TAIWAN Law and Practice Contributed by: Lihuei Mao (Grace), Derrick Yang, Yu-Ting Su and Rose Huang, Lee and Li Attorneys-at-Law
purchasers may need to disclose their conflict of inter - est. In Taiwan, preferred stocks are permitted under the Company Act and can be structured with various rights, including dividend, voting and veto rights. In practice, private equity investors often use preferred stocks to limit the management shareholders’ rights, such as by restricting voting and dividend distribution rights. Additionally, sometimes the management team may only sell their shares upon exit along with the controlling shareholders. 8.3 Vesting/Leaver Provisions Vesting provisions for equity incentives are common in Taiwan, and companies have the flexibility to design arrangements for any stock options and restricted stock units (RSUs). The Company Act is gener - ally silent on restrictions attached to stock options or RSUs, allowing issuers to determine the relevant terms and conditions. Vesting periods and other restricted rights, such as restrictions on share transfer, voting rights, dividend rights and/or share withdrawal, are generally permitted as long as they are stipulated under the terms and conditions and approved by the board of directors of the issuer and related commit - tees (if applicable). Issuers have the freedom to set vesting and perfor - mance conditions for stock options or RSUs based on their objectives and reward plans. Different vesting conditions or issuance prices may apply for the same round of stock options or RSUs. If an employee fails to meet the vesting conditions, such as being disquali - fied or leaving the company, the issuer may reclaim or repurchase the outstanding stock options or RSUs in accordance with the relevant terms and conditions. 8.4 Restrictions on Manager Shareholders It is common practice for management shareholders to enter into restrictive covenants with the company. Typically, standard non-compete, non-solicitation/ poaching, non-disparagement undertakings and non- dealing covenants are included in equity packages or employment contracts. In Taiwan, aside from post-employment non-compete clauses, restrictive covenants should not be subject to
excessive restrictions. Article 9-1 of the Labour Stand - ards Act provides that the period, area and scope of occupational activities limited by a post-employment non-competition clause should not exceed a reason - able range. Particularly, employers must have legiti - mate business interests that require protection, and a post-employment non-compete period should not exceed two years. An employer is also required to provide reasonable compensation to the employee for complying with a post-employment non-compete clause. The month - ly compensation should at least be one-half of the employee’s monthly wage upon departure, as stip - ulated under the Enforcement Rules of the Labour Standards Act. 8.5 Minority Protection for Manager Shareholders The rights of management shareholders are often restricted as private equity investors prefer not to pro - vide management shareholders with the same level of protection afforded to key minority shareholders. In practice, the voting rights, dividend distribution rights and exit rights vested in the preferred shares held by management shareholders may be limited to the full - est extent permitted by law. Notwithstanding the above, the Company Act provides a minimum level of protection for preferred sharehold - ers. Any amendment to the articles of incorporation (AOI) that is detrimental to preferred shareholders is subject to approval by a special resolution at a pre - ferred shareholders’ meeting; such protection cannot be contractually waived. 9. Portfolio Company Oversight 9.1 Shareholder Control and Information Rights A private equity shareholder typically requires the fol - lowing rights to ensure control over its portfolio com - panies: • Board appointment rights under which the share - holder can appoint a specific number of director(s) to the board.
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