other related matters in the context of an M&A transaction, the MOEA meeting also concluded that if directors of a company com-plies with the above requirements, and there is no reason to believe that the interests of the com-pany may be harmed, a corporate shareholder or director may vote on an M&A resolution in-volving its own interests.