Examining Limits on Stock Transfers During Bankruptcy Reorganizations

Since Taiwan's Rebar Group filed for bankruptcy reorganization, the focus of the media and the general public has been on whether Rebar would have an opportunity to seek protection under reorganization laws, and whether creditors could convince the court to dismiss Rebar's application and remove the emergency injunction against the exercise of creditors' rights. Comparatively speaking, the issue of minority shareholders' rights and interests during reorganization received little attention. In the following paragraphs, I will examine the necessity of prohibiting stock transfers during bankruptcy reorganizations, and will analyze whether the court's emergency injunction against shareholders' stock transfers is reasonable.

Under Article 287 of the Company Act, prior to ruling for a reorganization of a company, the court may, at the behest of the company or its interested parties, or upon its own authority, issue an emergency injunction, the content of which may include: an injunction for the preservation of the company's property; restriction on the business of the company; restriction on the performance of the company's debt obligations and the exercise of creditors' claims against the company; suspension of bankruptcy, reconciliation or compulsory execution procedures; prohibition against transfers of registered shares of the company; assessment of the liability of the company's "responsible persons" to compensate the company's losses, and injunctions to preserve their property. A "prohibition against transfers of registered shares" directly involves shareholders' interests, and there is more than one explanation of what purpose it serves. Some believe its purpose is to prevent a company's stock price from falling; others feel it is that it prevents directors or supervisors from using transfers to get their shareholdings down to the point where they would obviously be relieved of their duties, thereby evading their liability as directors or supervisors.

Looked out fairly, it is difficult to see how the above two explanations are tenable. Take preventing a fall in the company's share price: The share price is the transaction price negotiated between buyers and sellers in the markets, and is not directly related to whether or not a company may be reorganized. As for directors/supervisors avoiding liability, the current Securities and Exchange Law already places strict limits on transfers of shareholdings by directors or supervisors (see Article 22-2). Directors or supervisors wishing to dispose of their shareholdings would find it hard-going as it is. Also, if it was in fact some illegality on the part of directors or supervisors that led the company to request reorganization, then given that the illegality has already occurred, the fact that perpetrators have been removed from their posts does not present an obstacle to the pursuit of liability. Therefore, the explanations described above hardly constitute reasons for emergency injunctions against shareholders' stock transfers.

When a company seeks bankruptcy reorganization, and the court issues an emergency injunction against stock transfers, the effect on shareholder interests must be examined in the light of the "Operating Rules of the Taiwan Stock Exchange Corporation". The main point of the pertinent rules is that, where a court has ruled under Article 287 of the Company Act for a "prohibition against transfers of registered shares", then on the date the TSE learns of the ruling or receives notice of it from the court, or on a significant disclosure date for public companies (whichever is first), the company shall make an advance public announcement, and trading in its securities shall halt starting from the first business day following the announcement. In other words, once the court renders a ruling restricting stock transfers, trading in the affected company's shares effectively ceases, and they cannot be put back in circulation. Taking the bankruptcy reorganization filed by Rebar and Chia Hsin Food as an example, the court ruled for an emergency injunction against transfers of the two companies' stock, and their shareholders were, with scarcely any warning, prohibited from selling their shareholdings. The impact on shareholders' interests cannot be called anything but great.

From the foregoing analysis, it is open to discussion whether the system of emergency injunctions in company reorganizations should include restrictions on shareholder stock transfers. Even granting that, under the rules in Article 287 of the Company Act, the court can enjoin the "responsible persons" of a company to preserve their property, the directors being the company's "responsible persons", if an injunction to preserve the property of the directors (restricting directors from transferring personal shareholdings) can serve the purpose of seeking directors' liability, there would seem to be no need to restrict the whole body of shareholders from transferring shareholdings.

One more thing needs to be pointed out, and that is that the emergency injunction rules under the current Company Act's Article 287 do not obligate the court to produce an emergency injunction whenever petitioned to do so, as the court has leeway to exercise its judgment. Since there is room in the law for exercising judgment, if the court is going to reaffirm the need to restrict stock transfers, then it should at least explain in its ruling the necessity of restricting stock transfers on the part of all shareholders.

Eric Tsai is a partner at PricewaterhouseCoopers Taiwan. Please send your comments and questions to: Eric.Tsai@tw.pwc.com