General Overview

What legislation governs M&A activity in your jurisdiction?

The M&A activities in Taiwan are governed by various laws and regulations, mainly the

Merger and Acquisition Act (M&A Act) and the Securities and Exchange Act (SEA). Before the M&A Act was enacted in 2002, M&A activities, especially those involving cross-border transactions, encountered difficulty in that the general principles that governed M&A activities and were set forth in the Company Act, the Civil Code, the Fair Trade Act (FTA) and the Labor Standards Act were not flexible and often required a lengthy process to complete a deal.

In January 2002, three bills relating to mergers and acquisitions were promulgated: the M&A Act, amendments to the FTA and amendments to the SEA. The relevant authorities have been overhauling implementation regulations to remove the legal obstacles to M&A activities in Taiwan. Some important changes as a result of the M&A Act are summarised below:

• The M&A Act provides some general amendments to the Company Act. For instance, some M&A transactions may qualify for exemption of the statutory pre-emptive rights of shareholders and employees as provided in the Company Act. The M&A Act recognises the enforceability of voting agreements and restrictions on share transfer for an M&A transaction which, in practice, used to be an unsettled issue.
• The M&A Act introduces more types of merger, including whale-minnow mergers, cash-out mergers, and cross-border mergers.
• In terms of acquisitions, the M&A Act covers general assumption, general business transfer, assumption and transfer of major business or assets, and share exchange. The M&A Act abolishes the Civil Code requirement to issue notice to each creditor and instead permits companies to make a public announcement of an acquisition.
• In terms of demergers (spin-offs), the M&A Act permits the demerger of companies and stipulates the relevant corporate actions required for a demerger.
• The M&A Act provides certain tax measures to neutralise the transaction costs associated with M&A transactions. For instance, certain transaction taxes, such as securities transaction tax, stamp duty, VAT, and land value incremental tax, are exempted in a merger, demerger or an acquisition where at least 65% of the consideration is paid by voting stock.
• The M&A Act provides certain protection to the employees in a merger, demerger or acquisition, and the employees have the right to determine whether or not to be retained by the acquirer.

The amendments to the SEA introduce the mandatory tender offer and private placement. A mandatory tender offer is required within 50 days for the acquisition of 20% or more of the total issued shares of a public company. The Financial Supervisory Commission (FSC) promulgated the Regulations Governing Tender Offers for Acquisition of the Securities of a Public Company (Tender Offer Regulations) to govern the filing requirements and procedures of public tender offers. Tender offers have become an important method for acquiring a majority stake in a public company in Taiwan, often followed by a back-end merger if the goal is to acquire 100% interest in a public company.

In addition, Taiwan Stock Exchange (TSE) and GreTai Stock Market (GTSM) also revised their listing rules to address listing as well as delisting issues that result from a merger or acquisition. For instance, a non-listed company that acquires a listed company through a share exchange may apply for listing on TSE and GTSM, and a spin-off company meeting certain criteria may apply for an accelerated listing on TSE and GTSM. The new delisting rules, which came into effect in the fourth quarter of 2007, allow delisting and a merger to take effect at the same time.

What impact have recent legislative changes had on the nature and amount of M&A activity?

The promulgation of the M&A Act in 2002 and the subsequent amendments to the Tender Offer Regulations in 2005 have had considerable impact on M&A activities in Taiwan, especially in the merger and acquisition of public companies. Before 2005, there were only two successful tender offers. In 2006, there were around seven tender offers. In 2007, there have been around 12 tender offers launched and most of them were combined with a back-end merger or type of post-tender offer restructuring.

What legal innovation, if any, has there been in recent takeovers and mergers?

Private equity funds have been quite active in the M&A transactions in Taiwan in recent years. Since most of the target companies are listed companies, such M&A transactions inevitably have certain effects on public investors, especially when the company would be delisted after the transaction. Therefore, several rules have been adopted by the government authorities to ease the concerns of the public on M&A transactions initiated by private equity funds. For example, the delisting rules have become so stringent that the resolution for a delisting must be agreed by the directors or shareholders representing two-thirds or more of the total issued and outstanding shares in the company. Furthermore, to mitigate the risk arising from the high financial leverage model commonly used by private equity funds, the government authority governing foreign investment activities has proposed adopting the thin-capital rules and limiting the debt-to-equity ratio so that it is not higher than 66.7%.

