General overview

What legislation governs M&A activity in your jurisdiction?

Mergers and acquisitions in Taiwan are governed by various laws and regulations, mainly the Merger and Acquisition Act (the M&A Act) and the Securities and Exchange Act (the SEA). Before the M&A Act was enacted in 2002, M&A activities, especially those involving cross-border transactions, have encountered difficulty in that the general principles set out in the Company Act, the Civil Code, the Fair Trade Act (FTA) and the Labour Standards Act that govern M&A activities are not flexible and often require lengthy process to complete a deal.

In January 2002, three bills relating to merger and acquisition were promulgated: the M&A Act, amendments to the FTA and amendments to the SEA. Relevant authorities have been overhauling implementation regulations to remove the legal obstacles to M&A activities in Taiwan.

• 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 recognizes the enforceability of voting agreements and restrictions on share transfer for an M&A transaction, which had been an unsettled issue for years in practice.
• The M&A Act introduces more types of merger, including the whale-minnow merger, cash-out merger, and cross-border merger.
• In terms of acquisition, the M&A Act covers general assumption, general business transfer, assumption and transfer of business or assets, and share exchange. The M&A Act abolished the requirement to issue notice to each creditor set out in the Civil Code and instead permits companies to make public announcement of acquisition.
• The M&A Act permits demerger (spin-off) of companies and stipulates the relevant corporate actions required for demerger.
• The M&A Act provides certain tax measures to neutralize 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 if at least 65% of the consideration is paid by voting stock.
• The M&A Act provides certain protections 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 bid and private placement. A mandatory tender offer bid is required for acquisition of 20% or more of the total issued shares of a public company within 50 days. The Financial Supervisory Commission (FSC) promulgated the Regulations Governing Tender Offers for Acquisition of the Securities of a Public Company (the Tender Offer Regulations) to govern the filing requirements and procedures of public tender offers. Tender offer has become an important method for acquiring a majority stake of interest 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.

The Taiwan Stock Exchange (TSE) and GreTai Stock Market (GTSM) also revised their listing rules to address the listing and 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 accelerate listing on TSE and GTSM. Before the back-end merger can be consummated, the target company that is a public company must follow the delisting rules to go private first.

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 much impact on M&A activity in Taiwan, especially in the merger and acquisition of public companies. Before 2005, there were only two successful tender offer cases. Since 2005, around 10 tender offer cases have concluded successfully.

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

• 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 Partners' acquisition of a majority stake in China Network Systems, the largest cable TV system operator in Taiwan, which is yet to be concluded.
• Standard Chartered's acquisition of Hsinchu International Bank through tender offer.
• Jabil Circuit's acquisition of Taiwan Green Point Enterprise Co, the largest mobile phone plastics supplier in Taiwan, through tender offer followed by a back-end merger.
• Fairchild's acquisition of General System through tender offer.
• The Carlyle Group's acquisition of Advanced Semiconductor Engineering, through tender offer, which is 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 make an investment in a Taiwan company is required to obtain 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 investing in certain regulated businesses. Apart from those businesses on the Negative List, investment by foreign investors into 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 national newspapers, and the tender offer filing and the prospectus should be uploaded to the website of the tender offer agent immediately before launch. 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 after receiving the tender offer prospectus, the target company has to submit the relevant information to the relevant agencies (including the Securities and Future Bureau, Securities Association, Securities & Futures Institute, TSE, and Taiwan Securities Centralized Depository Corporation) and make a public announcement on the Market Observation Publication System (MOPS). This information includes: (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 resolution to accept the proposal for the M&A transaction, whichever comes first. Private companies are not subject to disclosure requirements.

To what extent do 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 that 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 cannot engage in any trading of securities.

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

How significant an issue is prospectus liability in a typical M&A transaction?

The tender offer prospectus made available in connection with a public offer cannot be misleading. If the tender offer prospectus contains misleading information, the parties involved in the issuance of the tender offer prospectus could be held criminally liable.

How have recent M&A transactions and/or legislation dealt with the issue of material adverse change clauses?

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 driven by commercial reasons.

What are the key unresolved issues in your jurisdiction?

The restrictions on PRC investors' investment in Taiwan and Taiwan's investments in PRC, the fiduciary duty owed by the target management in an M&A transaction, the legality of a leveraged buyout using the assets of the target as collaterals for financing, the process and procedures for hostile takeover, the settlement mechanism for a tender offer with the consideration in stock, and the legality for disclosure of intention to tender offer are the main unresolved issues in Taiwan.

Takeovers

Are there any specific regulations and/or regulatory bodies governing takeovers in your jurisdiction?

In Taiwan, the M&A is specifically enacted to govern takeovers in general. The MOEA is the regulatory body in charge of the interpretation and application of the M&A Act. 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.

