After much consideration and preparation, the current Taiwanese administration first permitted PRC (People's Republic of China) investors to make direct investments in Taiwan as of June 30 2009. According to statistical data published by the Investment Commission of the Economic Affairs, as of the end of March 2010, the accumulated PRC investment in Taiwan since June 30 2009 amounted to $68,939,000, which is significantly less than what the ROC (Republic of China) government and the private sector had anticipated. Therefore, both the government and the private sector have continued their efforts to promote and attract PRC investors to invest in Taiwan.
For example, the ROC government has implemented several measures to support and facilitate PRC investment in Taiwan, including permitting PRC individuals to act as directors or supervisors of ROC companies (in which such PRC investors invest, enter into and stay in Taiwan for a certain period of time). There have also been measures permitting such PRC individuals to be enrolled in labour and health insurance programmes in the ROC and to open bank accounts. Also, their spouses and children are permitted to reside in Taiwan and certain measures are in place to provide education and healthcare for such children residing in Taiwan. PRC investors are also permitted to acquire real properties in Taiwan for offices, factories and employee dormitories.
Both sides across the Taiwan Strait are currently looking forward to the possibility of further liberalization from both governments and the continued growth of PRC investment in Taiwan.
M&A changes
The 2009 M&A market in Taiwan did not meet initial projections, which were in part based upon an anticipated surge in bankruptcies and reorganizations that ultimately, did not occur. According to Bloomberg, however, the largest ROC M&A transaction in 2009 (the Taiwan Mobile/Eastern Multimedia deal) was actually twice the size of the largest deal in 2008. There were also quite a few transactions concluded on the basis that the sellers were in need of cash or restructuring. In 2010, it is speculated that there will be more acquisitions and divestments of multiple system operators as well as independent local system operators, which will involve investments from private equity funds. In addition, the trend of acquisition and consolidation of financial institutions should continue, as certain distressed foreign financial institutions continue to dispose their assets in Taiwan, while other foreign financial institutions are interested in acquiring local banks with solid asset bases and a history of sound, good management. Furthermore, as many M&A deals were postponed or suspended in 2009 either due to the financial crisis or fluctuation of the trading prices in the stock exchanges, one could imagine that in 2010, these deals may resume and that buyers would continue to search for new targets.
In December 2009, the Financial Supervisory Commission (FSC) of the Executive Yuan amended the Regulations Governing Tender Offers for Purchase of the Securities of a Public Company (the Regulations) and Guidelines for Information to Be Published in Public Tender Offer Prospectuses (the Guidelines).
One of the major changes was made due to the trend of management buy-outs, hence the authorities wanted to reinforce the principle of equal treatment of the selling shareholders in tender offer transactions, as set forth in the Securities Transaction Act. The amendment prohibits a tender offeror from entering into agreements with certain selling shareholders who participate in the tender offer, to offer special rights to such selling shareholders, therefore resulting in difference in the terms and conditions for the tender offer between different shareholders. During the course of finalizing the amendment, the competent authority provided an example for illustration purposes: if a selling shareholder is allowed to invest in the tenderor or its affiliate in a tender offer transaction, (i) such a shareholder shall complete such investment before it tenders its shares to the tender offeror; or (ii) the source of funds for such shareholder to make such investment shall not be from the proceeds that it is to receive from tendering its shares to the tender offeror.
In local practice, a tender offeror needs to specify a lower threshold and an upper threshold for the number of shares that it intends to acquire and a tender offer will only be closed if the number of shares being tendered reaches the lower threshold. Such thresholds are deemed as a condition to a tender offer. In the past, whether any government approval required should also be deemed as a condition to a tender offer (which should be obtained prior to the announcement of a successful tender offer) or a condition to the payment of a tender offer (which should be obtained after the announcement but before the payment deadline) has been debated. The amendment specifically includes any required government approval concerning a tender offer as a condition that shall be satisfied before a tender offeror publicly announces the success of a tender offer. The amendment also requires that a tender offeror make a public announcement and notify the competent authority within two days of the satisfaction of the conditions of the tender offer. In addition, the amendment specifically states that a tender offeree may withdraw his/her agreement to sell before the tender offer is approved by all competent authorities even if the number of shares being tendered has reached the minimum number of shares for acquisition in the tender offer as set by the tender offeror.
