In 2008, the market in Taiwan saw a decrease in M&A activity compared to 2007. In 2007 there were 12 tender-offer cases launched. Most of them combined with a back-end merger or a type of post-tender offer restructuring transaction and private equity funds were the most active buyers. In 2008, there were four tender-offer cases and fewer take-over cases by private equity funds.
On the other hand, with respect to the financial sector, there were a number of transactions in 2008 concerning the sales of distressed banks or financial institutions. In addition, due to the adoption of international financial reporting standards by European insurance companies to determine their liability adequacy, several European insurance companies have sold or have begun selling their local assets or businesses to local insurance companies since the end of 2008. The market in the second half of 2008 also saw M&A deals where sellers in urgent need of cash sought buyers for assets with solid fundamentals and potential for growth.
Since President Ma Ying-Jeou was elected in 2008, it has been anticipated that the new administration will repeal the long-time ban on Chinese investment in Taiwan. For example, concerning investment in listed securities in Taiwan, the securities regulatory authorities have cancelled the requirements for foreign institutional investors in the form of investment fund to issue statements verifying that the funds to be invested in Taiwan do not include any Chinese source of funds. Furthermore, institutional investors qualified under the laws of China are now permitted to invest in the Taiwan stock market. It has also been anticipated that the government would begin to allow Chinese investors to make direct or indirect investments in certain industries in Taiwan.
It has been anticipated that the soonest time for the government to finalise the relevant proposals to allow investments from China into Taiwan would be some time in May or June 2009, after the third meeting of Chiang and Chen held in April 2009.
In view of the global economic downturn, it is possible that there may be more M&A deals related to distressed or insolvency companies in 2009. In this regard, there were several acquisitions of distressed local companies, including banks, by local or international companies in 2008. It has been anticipated that there would be more of such deals in 2009 and the legal services for such transactions may require a combination of traditional M&A techniques and reorganisation or bankruptcy aspects.
Furthermore, should the relevant changes to laws and regulations be passed allowing investments from China into Taiwan as discussed above, it is anticipated that there could be cross-strait M&A activities.
Bank seizure
The takeover activities of banks in Taiwan may be affected by a newly-amended banking regulation. The new amendment adopted at the end of 2008 requires that a person or related party who, individually, jointly or collectively holds more than 5% of a bank's total outstanding voting shares, shall report such shareholding to the Financial Supervisory Commission (FSC) within 10 days of its acquisition of such shares. Thereafter, as long as such person or related party holds at least a 5% interest in the bank, reporting will also be required whenever there is an accumulated increase or more than 1% decrease of the bank's total outstanding voting shares in such person's or related party's shareholding. For non-banks, the reporting threshold is 10%.
The 'fat cat' clauses
In view of the global financial crisis, the government intends to make a special financial assistance programme available to Taiwanese enterprises, similar to the financial rescue package announced by the US government. Given that the various assistance funds disbursed by the government to companies in the private sector will ultimately impose a shared burden on the tax payers, the amendments to the Company Act adopted several measures to monitor such companies.
When a company avails itself of a special assistance programme, the remuneration of its managers will be subject to a statutory cap to be set by the competent authority, in order to prevent the unfair situation whereby managers continue to receive high remuneration when their company is performing poorly. By the same token, the law requires that directors' remuneration should be determined in accordance with a company's articles of incorporation and with resolutions of its shareholders' meetings, and may not be set retrospectively. However, since the shareholding structure of Taiwanese companies is concentrated, the Company Act has been amended to expressly provide that when a company avails itself of a special assistance programme, the remuneration of its directors and supervisors should also be subject to a statutory cap to be set by the competent authority.
Based on the regulatory approach underlying the US financial assistance package, when a company avails itself of a special assistance programme, the government is permitted to receive shares newly issued by the assisted company as consideration for the financial assistance, and the share issuance procedure is not subject to those restrictions on the issuance of new shares under the Company Act. This measure is intended to allow all Taiwanese taxpayers to share in the profits of assisted enterprises after such enterprises successfully emerge from their difficulties. According to the Ministry of Economic Affairs' proposals, in order to improve an assisted company's financial structure, the company should first reduce its capital and then increase it again in accordance with the Company Act, with the government becoming a shareholder of preferred shares after the increase in capital.