What have been the most significant M&A transactions in your jurisdiction over the past year?

• Oaktree's acquisition of Fu Sheng in a take-private transaction.
• CVC's acquisition of Nien Made in a take-private transaction.
• TCC International Holdings' (TCCIH) acquisition of Chia Hsin Cement Greater China Holding Corporation (CHCG).
• Clsa Capital Partners' acquisition of shares in Unitech Printed Circuit Board Corp through private placement of convertible bonds.
• Saudi Basic Industries Corporation's (Sabic) acquisition of General Electric Company's (GE) Plastics Unit.
• The Carlyle Group's sale of its stake in Taiwan Broadband Communications, the third largest cable TV system operator in Taiwan, to Macquarie Bank and its affiliates.
• The Carlyle Group's acquisition of a majority stake in Eastern Multimedia Company, the second largest cable TV system operator in Taiwan.
• MBK Partner LP's acquisition of a majority stake in China Network Systems, the largest cable TV system operator in Taiwan. This has yet to be concluded.
• Standard Chartered's acquisition of Hsinchu International Bank through a tender offer.
• Jabil Circuit's acquisition of Taiwan Green Point Enterprise, the largest mobile phone plastics supplier in Taiwan, through a tender offer followed by a back-end merger.
• Fairchild's acquisition of General System through a tender offer.
• The Carlyle Group's acquisition of Advanced Semiconductor Engineering through a tender offer, which has yet to be concluded.
• Test Rite International's acquisition of a major stake in Tong Lung Metal Industry from HSBC.

How, and to what extent, is foreign involvement in M&A transactions in your jurisdiction regulated or restricted?

A foreign investor who wishes to invest in a Taiwan company is required to obtain the foreign investment approval pursuant to the Statute for Investments by Foreign Nationals. The Investment Commission of the Ministry of Economic Affairs (MOEA) is in charge of foreign direct investment and the FSC is in charge of foreign portfolio investment in Taiwan-listed securities.

The Executive Yuan has promulgated the Negative List to prohibit or restrict foreign investors from making investment in certain regulated businesses. Apart from those businesses that fall under the Negative List, investment by foreign investors in other businesses is generally permissible. The prohibited or restricted businesses are mainly driven by national security or public policy. For instance, facilities-based telecom operators and cable television system operators are subject to foreign ownership restrictions and foreign investment in terrestrial broadcasting networks is prohibited.

Due diligence

What are the principal disclosure requirements in a typical M&A transaction?

In the case of a tender offer, the tender offer filing must be published in the newspapers, and the tender offer filing and the prospectus must be uploaded on to the website of the tender offer agent immediately before launching the tender offer. The tender offer agent must also make similar announcements when the minimum number of the acquired shares has been met and the tender offer has been completed.

Within seven days of receiving the tender offer prospectus, the target company has to submit the relevant information to the relevant agencies (including Securities and Future Bureau, Securities Association, Securities & Futures Institute, TSE, and Taiwan Securities Centralised Depository Corporation) and make a public announcement on Market Observation Publication System (MOPS) regarding: (i) the shareholding of the incumbent directors, supervisors and shareholders holding more than 10% of the total issued shares, (ii) recommendation to the shareholders for the tender offer and the directors objecting to the tender offer along with the reasons for its recommendation, (iii) any material adverse change to the company's financial conditions after submission of the latest financial reports, (iv) the shares held by the incumbent directors, supervisors and shareholders holding more than 10% of the total issued shares in the acquirer or its affiliates, and (v) other important information.

If an M&A transaction involves a public company, the company will need to make a public announcement upon signing any transaction documents relating to the M&A transaction, or upon adopting the board's resolution to accept the proposal for the M&A transaction, whichever comes first. Private companies are not subject to any disclosure requirements.

To what extent do the current disclosure requirements achieve market transparency?

