The Cumulative Voting Rule in Taiwan

Abstract

Cumulative voting is a type of voting system that allows minority shareholders to secure seats on the board of directors with a small amount of shares, thereby protecting a stock company’s minority shareholders more effectively than straight voting. Although there are no empirical studies that show uniform results on cumulative voting’s effect on the value of a company, it is evident that cumulative voting increases possibility of electing directors who represent minority shareholders, compared to straight voting. In the midst of continued attempts to mandate cumulative voting by amending the Commercial Act, this study aims to serve as a reference for future academic studies and legislation by exploring the use of cumulative voting in Taiwan – a relatively unknown subject in Korea – and foreign empirical studies on cumulative voting. With respect to the United States’ cases, which have been a popular subject of studies in Korea when it comes to cumulative voting, most of the U.S. companies have the discretion on the use of cumulative voting. Unlike in Korea, so-called ‘chaebols’ do not exist in the United States, and corporate affairs are managed by individual companies, not by corporate groups. In the United States, managerial governance prevails, whereas, in Korea, members of the board of directors are largely determined by controlling shareholders, and thus controlling shareholders, in effect, govern the corporate management. In this sense, the fact that most U.S. states leave cumulative voting to companies’ discretion cannot be used as a rationale to counter the argument that cumulative voting must become compulsory under Korea’s Commercial Act. Instead, legislation of Taiwan seems to have huge implications for us, because Taiwanese stock companies have lower stock dispersion than U.S. stock companies, and most Taiwanese listed companies are family-controlled and have a corporate governance structure that is similar to ours. From 1966, the Taiwanese Company Act had a mandatory provision on cumulative voting, and companies were required to use cumulative voting. But when the Company Act was revised in 2001, the mandatory provision was changed to a default provision to improve companies’ autonomy, allowing them to opt out of cumulative voting. However, YAGEO’s hostile takeover attempt on Tai-I Co. prompted another revision in 2011, when a mandatory provision was put in place once again. The main reasons for the 2011 revision were: ① to guarantee equality among shareholders, and ② to promote a check-and-balance scheme in corporate governance, etc. When companies are allowed – just as our current Commercial Act provides – to exclude cumulative voting by stating so in their bylaws, cumulative voting will hardly be used by the companies because Korean companies’ stock dispersion tends to be low. Eventually, it gets difficult to elect directors who can represent minority shareholders’ opinions and interests, and to protect companies and minority shareholders from controlling shareholders who try to pursue their personal gains. Cumulative voting can also be used to prevent hostile takeover attempts, just as the Taiwanese case indicates. Preventing hostile takeover attempts by changing election rules without disclosure and immediately applying such a changed rule to a general shareholders' meeting is not desirable not just in the context of corporate governance but in relation to social efficiency, given that such approach also hinders efficient and healthy takeovers. Although the effectiveness of cumulative voting has not been fully proven in overseas empirical studies, it is difficult for Korea to directly refer to such studies when discussing mandatory cumulative voting in Korea, since most of these empirical studies have been focused on the companies in the United States. In Korea, where controlling shareholders are more likely to form a close tie with the management, and pursue their personal interests at the cost of companies’ and minority shareholders’ interests, cumulative voting will prove to be even more effective in protecting minority shareholders from controlling shareholders. Considering the relevant cases of Taiwan, I believe a desirable approach would be to mandate cumulative voting through legislation to ensure that it can serve its primary purpose which is protecting minority shareholders.