Private-market monitoring
Private equity funds were quite active in the M&A market in Taiwan in 2006 and 2007. Since most of the target companies were listed companies, such M&A transactions inevitably had certain impacts on public investors, especially when the target company would be de-listed after the transaction. Therefore, several rules have been adopted by the government authorities to ease the concerns of the public with regard to M&A transactions initiated by private equity funds. For example, to mitigate risks arising from the high-leverage financial model commonly used by private equity funds, the government authority monitoring foreign investment activities has proposed to adopt thin capital rules and limited the debt-to-equity ratios to no higher than 66.7.
In furtherance of efforts to ease the concerns of the public, the newly amended Corporate Governance Best-Practice Principles for Taiwan Stock Exchange Corporation/GreTai Securities Market listed companies require listed companies to conduct management buyouts (MBOs) in accordance with the relevant laws and regulations and further, the Best Practice Principles recommend listed companies form an independent committee to review acquisition prices and the fairness of MBO-acquisition plans. The Best Practice Principles also remind the persons of the target company conducting the MBO of their legal obligations concerning conflict of interest.
Delisting rule amendments
The Taiwan Stock Exchange (TWSE) and the GreTai Stock Market (GTSM) revised their listing rules to address issues related to listing and delisting as a result of mergers and acquisitions. For instance, a non-listed company that acquires a listed company through a share exchange may apply for listing on the TWSE and the GTSM and a spin-off company meeting certain criteria may apply for an accelerated listing on the TWSE and the GTSM. The new delisting rules, which became effective in the fourth quarter of 2007, allow a delisting and a merger to take effect at the same time.
The delisting rules have become more stringent in that the resolution for the delisting must be agreed by the directors or shareholders representing two-thirds or more of total issued and outstanding shares in the company.
M&A transactions in 2008
- ING's sale of its life insurance business to Fubon Financial Holding
- Standard Chartered's acquisition of Asia Trust from Central Deposit Insurance
- The sale of China Times Media group, including China Times, China TV, and CTiTV and other targets
- Acquisition of Dragon Steel by China Steel
- Micron Technology's acquisition of Inotera Memories
- MBK Partner's acquisition of GTV
- Macquarie Korea Opportunities Fund's acquisition of Taiwan Broadband
Legislation coming down
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 2002 enactment of the M&A Act, M&A activities, especially cross-border deals, had encountered difficulties for the various restrictions set forth in the Company Act, the Civil Code, the Fair Trade Act (FTA) as well as the Labor Standards Act and required a lengthy process to complete a deal. The 2002 legislation, including the enactment of the M&A Act and amendments to the FTA and the SEA, are summarised below:
- Certain M&A transactions may qualify for exemption of the statutory preemptive rights of shareholders and employees as provided in the Company Act;
- The M&A Act recognises the enforceability of voting agreement and restrictions on share-transfer for an M&A transaction, which used to be an unsettled issue for years in practice;
- The M&A Act introduces more types of merger, including, 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 major 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;
- In terms of demerger (spin-off), the M&A Act permits demerger of companies and stipulates the relevant corporate actions required for 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, value-added tax, and land-value incremental tax, are exempted in a merger, demerger or an acquisition where at least 65% of the consideration is paid with voting stock; and
- 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.
Foreign-investment regulation
A foreign investor who wishes to make investments in a Taiwanese 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 investments in Taiwan-listed securities. It is anticipated that the application and approval procedures for foreign investment will be amended in light of the anticipated permission of Chinese direct/indirect investment.
Foreigners are not permitted to invest in certain industries. 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 have fallen under the Negative List, the investments by foreign investors in other businesses are 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 restriction and foreign investments in terrestrial broadcasting networks are prohibited.
Disclosure demands
Transparency and disclosure
According to 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. For any such event, a public company needs to make disclosure to the public no later than the next day after the day of the occurrence of such event. The official disclosure method is for a public company to enter such an event into the Market Observation Publication System (MOPS) maintained by the TWSE.
In addition, public companies in Taiwan are subject to the relevant disclosure requirements for certain periodical events, such as the disclosure of quarterly, semi-annual and annual reports by public companies. A public company shall disclose its quarterly reports for the first and third quarter of each year no later than one month after the end of such quarter, no later than two months following the end of the first-half of a year for its semi-annual report and no later than four months following the end of each year for its annual report.
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 shall keep the information in strict confidence and shall not engage in any trading of the company's securities.
