After much consideration and preparation, Taiwan and the PRC signed the Economic Cooperation Framework Agreement (ECFA) on June 29 2010. The execution of ECFA will allow Taiwan to become a more attractive partner to foreign enterprises that contemplate entering into the PRC market, as Taiwan enjoys favourable customs to sell and export products to the PRC and has a good legal environment for the protection of intellectual property rights.
According to statistical data published by the Investment Commission of the Ministry of Economic Affairs (MOEA), since restrictions on direct investment in Taiwan by PRC investors were lifted on June 30 2009 there were 102 applications for PRC investment in Taiwan and the accumulated investment had reached $132 million as of December 31 2010.
The top three industries invested in by PRC investors have been computers, electronic products and optical device manufacturing, information and telecommunications, and wholesale and retail. These account for 42.07%, 28.82% and 13.55% of the total investment amount, respectively. Both the government and the private sector believe that the execution of ECFA could promote and attract more PRC investors as well as foreign investors to invest in Taiwan, therefore significantly boosting the potential for investments on the island.
The government also has implemented several measures to support and facilitate PRC investment in Taiwan, including permitting PRC individuals to act as directors or supervisors of Taiwanese companies in which such PRC investors invest, and where such individuals reside in Taiwan for a certain period of time. Measures have also been issued which permit such PRC individuals to be enrolled in labour and health insurance programs in Taiwan and to open bank accounts. Their spouses and children are permitted to reside in Taiwan and certain measures are in place to provide education and healthcare for such children. PRC investors are also permitted to acquire real property in Taiwan for offices, factories and employee dormitories.
Markets on both sides of the Taiwan Strait are looking forward to the possibility of further liberalisation by their respective governments and the continued growth of PRC investment in Taiwan.
More transactions
The 2010 M&A market in Taiwan gradually revived from its lowest point in 2009, especially during the fourth quarter. According to Bloomberg, the 136 transactions involving $5.29 billion in the fourth quarter accounted for 44% of the transactions by number and 47% of the transactions by value in 2010. The largest ROC M&A transaction in 2010 was Carlyle's sale of Kbro to Wealth Media for about $1.19 billion (in the cable TV industry).
In 2011, it is anticipated that the trend of acquisition and consolidation of financial institutions will continue. AIG's announcement of the winning bidder for Nan Shan Insurance in early January 2011 encouraged other foreign insurance companies to plan to dispose of their local stakes. Furthermore, since operating performances in the high-tech and traditional industries in 2010 were better-than-expected and the outlook is generally positive, enterprises may conduct M&A transactions to expand their operations and bolster their continuous growth in 2011.
Amended laws or measures
Securities Exchange Act
Before being amended on June 2 2010, Article 157-1 of the Securities Exchange Act (SEA) provided that upon learning any information that will have a material impact on the price of the securities of the issuing company, insiders must not purchase or sell shares of the company that are listed or are traded on the over-the-counter market, or any other equity securities of that company before public disclosure of such information or within 12 hours after its public disclosure.
After amendment, this 12-hour trading restriction was extended to 18 hours. In addition, insiders are also prohibited from trading the company's corporate bonds before public disclosure of information that would materially affect its capability to repay the principal and interests or within 18 hours after its public disclosure. Furthermore, material information must be "certain" to be deemed inside information.
Even though the legislature has tried to reduce the uncertainty of the definition of insider trading, it is questionable whether the amendments will achieve this purpose. Hence, parties to an M&A transaction should continue to monitor relevant court opinions and decisions.
Income Tax Act
The legislature has adopted a bill to regulate thin capitalisation in the Income Tax Act which provides that, from 2011, if debts payable to interested parties exceed a certain percentage of the owner's equity in an enterprise, the interest accrued for the excess amount cannot be booked as expenses or losses. The bill has become effective pursuant to the President's public announcement dated January 26 2011, and the Ministry of Finance will separately promulgate rules to define debts, interested parties, scope of owner's equity, threshold and other relevant matters.
Given such an amendment, parties to an M&A transaction should evaluate whether the relevant financing arrangements might be affected (from a tax perspective, for example).
Labour laws
Amendments to the Labor Union Act, Collective Bargaining Agreement Act and the Settlement of Labor Disputes Act are scheduled to take effect on May 1 2011.
According to the amended Labor Union Act, when two companies merge the labour unions of the two companies must be merged within one year of the merger record date and assume the rights and liabilities of the two unions in general. If the merger of the unions is not completed within one year, the authorities may order the situation to be rectified within a given period. If rectification is not made within the given period, the authorities will order that the union be re-organised. According to the amended Collective Bargaining Agreement Act, unless otherwise stipulated in the collective bargaining agreement, the agreement will be assigned and transferred to the organisation after the merger or spin-off.