In local practice, shareholders of a target company may be less willing to tender their shares unless they are certain that the conditions of a tender offer will definitely be met. Before the amendments to the Regulations and the Guidelines, a tender offeror could make a public announcement stating that the conditions of a tender offer were satisfied before the required government approvals were obtained in order to encourage shareholders to tender their shares. Given the amendments, one can imagine that it may become more difficult for a tender offeror to induce the shareholders to tender their shares before government approvals are obtained.
In line with the amendments to the Regulations, amendments were made to the Guidelines. Certain additional matters must now be included as part of the terms and conditions of a tender offer and be disclosed in the prospectus: (i)whether the tender offer is subject to the approval of, or registration with, the FSC or other authorities; and if so, whether the tender offer has been duly approved or registered; and (ii) in the event that the tender offeror makes a public announcement after the conditions of the tender offer are satisfied, the tender offeree is prohibited from withdrawing his/her express intent to sell, unless it is otherwise permitted pursuant to the Regulations. Further, in the prospectus, an additional matter should be included in the section on matters concerning the tender offeror's sale or purchase of the target company's shares: the terms and conditions of any agreement or arrangement between the tender offeror and certain shareholders of the target company with respect to the tender offer shall be stated, for example, whether the shareholders will be entitled to participate in any investment to be made by the tender offeror or any of its affiliates.
PRC investors
The Act Governing Relations between Peoples of the Taiwan Region and the Mainland Region (the Act) prescribed that PRC investors may make investment in Taiwan if approved by the competent authorities. However, in the absence of relevant regulations to guide the approval of such investments, the access has long been denied.
The Executive Yuan approved the Regulation Regarding the Taiwan Investments Made by Persons of the Mainland Region (the Investment Regulation) and the Regulation Regarding the Establishment of Branch Offices or Agencies in Taiwan by Profit Seeking Enterprises of the Mainland Region (the Establishing Regulation). Starting from June 30 2009, access has been granted to inbound PRC capital for local investments.
As a general rule, an individual, juristic person, organization, or other institution of the Mainland China Region (a mainland person), or any company a mainland person invests in, in any third region, must obtain an approval pursuant to the Investment Regulation before making any investment in Taiwan.
Permitted investments include: (i) the acquisition of shares of equity interest of Taiwanese companies or other entities, (ii) the establishment of branch offices, solely-invested enterprises, or partnerships, and (iii) the provision of loans with terms of one-year or more to the above-mentioned investment target entities.
Regarding the investment through a third-region company, such third-region company, according to the Investment Regulation, refers to any company established pursuant to the law of a jurisdiction other than the mainland and Taiwan regions with an investment from a mainland person, where (i) such mainland person directly or indirectly holds more than 30% of the equity interest of such third-region invested company, or (ii) such mainland person has control over the such company. This indirect investment should be made pursuant to the Investment Regulation instead of the Statute for Investments for Foreign Nationals.
Along with the promulgation of these regulations, the Investment Committee published a list of almost 200 industries of manufacturing, service and public construction sectors eligible for investment using mainland capital. Nevertheless, the relevant authorities will have the right to further restrict or deny applications for policy reasons.
Under the Establishment Regulation, mainland companies may apply to establish branch offices or agencies in Taiwan, subject to different documentation and approval requirements. It is also required that applicants set aside operating funds specifically for their Taiwan branches to meet the minimum requirements stipulated by the authorities governing the relevant industries to be invested in.
Takeovers
In Taiwan, the Merger and Acquisition Act (M&A Act) was specifically enacted to govern takeovers in general. The Ministry of Economic Affairs (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 DOC of the U.S. 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 an equivalent to the SEC (Securities and Exchange Commission) of the U.S.