Under Article 36 of the SEA, public companies are required to publish any fact or event relevant to the company which is likely to have a material impact on the price of its stock. In practice, the disclosure of an M&A transaction would normally be made when there is a definitive agreement or the board of directors has adopted a resolution to approve the transaction.

Before the information goes public, corporate insiders must keep the information in strict confidence and must not engage in any trading of securities.

To ensure transparency during an M&A transaction and to avoid any inside trading, the TSE recently amended its rules by requiring TSE-listed companies to post on the MOPS, within 2 days of the board passing any resolution for approval of an M&A transaction, any information relevant to the M&A transaction, including the names of the persons participating in the transaction and important matters and dates.

How has the growth in private equity buying in the past few years affected due diligence?

The due diligence exercises for M&A projects have become more and more extensive in Taiwan. In private equity deals, due diligence of financial information and related matters have been the focus of the buyer.

Has the issue of material adverse change clauses become more important with the recent failure of some large M&A deals around the world?

Material adverse change clauses are commonly seen as the condition precedent to the conclusion of a public tender offer (only limited to a material adverse change in the financial and business conditions of the target company), as well as a condition precedent to closing in a private transaction. However, neither the securities authorities nor the court has elaborated the term material adverse change so the relevant authorities may at their discretion determine whether there is a material adverse change in the financial and business conditions of the target company on a case-by-case basis. In practice, the securities authorities would be extremely reluctant to agree to any suspension of a tender offer for commercial reasons. Thus far we have not seen cases where material adverse change has resulted in the failure of a public tender offer or large private deal.

Takeovers

Are there any specific regulations and/or regulatory bodies governing takeovers in your jurisdiction? How do they compare to other international regulators?

In Taiwan, the M&A Act is specifically enacted to govern takeovers. The MOEA is the regulatory body in charge of the interpretation and application of the M&A Act as well as matters regarding formation of corporate entities and registration of companies. A part of the MOEA's function is similar to that of the Department of Commerce in the US. Also, the Financial Institutions Merger Act and Financial Holding Company Act apply to the mergers and acquisitions of financial institutions. The FSC is the regulatory body in charge of the M&A activities of financial institutions and public companies and it is also the supervisor of the financial industry and securities market. The FSC could be viewed as an equivalent to the SEC of the US.

If the takeover meets any of the thresholds provided in the FTA, it is subject to the combination notification requirement. The Fair Trade Commission (FTC) is the regulatory body in charge of the combination notifications in Taiwan. In cross-border or global transactions, the FTC often respects the decision of the antitrust regulator of major jurisdictions, such as the EU or the US.

Recently, the regulators emphasise investor protection in M&A deals, and the implementation of insider trading regulations has been strengthened.

What are the various methods by which a takeover can be achieved?

Pursuant to the Tender Offer Regulations, any person who individually or jointly with others intends to acquire within 50 days shares accounting for 20% or more of the total issued shares of a public company must do so through a public tender offer. In practice, however, a public tender offer is required only if the closing is made within the 50-day interval. It is possible to acquire the shares of a public company in several tranches over more than 50 days.

The M&A Act also provides various methods for takeovers, including merger, de-merger, stock exchange, and assets and business acquisition. In the case of a merger, the considerations may be paid in stock or in cash or in a combination of the two. As a result of the promulgation of the M&A Act and other implementation regulations, the regulatory framework with respect to takeovers has become more transparent and predictable. Tender offers with a back-end cash-out merger have become popular methods for taking over public companies in Taiwan.

How differently are hostile and voluntary takeover bids treated?

In general, the relevant laws and regulations governing takeovers do not differentiate between hostile and voluntary takeovers. In the case of a tender offer, the board of the target company would have to respond to a tender offer, and provide recommendations to its shareholders, within seven days of being notified of the tender offer, pursuant to the Tender Offer Regulations. This provides an opportunity for public shareholders to be aware of the position taken by the target board towards a takeover bid.

Hostile takeovers are allowed, but some procedural hurdles render hostile takeovers a less preferable approach, compared with voluntary takeovers. It may be a time-consuming process to reorganise the target's board and management team in the absence of an agreement with the key members of the target's board.