A takeover meeting any of the thresholds provided in the FTA is subject to the combination notification requirement. The Fair Trade Commission (FTC) is the regulatory body in charge of the combination notifications.

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 with more than 50-day intervals.

The M&A Act also provides various methods for takeovers, including merger, demerger, stock exchange, and assets and business acquisition. In the case of a merger, the considerations may be paid in stock and in cash or 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 offer with a back-end cash-out merger have become popular methods for takeovers of 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 bid and provide a recommendation to its shareholders within seven days after 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 toward a takeover bid.

Hostile takeovers are allowed, but some procedural hurdles render hostile takeover a less preferable approach than voluntary takeover. Among others, it can be time-consuming to reorganize the target board and management team in the absence of an agreement with the main members of the target board.

What penalties are imposed for parties who violate takeover regulations?

Except as otherwise exempted by the relevant laws and regulations, a public tender offer is required for acquisition of 20% or more of the total issued shares of a public company within 50 days. 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 at least NT$100,000 ($3000) and up to NT$50 million.

What are the thresholds for disclosing bids and offers?

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

Competition/Antitrust

What have been the main 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 has been changed to a prior notification system. Under the prior notification system, the parties to a combination transaction meeting the thresholds are required to make a notification with the FTC before closing the combination transaction. Provided the FTC does not object to the combination transaction after 30 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. FTC has certain statutory authority to conduct investigation against any anti-competition practices and makes its decision on a case-by-case basis. The FTC also promulgates directives to serve as guidance to the compliance of the competition/antitrust regulations.

How do legislation and regulation approach the issue of abuse of dominant position?

Article 10 of the FTA prohibits an enterprise with a monopoly market position from abusing its market power, and Article 19 further provides that enterprises must refrain from engaging in any anti-competition activities that could restrict or impede fair competition. In practice, whether an enterprise has abused its dominant position would be determined by the FTC 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:

• as a result of the combination, any of the enterprises will acquire one-third of the market share;
• an enterprise participating in the combination holds one-quarter of the market share; or
• 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: 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 turnover threshold would be increased to NT$20 billion and NT$2 billion, respectively.

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

• involves two or more foreign enterprises engaging in a combination outside the territory of Taiwan;
• constitutes any of the circumstances provided in Article 6 of the FTA; and
• 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 graduate in law from the National Taiwan University. He received an LLM degree at Soochow University and an MBA degree at Sloan School of Massachusetts Institute of Technology. Admitted in 1989, he has a wide range of practice, with a special focus on corporate and investment matters. He specializes in M&A transactions and many of the transactions he has been involved are cross-border. He advised China Network Systems (CNS) in the transactions for 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 has also advised Sanofi-Aventis, STATS Chippac, Novartis, and Far EasTone in M&A transactions. James Chen is leader of the telecom and media practice group of Lee and Li and regularly acts as a consultant for the regulators in telecom and media law and policy. He also has intensive experience in combination notifications involving Taiwan and has helped many multinational companies obtain clearance in Taiwan. CT Chang Lee and Li CT 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 an LLM degree from Soochow University. Admitted in 1990, his practices cover finance, capital market and M&A transactions. He is also involved in many privatization projects of state-owned companies in Taiwan. He is a committee member of the Privatization Supervisory Commission of Executive Yuan (Cabinet). Among those M&A transactions that involved cross-border elements, he advised the Carlyle Group in a management buyout transaction to privatize ASE Inc, the biggest semiconductor packaging and testing company in the world. He also advised AEGON Group in its acquisition of TransAmerica Life and AXA Life in Taiwan, and worked with ING Group on 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 and is head of the firm's capital markets practice group. His practice focuses on banking, securities, international corporate finance, and mergers and acquisitions. Liu advises international commercial banks and investment banks on their operations in Taiwan. He has extensive experience in advising on international capital market transactions including global depositary receipts, Euro-convertible bonds and securitization 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' merger with Siliconware Corporation, Epitech Technology Corporation's merger with Formosa Epitaxy Incorporation, 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. Alex 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. She joined Lee and Li in 1981, and is a senior counsel 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. Yeh 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. She was recently involved in a government-mandated study on private equity funds' investments in Taiwan. In 2006, among the various acquisitions and disposal of assets and business by Philips, Yeh helped to conclude the sale of cable television business by The Carlyle Group and helped the Carlyle Group acquire another large cable television business. She also helped conclude a tender offer in Jabil's acquisition of Taiwan Green Point, a Taiwan listed company, and advised HSBC in the sale of its majority interest in Tong Lung Metal Industry to a Taiwan listed company. Sophia Yeh is the leader in the fair trade practice group of Lee and Li and helps various clients in obtaining antitrust clearance in M&A transactions.