The Effects and Boundaries of Corporate Charters–Lessons from the British and American Legal Systems

Corporate charters are norms and principles that govern the frameworks and functions of corporations. They weave the external facades and internal structures of corporations out of their provisions. This thesis attempts to conduct a thorough inquiry into the effects and boundaries of corporate charters. In respect of the research subjects, the thesis starts from the nature of charters, and extends the research scope to the external and internal effect of charters, as well as the procedural and substantial limits of adopting and amending charters. In respect of research methods, the thesis learn lessons from the legal systems of the U.K. and the U.S., making references to their statutes, regulations, academic views and cases, and compares them to the contemporary situation in Taiwan for the purpose of review and critique, and, in turn, of suggestions for revisions.
The first chapter of this thesis is the preface. The second chapter firstly probes into the essence and various categories of corporate charters. With regard to the essence of charters, this thesis will introduce the theory treating charters as contracts, which is firmly adopted both in the U.K. and the U.S., involving also the discussion of other theories on the nature of charters. After thorough analysis, this thesis determines to adopt the contract theory as well, while at the same time recognizing the differences between corporate charters and conventional types of contracts. With regard to the forms of charters, the thesis will also introduce the ways of categorizing charters and the regulatory philosophy behind such categorizations in the U.K. and the U.S. repectively. After that, the thesis will review corporate laws in Taiwan, indicating that the the classification and coverage of corporate charters are obscure according to the laws. It is recommended that the categories and sphere of corporate charters in Taiwan be clearly defined by referring to the English or American legal systems. Meanwhile, whether a specific document should be categorized as a charter should be judged by whether it possesses the external and internal effect of corporate charters. In other words, the term “corporate charters”should contain not only documents that formally named as charters, but those that are substantially equipped with the characteristics of charters.
Chapter 3 aims at approaching the issue of the internal effect of corporate charters. Under both the English and Taiwanese laws, charters have the characteristic of “public document”after registration. Due to the public notice effect brought up by registrations, English common law in its early stages confers the effect of “deemed notice”to registered charters, enabling corporations to claim registered charter provisions against their trading counterparts. The development of case law, however, gradually places its emphasis on the protection of economic interests and transaction security. In the end, U.K.’s 2006 Companies Act officially abolishes the “deemed notice” principle, declaring that provisions concerning limitations of the power of directors in the charter shall not bind persons dealing with the company.
In contrast, article 12 of Taiwan’s Company Act explicitly prescribes that if a company, after its incorporation, fails to register any particular that should have been registered or fails to register any changes in particulars already registered, such particulars or changes in particulars cannot be set up as a defence against any third party. Speaking in the opposite, charges or particulars that are registered can set up defences against any third party. After reasoning and analysis, this thesis is of the opinion that such a regulation is equivalent to requiring any person dealing with the company to inquire every article and item of the company’s charter, thereby imposing on them an unreasonably exorbitant transaction cost on searching information. This interpretation will pose a great threat on transaction security and economic order. Therefore, this thesis argues that charters in modern corporations should be regarded as internal rules and regulations governing rights and obligations within the company. The mere fact that its charter is registered does not necessarily grants the company a defence against any third party.
In Chapter 4, the thesis goes on to study on the internal effect of corporate charters. Since charters are regarded essentially as contracts, they could in principle only bind “parties” to the contract, namely the companies per se and their shareholders. The legal relationships of other participants in the playing field, such as directors, managers and employees, are simply not governed by such contracts. This is exactly the mainstream viewpoint of English scholars and justices. As the thesis points out, nevertheless, there are academic opinions that propose serious criticism and arguments against such a viewpoint, and there are cases that echo with those academic arguments.
In Taiwan, since there lacks in depth studies on the internal effect of charters, the thesis attempts to contruct charters’ internal effect in Taiwan by resorting to the discussions in the U.K. In regard to research methods, the thesis raises provisions concerning directors’ remuneration in article 196 of Taiwan’s Company Act to exemplify the points it addresses. This thesis proposes various possible approaches for directors to claim for its remuneration inscribed in corporate charters and provides analysis and commentary on the legal bases of all those approaches. In the end, it is suggested that the most feasible option under current laws appears to be adopting an utterly extensive interpretation on the contract of mandate between the director and the company at issue. Furthermore, the research coverage of the thesis also extends to other relevant aspects of director’s remuneration, and eventually conducts an overall review on the current mechanism for determining director’s remuneration in this country.
