A Study on Legal Capital Restrictions on Corporate Distributions to Shareholders
Date Issued
2010
Date
2010
Author(s)
Hsieh, Yun-Che
Abstract
Limited liability is a fundamental principle of corporate law and has significant influence to the development of economy. Because limited liability partially transfers the risk of bankruptcy from shareholders to creditors, it results in the conflict that exists between creditors and shareholders regarding how to allocate a company’s capital. To regulate the conflict, European legal system developed the notion of legal capital (in Taiwan also known as “the three legal capital doctrines”) which has been introduced to Taiwan. However, in recent years, legal capital is being under review in European Unions and United Kingdom. As a result, this paper asks whether legal capital rules in Taiwan can be understood as an efficient instrument to balance the shareholder-creditor conflict.
This paper explores the fundamental differences between Taiwan, European Union, United Kingdom and United States approaches to the conflict between fixed and equity claimants and analyses the provisions on legal capital in Taiwan’s Company Law, arguing that our current approach provides little or no benefit to corporate creditors and the rules create extra costs for shareholders, certain creditors, and society as a whole. Whether adopting legal capital identifies a marked divergence between Continental Europe, which prefers the rules-based strategy to the standards strategy, and the US, in whose State corporate laws on creditor protection are noticeable largely by their absence and where creditors'' interests are addressed through a standards-based strategy.
As to the direction of reform, this paper suggests two approaches to the reform of legal capital in Taiwan. For the short term, the first approach is an evolution of the current regime to a more simplified and modern capital regime based on the Companies Act 2006 of UK. For the long term, the second approach is roughly based on the experience of US jurisdictions that have passed statutes based on the Model Business Corporations Act, which leave creditor protection to contract law, and insolvency provisions in the event of the company’s insolvency. However, since our legal system is different from United Kingdom and United States, we should still notice the difficulties that to such changes would imply.
Subjects
the three legal capital doctrines
legal capital
distribution
acquisition by the company of its of own shares
the reduction of capital
financial assistance
creditor
solvency test
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