A takeover meeting any of the thresholds provided in the Fair Trade Act (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 anti-trust regulator of major jurisdictions, such as the EU or the U.S.
Recently, the regulators have been emphasizing and strengthening investor protection in M&A deals as well as the implementation of insider trading regulations. As stated above, the tender offer rules have been amended to strengthen equal protection of selling shareholders (tender offerees) and law enforcement authorities have been conducting intensive investigation and prosecution of insider trading violations. Since 2007, almost every tender offer case has encountered questioning or investigation from law enforcement authorities with regard to insider trading.
In Taiwan, there is no statutory squeeze-out mechanism. A major shareholder has no right to force the minority shareholders to sell out their shares. The only way to achieve this objective is to conduct a cash merger or share exchange with redemption of preferred shares.
As such, a tender offer with a back-end cash merger has become a popular method for takeovers of public companies in Taiwan since 2007. Pursuant to the tender offer rules, 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 tender offer.
In addition, the M&A Act provides various other methods for takeovers, including short-form merger, de-merger, share 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. Following the promulgation and implementation of the M&A Act and other implementation regulations, the regulatory framework and regulatory approval process with respect to takeovers has become more transparent and predictable.
As stated above, according to the newly amended tender offer rules, it has been clarified that obtaining required governmental approvals shall be one of the conditions to a tender offer and a public announcement of a successful tender offer cannot be made without first obtaining such required governmental approvals. For private deals, obtaining required governmental approvals has always been a condition precedent. Another common condition to a tender offer is to ensure that there are no encumbrances on the shares to be tendered.
Material adverse change clauses are also commonly seen as the condition precedent to the conclusion of a 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 its 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. Thus far, we have not seen cases where material adverse change has resulted in failure of tender offer or large private deals.
For deals that are not conducted by way of tender offer, there have been many kinds of conditions precedent based on the parties' needs and requirements. For example, in 2009, the China Mobile and Far Eastone deal was conditioned upon the future relaxation of the relevant regulatory restrictions.
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 to provide recommendation to its shareholders within 7 days after being notified of the tender offer pursuant to the tender offer rules. 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 hostile takeover a less preferable approach, compared with voluntary takeover. Among others, it may be a time-consuming process to reorganize the target board and management team in the absence of an agreement with the key members of the target board.
Except as otherwise exempted by the relevant laws and regulations, a 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 ($3,144) and up to NT$50 million.
In the case of a tender offer, the tender offer filing shall be published in the newspapers 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 of receiving the tender offer prospectus, the target company has to submit the following information to the relevant agencies (including, Securities and Futures Bureau, Securities Association, Securities & Futures Institute, Taiwan Stock Exchange, and Taiwan Securities Centralized Depository Corporation) and make a public announcement on MOPS (Market Observation Post System): (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 involving a public company, the company will need to make 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.
Pursuant to 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 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 take-over of banks, the reporting threshold has been lowered to 5%. Any 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 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 decrease in excess of 1% of the bank's total outstanding voting shares in such person's or related party's shareholding.
Competition
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:
(i) as a result of the combination, any of the enterprises will acquire one-third or more of the market share;
(ii) an enterprise participating in the combination holds one-quarter or more of the market share; or
(iii) 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:
(i) involves two or more foreign enterprises engaging in a combination outside the territory of Taiwan;
(ii) constitutes any of the circumstances provided in Article 6 of the FTA; and
(iii) 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.
In Taiwan, it is the FTC that 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 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. 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 significantly 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 Co. Ltd. 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 major KTV players.
Article 10 of the FTA prohibits an enterprise with 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.