What penalties are imposed on parties who violate takeover regulations (or their equivalent)?

Unless exempted by the relevant laws and regulations, a public tender offer is required within 50 days to acquire 20% or more of the total issued shares of a public company. Any person who violates this requirement is subject to criminal liability

With respect to the combination notification requirement, failure to make the required notification may result in an administrative fine of not less than NT$100,000 ($2500) and up to NT$50 million.

What are the thresholds for disclosing bids and offers?

Pursuant to Article 43-1 of the SEA, any person who individually or jointly with others acquires shares accounting for more than 10% of the total issued shares of a public company must, within 10 days of the acquisition, make a report to the competent authority to disclose the purpose of such acquisition, the funding source and other matters prescribed by the competent authority. This reporting requirement applies to any subsequent changes of the items reported.

How do you think M&A will develop next year? Do you think there will be more industry takeovers or purchases from emerging economies such as China and the Middle East?

In view of the current economic situation in Taiwan, it is possible that the M&A projects relating to financial institutions or financial holding companies will become quite active in the near future, and listed companies with significant economic become potential M&A targets. In respect of the geographic market, it is foreseeable that more and more M&A activities will be conducted in the emerging economies, especially in China and India.

Competition/Antitrust

What have been the major recent developments in competition policy and legislation as they relate to M&A in your jurisdiction?

There have been no recent changes in competition policy and legislation as they relate to M&A in Taiwan. The latest amendments to the FTA were made in 2002 pursuant to which the requirement for a pre-combination approval was changed to a prior notification system. Under the prior notification system, the parties to a combination transaction meeting any of the thresholds are required to make a notification with the FTC before closing the combination transaction. If the FTC does not object to the combination transaction after 30 days (may be extended to 60 days) from the filing date (assuming that no additional inquiries are raised by the FTC after the filing), the parties to the combination transaction are free to proceed.

How are the competition/antitrust regulations enforced in your jurisdiction?

In Taiwan, the FTC enforces the competition/antitrust regulations. Antitrust, combination notification, concerted action, and unfair trade practices all fall under the FTC's jurisdiction. As such, companies have to make their own assessment of compliance with relevant regulations. The FTC has certain statutory authority to conduct investigations against any anti-competitive practices and makes its decision on a case-by-case basis. The FTC also promulgates guiding directives to help companies comply with competition/antitrust regulations.

How do legislation and regulation approach abuse of dominant position?

Article 10 of the FTA prohibits an enterprise with a monopoly from abusing its market power. Article 19 further requires that enterprises refrain from engaging in any anti-competitive activities that may restrict or impede fair competition. In practice, the FTC determines whether an enterprise has abused its dominant position on a case-by-case basis.

In addition, Article 26-1 of the Telecommunications Act specifically provides that any Type I telecom operator with a dominant market position must not abuse its dominant position or engage in other unfair competition.

To what extent are parties to an M&A transaction subject to prior notification requirements?

The parties to a combination transaction meeting the statutory thresholds are required to make a filing with the FTC before closing a combination transaction, if:

1. as a result of the combination, any of the enterprises will acquire one-third or more of the market share;
2. an enterprise participating in the combination holds one-quarter or more of the market share; or
3. the turnover in the preceding fiscal year of an enterprise participating in the combination exceeds the amount prescribed by the FTC.

The turnover test includes two elements, that is, the combining enterprises must meet the high and low thresholds at the same time. For a combination between non-financial institutions, one combining enterprise must have an annual turnover of at least NT$10 billion, and the other combining enterprise must have an annual turnover of at least NT$1 billion. For a combination between financial institutions, the high turnover threshold would be increased to NT$20 billion, but the low turnover threshold would remain NT$1 billion.

The FTC also exercises jurisdiction over extraterritorial combinations involving Taiwan in certain circumstances. The term extraterritorial combination is defined as any combination that:

1. involves two or more foreign enterprises engaging in combination outside the territory of Taiwan;
2. constitutes any of the circumstances provided in Article 6 of the FTA; and
3. has a direct, substantial and reasonably foreseeable effect on the Taiwanese market.

