Newsletter
REQUIREMENT FOR MINIMUM SHAREHOLDINGS OF DIRECTORS AND SUPERVISORS
Article 26 of the Securities and Exchange Act (SEA) provides that the shareholding of the entire body of either directors or supervisors of a public company shall not be less than the mini-mum percentage of the total issued shares stipulated by the Securities and Futures Bureau (SFB) of the Financial Supervisory Commission in its Rules and Review Procedures for Director and Supervisor Share Ownership Ratios at Pub-lic Companies. In the past, the SFB set different ratios for companies based on differences in paid-in capital. But in recent years, consistent with the introduction of independent directors and audit committees, amendments to the Rules have been made to provide that shareholdings of independent directors shall not be counted in the total calculation of shareholdings of directors and supervisors. In addition, if a company has two or more independent directors, the minimum shareholding requirement for the remaining di-rectors and supervisors shall be reduced by 20%. Furthermore, if a company has established an audit committee, the minimum shareholding requirement for supervisors is not applicable.
On October 16, 2007, the SFB amended Article 2 of the Rules by adding a new Paragraph 4 to provide that with the exception of financial holding companies, banks, and insurance com-panies, if independent directors make up more than half of the directors of a public company, and the company also has established an audit committee, then the company is not subject to the requirement for minimum shareholding per-centage for either directors or supervisors. This amendment will test capital markets' reaction to the minimum shareholding requirement and their attitude toward the mechanism of independent directors.
The separation of ownership and management is a common phenomenon for public companies. In most developed countries, the agency prob-lems arising from such separation are addressed by means of independent directors and reinforcing the accountability mechanisms (e.g., the use of proxy voting when seeking to dismiss the management, the purging of underperforming managers through mergers and acquisitions, and shareholder litigation to hold directors accountable for their liabilities).
The minimum shareholding requirement under the SEA, which aligns the interests and risks of management with those of the company to mitigate the agency problem, is a product of the times when other accountability mechanisms were insufficiently developed. Now that inde-pendent directors and audit committees are in place, and other investor-protection mechanisms are continuously improving, the FSC has finally decided to relax the minimum ownership re-quirement.