To ensure transparency during the course of a M&A transaction and to avoid any insider trading activities in the process of a M&A transaction, the TWSE has amended its rules by requiring TWSE-listed companies to enter into the MOPS so that certain information relevant to a M&A deal, including the names of the persons participating in the deal and important matters and dates, is disclosed within two days after the board has passed any resolution for approval of a M&A transaction.
Disclosure requirements concerning tender offer
In the case of a tender offer, the tender-offer filing shall be published in the press, and the tender-offer filing and the prospectus shall be uploaded 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 after 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, TWSE and Taiwan Securities Centralised Depository Corporation) and make public announcement on MOPS: (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 (Mac) 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 a M&A transaction involves a public company, the company will need to make a public announcement upon the signing of 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 any disclosure requirements.
Mac clauses are seen as the condition precedent to the conclusion of a public tender offer (only limited to a Mac 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, so the relevant authorities may, at its discretion determine whether there is a Mac 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. Thus far, there have not been cases where a Mac has resulted in failure of public-tender offer or large private deals.
Takeovers
Regulatory bodies
In Taiwan, the M&A Act was enacted to govern takeovers in general. The MOEA is the regulatory body in charge of the interpretation and application of the M&A Act and matters regarding formation of corporate entities and registration of companies. A part of the MOEA's function is similar to that of the US Department of Commerce. 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 supervision body of the financial industry and securities transaction/market. The FSC could be viewed as similar to the US Securities and Exchange Commission.
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 in Taiwan. In cross-border or global transactions, the FTC oftentimes would respect 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 regulation has been strengthened.
Methods achieving takeovers
Tender offer with a back-end cash-out merger have become popular methods for takeovers of public companies in Taiwan since 2007. 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 shall 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-days intervals.
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 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.
Hostile or voluntary
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 as well as provide 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 that render a hostile takeover a less-preferable approach, compared with voluntary takeover. Among others, it may be a time-consuming process to reorganise the target board and management team in the absence of an agreement with the key members of the target board.
Penalties for violation
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 not less than NT$100,000 and up to NT$50 million.
Disclosure thresholds
Pursuant to Article 43-1 of the SEA, any person who individually or jointly with others have 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 such acquisition, the funding source and other matters prescribed by the competent authority. This reporting requirement applies to any subsequent change of the items reported. Note that for the takeover of banks, the reporting threshold has been lowered to 5%. Please refer to discussion under the section of new laws or measures concerning M&A activities above.
Antitrust concerns
Combination notification
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 any of the statutory thresholds are required to make a notification with the FTC before closing the combination transaction.
The statutory thresholds include:
- as a result of the combination, any of the enterprises will acquire one-third or more of the market share;
- an enterprise participating in the combination holds one-fourth or more 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, which are, 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:
- 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 direct, substantial and reasonably foreseeable effect on the Taiwanese market.
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.
Enforcement
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-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 and antitrust regulations. For example, in 2008 the FTC revoked its Guidelines for Handling Civil Air Transportation Enterprises' Merger Filings and Guidelines on Unendorsed Ticket Transfers between Airline Companies, and issued Guidelines for Handling Merger and Concerted Action Cases of Domestic Civil Air Transportation Enterprises. The new guidelines are intended to enable the FTC to effectively handle domestic civil air carriers' merger filings and applications for permission to engage in concerted actions, in order to maintain the orderly conduct of trade, uphold consumers' interests and assure fair-market competition, following the major changes in the competitive environment in Taiwan's domestic air transportation market since the entry into service of the Taiwan High-Speed Rail.
Concerning merger control, in the past, the FTC seldom objected to any combination notification or imposed any penalty except for combinations in certain industries, such as the cable TV industry. Nevertheless, in September 2008, the FTC ruled on a proposal by a leading instant noodle vendor to indirectly acquire, through a subsidiary, more than one-third of the shares in another leading instant noodle vendor. Finding that the proposed takeover was likely to restrict competition, and considering the insignificance of the overall economic benefit of the proposed takeover, the FTC held that the overall economic benefit of the business combination would not outweigh the harm of restraint of competition, and barred the takeover pursuant to Article 12 Paragraph 1 of the FTA. In April 2008, the FTC determined that the adverse consequences of restraining competition arising from the proposed acquisition and merger of Cashbox Party World Karaoke Parlors by Holiday Group would outweigh the overall economic benefit from the transaction and thus the FTC prohibited the merger under Article 12 Paragraph 1 of the FTA. This is the second time that the FTC objected to the merger of the two KTV players.