Author biographies

James Chen Lee and Li James Chen is a partner of Lee and Li and is a law graduate of the National Taiwan University. He received a LLM degree from Soochow University and a MBA from the Sloan School of Massachusetts Institute of Technology. Admitted in 1989, he has a wide range of practices with a special focus on corporate and investment matters. He specialises in M&A and many of the transactions he has been involved with are cross-border. He advised China Network Systems (CNS) on the sale of related cable systems to MBK for $1.3 billion. He advised Fairchild Semiconductors when it acquired System General Corporation, a Taiwan listed company. He also advised Sanofi-Aventis, STATS Chippac, Novartis, and Far-EasTone in some M&A transactions. James Chen is the leader of the telecom and media practice group at Lee and Li and regularly acts as a consultant for the regulators over telecom and media law and policy. He also has a lot of experience in combination notifications involving Taiwan and has assisted many multinational companies in obtaining clearance in Taiwan. C T Chang Lee and Li C T Chang is a partner of Lee and Li and head of the firm's insurance practice group. He holds an LLB degree from National Chen-Chi University and a LLM degree from Soochow University. Admitted in 1990, his practice covers finance, capital markets and M&A. He is also involved in many privatisations of state-own-companies in Taiwan. He is a committee member of the Privatisation Supervisory Commission of Executive Yuan (Cabinet). Among the M&A transactions that were cross-border, he advised the Carlyle Group in a management buy-out to privatise ASE, the biggest semiconductor packaging and testing company in the world. He also advised Aegon Group on its acquisition of TransAmerica Life and Axa Life in Taiwan and worked with ING Group for the completion of its domestication project in Taiwan. Alex Jui-Lin Liu Lee and Li Alex Jui-Lin Liu is a senior counselor at Lee and Li. His practice focuses on banking, securities, international corporate finance, and mergers and acquisitions. He also oversees the firm's China operation in Shanghai, Lee and Li Business Consultants (Shanghai) Ltd. Liu advises major international commercial banks and investment banks on their operations in Taiwan. He has extensive experience of international capital market transactions, including global depositary receipts, convertible bonds and securitisation products. Liu is also an expert on merger and acquisition transactions involving Taiwan listed companies. He advised on TSMC's merger with Worldwide Semiconductor Manufacturing and TSMC-Acer, Siliconware Precision Industries's merger with Siliconware, Epitech Technology's merger with Formosa Epitaxy, Chinatrust Financial Holding's acquisition of Cosmos Bank and several other cross-border M&A transactions. Liu received his Bachelor of Law degree in 1977 and Master of Laws degree in 1982 from Soochow University in Taiwan. In 1988, he received a Master of Laws degree from the University of Michigan, and in 1991, a Juris Doctor degree from the University of Utah. Liu is a member of the New York State Bar Association, American Bar Association and Inter-Pacific Bar Association. He is also an associate professor of law at Soochow Law School and Shih Hsin Law School in Taiwan. Sophia Yeh Lee and Li Sophia Yeh received her LLB from National Taiwan University in 1980 and her LLM from University of Pennsylvania in 1987. Sophia joined Lee and Li in 1981, and is a senior counselor in the Corporate and Investment Department. Her practice areas include mergers and acquisitions, corporate, contracts, cross-border investments, venture capital, technology transfer, securities, taxation, cable television, labour law, joint venture and antitrust. Sophia contributed to the drafting of the bill for Taiwan's Merger and Acquisition Act and the amendment to the Company Act to improve the legal framework for effecting mergers and acquisitions in Taiwan, especially cross-border transactions. She was also involved in streamlining the government's policy on encouraging the development of the service industry as a whole in Taiwan. In 2007, among many other acquisitions, Sophia helped to conclude taking a listed company private – Fu Sheng by Oaktree together with Fu Shen's controlling shareholders – which is the first successful privatisation of public company by private equity in Taiwan. She also helped to conclude taking private another listed company, Nien Made by CVC and Nien Made's family members.