Article 223 of the Company Act stipulates that when a director engages in transactions such as buying, selling, borrowing, or other legal acts on behalf of themselves or others with the company, the supervisors shall act as the company's representative.  Although this provision explicitly designates the representative for transactions between the company and its directors, there is no consensus in academic and judicial interpretations regarding the internal decision-making process.  This article will explore the application of this provision, starting with the current regulations and judicial opinions.

The application of Article 223 of the Company Act varies depending on whether the company has established an audit committee.  For companies that do not have an audit committee, some judicial opinions suggest that the supervisors should represent the company externally, and there is no need for an internal resolution by the board of directors.^[1]  As for whether all supervisors must be named or if individual supervisors can represent the company, there are differing views between the regulatory authorities and the courts.  The former believes that individual supervisors can represent the company,^[2] while the latter holds that all supervisors must be named.^[3]

If the company has established an audit committee, the provisions of Article 223 of the Company Act are applied mutatis mutandis in accordance with Article 14-4, Paragraph 3 of the Securities and Exchange Act.  In this case, because the transaction between the company and its director involves matters that affect the director’s own interests, under Article 14-5, Paragraph 1 of the Securities and Exchange Act, the transaction must be approved by more than half of the audit committee members and then submitted to the board of directors for approval.  Therefore, when the company engages in a transaction with a director, the internal decision-making process must pass through both the audit committee and the board of directors.  As for external representation, Article 5, Paragraph 4 of the Regulations on the Exercise of Powers by the Audit Committee of Public Companies stipulates that the audit committee may designate a member to represent the company individually.  If no representative is designated, then all members of the audit committee must collectively act as the company’s representative externally.

If a company fails to comply with Article 223 of the Company Act and does not designate supervisors or audit committee members as representatives, the company's actions may be deemed ineffective due to the lack of authority to represent the company.^[4] Such actions can be retroactively ratified by the company to become effective.  It is also important to note that the Supreme Court has recently clarified that Article 223 of the Company Act pertains specifically to the powers of the supervisors and cannot be delegated to the directors for execution.  In other words, the supervisors cannot delegate their representative authority to directors.^[5]  If this occurs, the actions taken by the director to represent the company externally would still be considered acts performed without authority and thus would not be legally effective.

A violation of Article 223 of the Company Act directly results in the company's actions being deemed ineffective, which has significant consequences.  Recently, the courts have clearly stated that the representative authority under this provision cannot be delegated to directors.  This serves as an important reminder for companies to carefully plan their internal processes and avoid inadvertently violating the regulation.  Ensuring compliance with this provision is crucial to avoid the risk of the company’s actions being legally challenged or deemed invalid.

(The article is originally in Chinese which can be found here.)