Regulation on 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 may 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.
| Author biographies |
Ken-Ying Tseng
Lee and Li
Ken-Ying Tseng, a partner specialising in M&A, corporate governance, e-commerce, telecom, media and employment law, leads the firm's M&A practice group (non-financial sector). Tseng received a law degree from Harvard Law School after receiving a Master of Laws and a legal degree from National Taiwan University. Having advised both sellers and buyers in various forms of M&A, Tseng is experienced in identifying and resolving both legal and commercial issues. The list of transactions that Ken-Ying has handled in recent years includes, among others, the sale of China Times group in 2008, the merger of Taimall (the first shopping mall in Taiwan) and GIC, Eaton's tender offer for Phonixtec Power in 2007, Arrow's acquisition of Ultra Source in 2007 and subsequent delisting.
In addition to assisting in acquisitions in Taiwan by foreign companies such as Henkel, Bureau Veritas, the Laird group, BASF and Tesco, Tseng also advises local companies on offshore listing matters, such as the listing of Good Friend International in Hong Kong in 2006. Furthermore, she has extensive experience in advising clients for compliance with e-commerce, telecom and media and employment laws.
Robin Chang
Lee and Li
Robin Chang is a partner at Lee and Li and the head of the firm's banking practice group. His practice focuses on banking, capital market, international finance and M&A.
Chang received his law degree in 1993 from National Taiwan University. In 1999, he received a Masters degree from the University of Pennsylvania. He is a member of the Taipei Bar Association.
Chang advises major international commercial banks and investment banks on their operations in Taiwan. He advised SAC in its syndication financing of TWD$11.3 billion for acquisition of Cosmos Bank in Taiwan. He also advised six local banks for their customers' investments in structured notes issued by Lehman Brothers entities. He assisted Credit Suisse in establishment of its Taipei Bank Branch under the universal banking structure in Taiwan, which is the country's first 'dual branch' structure. Chang represented RBS in restructuring its local structure of Taiwan branches of ABN Amro Bank. He has also been involved in many M&A transactions of financial institutions, including Temasek's 15% investment in E Sun Financial Holdings Company and Chinatrust Financial Holding Company's acquisition of Grand Commercial Bank in Taiwan.
Lihuei Mao
Lee and Li
Lihuei Mao, a partner of Lee and Li, received a law degree from National Taiwan University and a Masters from New York University. She is a member of the Taiwan Bar Association as well as the New York State Bar Association. Mao leads the corporate and investment practice group at Lee and Li and her main practice areas, besides corporate and investment, include M&A, securities anti-trust law and labor law.
In addition to advising China Network Systems on the sale of cable systems to MBK for $1.3 billion, Mao has also advised CVC, H&Q and ShopNet, among other major clients, on various acquisitions. Such expertise, as well as her extensive experience in handling anti-trust filings, and insights from having assisted international companies in various industries enable Mao to provide her clients with sophisticated legal solutions to complex M&A issues.
Patricia Ya-chun Lin
Lee and Li
Patricia Ya-chun Lin is a senior counselor at Lee and Li. Her practice focuses on banking, securities, capital markets, international corporate finance, aircraft and ship financing and M&A.
Lin has assisted on many international capital market transactions, including global depositary receipts, American depositary receipts, Euro-convertible bonds and Euro exchangeable bonds. She has successfully helped Deutsche Bank launch the first US dollar denominated corporate bonds in Taiwan. She also advises major international commercial banks and investment banks on their operations in Taiwan.
Lin is an expert on M&A transactions involving Taiwan listed companies (in particular, Taiwan financial holding companies and banks). She has advised, among others, the local banks or financial holding companies and the foreign private equity funds or investors in connection with their proposed acquisition in the local financial holding companies and banks. She has also advised several M&A activities between financial institutions and between companies in general industry. In the last five years, she has advised Cosmos Bank in connection with the investment by GE Capital, and she has also advised a major international private equity fund in two transactions to acquire local financial holding companies, as well as several other cross-border M&A transactions.
Moreover, Lin is an specialist in aircraft and ship financing. She has assisted international banks in connection with their financing to local airlines in lease, sale and lease-back, conditional sale and other structures.
Lin received her law degree in 1993 from National Cheng-Chi University and her Masters in 1995 from Boston University. She is a member of the New York State Bar Association. |