Uni-President Enterprises Corporation

Case:

Key Words:

instant noodle, substantial control, seats of directors

Reference:

Fair Trade Commission Decision of February 11, 2009 (the 901st Commissioners' Meeting), Disposition Kung Ch'u Tzu No. 098035

Industry:

Noodle Manufacturing (0892)

Relevant Laws:

Article 6, 11 and 13 of the Fair Trade Law

Summary:

1. In the re-election for directors and supervisors of Weilih Food Industrial Co., Ltd. (hereinafter referred to as Weilih), Uni-President Enterprises Corporation (hereinafter referred to as Uni-President) won 3 seats of directors and 1 seat of supervisors, which in total constitute half of the seats of Weilih's directors and supervisors. In addition, Mr. Zhixian Luo (General Manager of Uni-President) will be the Chairman of Weilih. The Commission initiated an ex officio investigation on whether the enterprise failed to file a pre-merger notification.

2. Investigation and Results: Uni-President appointed XX Luo, XX Xie, and XX Liu to be the directors. It also appointed Jianli Yin to be the supervisor of Weilih. The above-mentioned persons are all managers working at Uni-President. Furthermore, there is an investment agreement between Uni-President and Weilih's major shareholders, in which the latter shall support and help the former to acquire seats in Weilih's directors and supervisors. In addition, the major shareholders of Weilih shall support the representative of Uni-President's second-layer subsidiary (who was elected a director of Weilih) to be Weilih's Chairman.

3. Grounds for Disposition
   (1) To "directly or indirectly control the business operation or the appointment or discharge of personnel of another enterprise" is a type of mergers specified in Article 6(1)(v) of the Fair Trade Law. According to Article 11(1)(iii) of the same Law, where sales for the preceding fiscal year of one of the enterprises in the merger exceeds the threshold amount publicly announced by the central competent authority, such enterprises shall file a pre-merger notification to the central competent authority.
   (2) To "directly or indirectly control the business operation or the appointment or discharge of personnel of another enterprise" means that an enterprise, directly or indirectly, may substantially influence another enterprise's decision to engage or not engage in certain business operation. The determination as to whether an enterprise has "substantial control" over another, including elements of the share holding and number or percentage of directors and supervisors, is evaluated case by case. Sometimes even though when an enterprise may not hold a certain percentage of shares or number of directors of another enterprise, by ways of keeping substantial control over another through financial dependency, information-sharing, veto rights, or other rights relavant to corporate governance, it still has substantial control over another enterprise's operational decisions, and such a merger may impede market competition.
   (3)Uni-President assigned its certain personnel to be directors of Weilih, in name of representatives of Uni-President's affiliated companies. According to Article 27 of the Company Law, Uni-Presdient may replace the three persons who were appointed directors of Weilih, owing to the change of his/her functional duties. Besides, those three persons are all managers at Uni-President. According to Article 33 of the Company Law, "a managerial personnel shall not make any change or alteration in any decision made by the directors or the executive shareholder(s), or any resolution adopted by the shareholders' meeting or the board or directors, or go beyond the scope of his/her duties and power when exercising his/her functional duties." According to Article 31 of Weilih's Articles of Incorporation, "the manager shall comply with resolutions of the Board of Directors to organize all corporate affairs. The appointment, discharge, and remuneration of managers shall be determined by the Board of Directors." Since Uni-Presidnet has substantial control over half of the seats of directors, supervisors, and Chairman of Weilih, it can influence Weilih thorough the above-mentioned persons.
   (4)According to the Weilih's Articles of Incorporation, Weilih's Broad of Directors still controls its business operation and the appointment or discharge of personnel. Furthermore, Uni-President claimed that personnel it appointed to be the directors of Weilih would supervise the latter not to engage in unrelated investments and focus on the instant noodles business. Therefore, it is fair to conclude that the directors of Weilih appointed by Uni-President substantially affect Weilih's decision to engage or not engage in certain operation or investments. In addition, Article 18 of Weilih's Articles of Incorporation provides that resolutions of the Board of Directors shall only be adopted by a two-thirds of the directors at a meeting attended by a majority of the directors. Since Uni-President holds half of the seats for Weilih's directors, the assembly and resolution of Weilih's Board of Directors will depend on the attendance and consent of Uni-President's representatives. The attendance and consent of Uni-President's representatives is thus crucial to the operation of Weilih's Board of Directors. Since Weilih and Uni-President are market competitors and now that Uni-President holds half of the director seats in Weilih, should Weilih impose a strategy that is harmful to Uni-President, such decision may not be approved and executed by Weilih's Board of Directors. This shows that Uni-President indeed has material influence over Weilih's operational decisions. Therefore, the fact that Uni-President acquired half seats of Weilih's directors and supervisors suggests that the former has certain control over the latter's material operational decisions.
   (5) In sum, with respect to the case where the staff of Uni-President acquired half the seats of directors and supervisors and become the Chairman of Weilih, it constitutes a merger under Article 6(1)(v) of the Fair Trade Law. The merged enterprises have exceeded the threshold to file a pre-merger notification. According to Article 11(1)(iii) of the Fair Trade Law and Article 7(1) of the Enforcement Rules to the Fair Trade Law, Uni-President shall file a pre-merger notification to the Commission prior to the merger. It failed to comply with the law and has violated Article 11(1) of the Fair Trade Law. In addition, pursuant to Article 13(1) and Article 40(1) of the same Law, personnel who hold positions in both Uni-President and Weilih shall be discharged until there is no substantial control, and an administrative file of NT$ 500,000 is imposed.

Appendix:
Uni-President Enterprises Corporation's Uniform Invoice Number: 73251209
Summarized by Chang, Chan-Chi; supervised by Yang, Chia-Hui