Chinese Characteristics Compared: A Legal and Policy Perspective of Corporate Finance and Governance in Taiwan and China
55 Pages Posted: 12 Jun 2001
Both dragon economies, Taiwan and China are poised to enter the World Trade Organization ("WTO"). The WTO accession will have significant ramifications for Taiwan, China, as well as their trading partners. Increasing competition will force Taiwan and China to reform their economic and financial laws and market institutions. Taiwan has had a head start in integrating with the global economy and implementing domestic economic reform. China, on the other hand, has garnered worldwide attentions and resources in recent years. Despite many political and social problems, she has managed to produce robust and consistent economic growth. This paper offers a preliminary comparison of corporate finance and governance in Taiwan and China from a legal perspective. This is a worthy examination because each in her own way has been an important model for economic development Taiwan and China share many striking similarities. Both are ethnic Chinese economies heavily affected by Confucian culture, controlled or guided by strong regulatory states, and yet exposed to ever-increasing international competition. Securities markets in Taiwan and China share similar Chinese characteristics: high volatility, state intrusion, and ownership concentration (albeit through vastly different types of ownership). Because of ideology, land area and population, political system, Taiwan and China are also stark contrasts. Most amazing, however, is the phenomenon that (like it or not) Taiwan is rapidly integrating with coastal China. Both Taiwan and China have chosen a continental system of company legislation, but their securities laws are both increasingly influenced by the American, Common Law model. In addition, since corporate finance is heavily regulated, one cannot scrutinize corporate governance performance without examining constraints on corporate finance as well. Likewise, if law matters to corporate governance, then judges matter, too. Even though Taiwan judges have better overall professional training, courts and the judicial system in both Taiwan and China are weak and inexperienced in enforcing shareholder rights meaningfully. Both have yet to converge clearly with international norms or best practices for corporate governance. In any event, a crude beginning in such cross-strait comparison still yields fruitful insights for further studies.
A salient feature of this paper is its examination of the relationship between corporate finance and corporate governance. Corporate finance rules may be more technical than corporate governance ideals. However, as Karl Llewelyn said: "[T]echniques without ideals is a menace, but ideals without technique are a mess." My main argument, therefore, is that the two are related: rigid corporate finance rules in Taiwan and China reflect regulatory concerns with poor corporate governance. But rigid corporate finance rules could make corporate governance performance worse. To be sure, the nature of concerns is different in these to vibrant ethnic Chinese economies: in China the state is more concerned with asset stripping by directors and managers of state-owned companies; in Taiwan the concerns relate more to minority expropriation by founders of family-controlled listed companies. Rigid corporate finance rules may be a creature of legal transplant from the Civil Law tradition. Nonetheless, regulators find much comfort in such rigidity as, so they think, otherwise the corporate governance issues would be more difficult to manage. Yet in both Taiwan and China, markets are become more mature and sophisticated. This rigidity-based relationship between corporate finance and corporate governance cannot hold much longer. Unless market forces are strengthened and judicial protection enhanced, regulators will not be able to rise to the challenge of globalization faced by Taiwanese and Chinese companies.
This article is broken into three parts. Part I discusses corporate finance and governance issues in Taiwan. I examine the market features in Taiwan, the phenomenon of Taiwan's family-control listed companies, the concept of a "market for corporate ownership" in Taiwan, mergers and acquisitions, the role, function and performance of board of directors and supervisors of Taiwan companies, independent directors and fiduciary duty. I also examine the rigidity of corporate and securities rules in Taiwan, and their impact on corporate finance and corporate governance in Taiwan. Issues reviewed include share issuance rules, employee stock dividend or profit participation plan, capital adequacy rules, and quality of disclosure. I then look at banking and insolvency laws and problems and potential reform, regulatory competition in such reform, and a uniquely Taiwan style of functional securities class actions administered through a nonprofit institute supported by the securities regulator. Part II focuses on China and addresses similar issues as found in Taiwan. I begin with a historical and policy review of China's marketization and company law program, and then dwell extensively upon China's experimental and yet rigid corporate and securities, drawing comparisons with Taiwan rules at the same time. These rules relate to pre-incorporation licensing, the control of business scope and corporate power, reinvestment restrictions, single shareholder companies, holding companies, minimum capitalization requirement, restrictions on making loans and guarantees, legal representative, capital structure and restrictions on equity and debt offerings. I also examine China's extraordinary effort to list state-owned companies offshore in the broader corporate law context. Then I review ownership structure of Chinese listed companies, the role, function and performance of directors and supervisors, the need for class actions. Part III concludes this article with about a dozen observations of the respective state of corporate finance and governance in Taiwan and China and areas for further cross-scrutiny and improvement.
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