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About the author
Ken-Ying Tseng, a partner with Lee and Li. She specialises in mergers and acquisitions, corporate governance, e-commerce, telecom, broadcasting and privacy law and leads the firm's mergers and acquisitions practice group (non-financial sector). She received an LLM from Harvard Law School after receiving an LLM and an LLB from National Taiwan University. Having advised both sellers and buyers in various forms of mergers and acquisitions, Ken-Ying is experienced in identifying 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, the merger of Taimall, the first shopping mall in Taiwan, and GIC, Eaton's tender offer for Phonixtec Power, Arrow's acquisition of Ultra Source and subsequent delisting. |
Contact information
Ken-Ying Tseng
Lee and Li
7F, 201 Tun Hua N. Road Taipei 10508 Taiwan, R.O.C.
Tel: +886-2-27153300 ext. 2179
Fax: +886-2-2713-3966 Email:kenying@leeandli.com
Web:www.leeandli.com |
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About the author
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 mergers & acquisitions.
Robin received his Bachelor of Law degree in 1993 from National Taiwan University. In 1999, he received a Master of Law degree from the University of Pennsylvania. He is a member of the Taipei Bar Association.
He advises major international commercial banks and investment banks on their operations in Taiwan. He advised S.A.C. in its syndication financing of NT$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 first dual branch structure in this country. |
Contact information
Robin Chang
Lee and Li
7F, 201 Tun Hua N. Road Taipei 10508 Taiwan, R.O.C.
Tel: 886-2-27153300 ext. 2208
Fax: +886-2-2713-3966 Email:robinchang@leeandli.com
Web:www.leeandli.com |
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About the author
Lihuei Mao, a partner of Lee and Li, received an LLB from National Taiwan University and an LLM from New York University and is a member of the Taiwan Bar Association as well as the New York State Bar Association. Lihuei leads the corporate and investment practice group at Lee and Li, and her main practice areas besides corporate and investment include mergers and acquisitions, securities anti-trust law and labour law.
In addition to advising China Network Systems on the sale of cable systems to MBK for U$1.3 billion, Lihuei also advised CVC, H&Q, ShopNet, among other major clients, on various acquisitions. |
Contact information
Lihuei Mao
Lee and Li
7F, 201 Tun Hua N. Road Taipei 10508 Taiwan, R.O.C.
Tel: +886-2-27153300 ext. 2274
Fax: +886-2-2713-3966 Email:lihueimao@leeandli.com
Web:www.leeandli.com |
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About the author
Patricia Lin is a senior counselor at Lee and Li. Her practice focuses on banking, securities, capital market, international corporate finance, financings (including syndicated financing, structured financing and aircraft/ship financing) and mergers & acquisitions.
She has assisted many international capital market transactions, including issuance of global depositary receipts, American depositary receipts, Taiwan Depositary Receipts, Euro-convertible bonds and Euro exchangeable bonds and has successfully helped Want Want Holding and DNI to be listed in Hong Kong and to list the Taiwan Depositary Receipts in Taiwan. She has also assisted Deutsche Bank to successfully launch the first $-denominated corporate bonds in Taiwan.
Patricia is also an expert in M&A transactions and has been involved in M&A transactions in both general industries and highly regulated industries (such as financial industries and telecom industries). She has advised several local banks/financial holding companies/securities firms and foreign private equity funds/investors in connection with the proposed acquisition between the acquirer and local financial holding companies and banks (such as Cosmos Bank being invested by GE Capital, Soro's investment in Taishin Financial Holding, Morgan Stanley's investment in Chinatrust Financial Holding and E.Sun Financial Holding and IBT's consolidation into Sinopac Financial Holding Company). She also advised the Taiwan telecom company for the first Mainland China company (Chinamobile)'s investment.
Moreover, she is an expert in aircraft/ship financing. She has assisted international banks and local airlines in connection with the financing with respect to lease, sale and lease back, conditional sale and other structured financing. |
Contact information
Patricia Ya-chun Lin
Lee and Li
7F, 201 Tun Hua N. Road Taipei 10508 Taiwan, R.O.C.
Tel: +886-2-27153300 ext. 2235
Fax: +886-2-2713-3966 Email:patricialin@leeandli.com
Web:www.leeandli.com |