Chapter 5 focuses on studying on the boundaries and limits of adopting and amending corporate charters, dividing the discussion into two aspects: procedural limitations and substantial demarcations. With respect to procedural limitations, this thesis starts with introducing English and American legal regulations regarding procedures for charter adoption and revision, and in turn examines such regulations in Taiwan. Recommendations are provided by referring to legal systems in the U.K. and the U.S., including emulating the legal design of “entrenchment provisions” under U.K.’s company law in order to grant more flexibility in setting the thresholds for amending corporate charters.
Moreover, the prevalent practice in Taiwan is that in convening a shareholder meeting to amend the charter of a company, it suffices to merely specify the cause and subject in words of “charter amendment” in the public notice and individual notice given to shareholders. Such a practice could seriously jeopardize the information rights of shareholders, and hence ought to be reviewed to avert a company’s management or controlling shareholders from encroaching on the rights of minority shareholders. On the contrary, American case law develops equitable restrictions on director’s manipulative actions for the protection of minority shareholders, the spirit behind such restrictions is worthy of serious reflection and contemplation.
With respect to substantial demarcations, this thesis also conducts researches on regulations concerning boundaries of the contents and limits of charters in the U.K. and the U.S. The main concerns of these two countries, however, diverse considerably. Ample discussions related to imposing equitable limits on the rights of majority shareholders to amend articles of association with the aim to protecting the minority are found under British company law. The United States, on the other hand, accents on other issues such as the protection of “vested rights”, the extent to which charters could replace the default rules contained in company law provisions with contractual rules concluded by the company and its shareholders (and thus naturally the differentiation between mandatory rules and enabling rules under the company law), and the limits inflicted by the policy choices embedded in the company law (the most important of which being the division of management power between the shareholder meetings and the board of directors).
As to the situation in Taiwan, substantial limits and boundaries concerning the contents and revisions of corporate charters remain obscure. In practice, moreover, it seems that judicial and administrative authorities have shown the inclination to “mandatorize” company law provisions, i.e. to interpret rules that are in nature default rules into mandatory regulations, and hence forbids companies to stipulate otherwise in their charters. Such an interpretation clearly contradicts with the principle of corporation autonomy and the principle of freedom of contract. This thesis makes reference to the British and American legal systems, taking illustrations of limits on free transfer of shares, liability exemptions of responsible persons in the company, and power division between shareholders and the boards in the company, to elucidate, analyze and criticize the norms regarding limits on corporate charters in Taiwan. In addition, the thesis proposes future directions for revising Taiwan’s company law: ranging from introducing the element of “equity” into charter amendment to returning the vast domain of self-autonomy to companies via redefining most company law provisions as enabling regulations or default rules. As to limits in relation to policy choices under Taiwan’s company law (such as the distribution of power between the shareholders and the boards), much depends on future development in both the legislative and judicial branches to offer precise and predictable guidances concerning the regulatory philosophy and standing that we should adopt. Lastly, this thesis takes the example of one case in Taiwan’s practice as the material to assay and verify the foregoing researches and arguments raised in this chapter.
Chapter 6 serves as the conclusion. Aside from summarizing and summing up the prominent ideas addressed above, this chapter also attempts to indicate the objectives for future development of Taiwan’s corporate charters which the government should pursue, inclusive of learning lessons from the paradigm of U.K. to draft model articles for companies to adopt or to serve as default rules. It is believed that these proposals contributes to providing vigors for Taiwaneved that these proposals contributes to providing vigoring and enabling them to play the role as constitutions regulating rights and obligations within companies, without becoming a stumbing stone for economic order or transaction security.
This thesis is deeply convinced that issues studied herein are not only extremely interesting in the academic sense, but, with the progress and development of Taiwan’s industrial environment, are practically fundamental in the modern commercial world. Hence, it is expected that by taking advantage of the foregoing analyses, researches and discussions, this thesis would be able to remind the academic circle, practitioners, and judges in Taiwan of the importance of the effects and boundaries of corporate charters, thereby opening the gate for digging deeper into these crucial issues. It is anticipated that such an initiative could achieve the purpose of contributing to the advancement and construction of Taiwan’s legal system.