Even though provisions directly relating to M&A transactions in the above three Acts are limited, acquirers must be familiar with these laws in order to negotiate with labour unions, and for collective bargaining agreements, to ensure that labour issues will not be an obstacle to the transaction.
Takeovers
Mandatory threshold
Pursuant to the tender offer rules, any person who, individually or jointly with others, intends to acquire within a 50-day period shares accounting for 20% or more of the total issued shares of a public company must do so through a tender offer.
Methods for achieving takeovers
In Taiwan, there is no statutory squeeze-out mechanism. A majority shareholder has no right to force 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 addition, the Mergers and Acquisitions 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 consideration may be paid in stock, cash or a combination of the two. Following the promulgation and implementation of the M&A Act and other implementing regulations, the regulatory framework and regulatory approval process with respect to takeovers has become more transparent and predictable.
The Financial Supervisory Commission (FSC) of the Executive Yuan amended the Regulations Governing Tender Offers for Purchase of the Securities of a Public Company, and Guidelines for Information to Be Published in Public Tender Offer Prospectuses, in December 2009.
Equal treatment to shareholders
One of the main changes to the Regulations and Guidelines was made due to the trend of management buy-outs. The authorities moved to reinforce the principle of equal treatment of the selling shareholders in tender offer transactions which has been set forth in Taiwan's 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. This would otherwise result in differences in the terms and conditions of the offer among different shareholders.
During the course of finalising 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 the shareholder to make such an investment shall not be from the proceeds that it will receive from tendering its shares to the tender offeror.
Government approval becomes condition precedent
In local practice, a tender offeror needs to specify lower and upper thresholds 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 before 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 an 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 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 be met. Before the amendments to the Regulations and Guidelines, a tender offeror could make a public announcement stating that the conditions of a tender offer were satisfied before the required government approval was 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.
Disclosure requirements
In line with the amendments to the Regulations, amendments were also made to the Guidelines, and two additional matters must be included as part of the terms and conditions of a tender offer:
(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 otherwise permitted pursuant to the Regulations.
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.
As stated above, it has been clarified that obtaining required governmental approvals is 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 courts have elaborated on the term "material adverse change. The relevant authority 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, securities authorities would be extremely reluctant to agree to any suspension of a tender offer driven by commercial reasons. Thus far, no cases have been seen in which 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. In 2009, the China Mobile and Far Eastone deal was conditioned upon the future relaxation of the relevant regulatory restrictions.
Regulations and regulatory bodies
In Taiwan, the M&A Act was 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 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 the 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 supervisory body of the financial industry and securities transaction/market.
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 notifications of combinations (essentially M&A) in Taiwan. In cross-border or global transactions, the Commission often respects the decision of the anti-trust regulator of jurisdictions such as the EU or US.
Recently, regulators in Taiwan have been emphasising and strengthening investor protection in M&A deals as well as the implementation of insider trading regulations. As stated above, "equal protection" of selling shareholders (tender offerees) has become a critical issue and the Securities and Futures Bureau pays special attention to this issue in every tender offer transaction.
Hostile versus voluntary
In general, the relevant laws and regulations in Taiwan 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 seven 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 there are some procedural hurdles that render hostile takeover a less preferable approach, as 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 relevant laws and regulations, a tender offer is required for an acquisition of 20% or more of the total issued shares of a public company within a period of 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.
Other disclosure requirements
In the case of a tender offer, there are regulations regarding publicising the filing in newspapers and online. Within seven days after receiving the tender offer prospectus, the target company must submit the relevant information to the relevant agencies and make a public announcement on the Market Observation Post System of:
(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, it will need to make a public announcement upon the signing of any transaction documents relating to the transaction or upon adopting a board resolution to accept the proposal for the transaction, whichever comes first. Private companies are not subject to any disclosure requirements.
Shareholding reporting threshold
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 takeover 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.
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About the author
Tseng specialises in M&A, corporate governance, and privacy law. She leads the firm’s M&A practice group (non-financial sector). She was involved in the sale of the China Times group, the merger of Taimall and GIC, Eaton’s tender offer for Phonixtec Power, and MStar’s pre-IPO restructuring. Tseng is also known for her work in the areas of e-commerce, broadcasting, telecoms, and data protection. She represents several offshore channels in Taiwan and handles acquisitions of TV channels and system operators. |
Contact information
Ken-Ying Tseng
Lee and Li
7F, 201 Tun Hua N. Road, Taipei 10508, Taiwan, R.O.C.
Tel: +886-2-2715-3300
Fax: +886-2-2713-3966
Email: attorneys@leeandli.com
Web: www.leeandli.com |
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About the author
Chang is head of the firm’s banking practice group and focuses on banking, capital markets, international finance, and M&A. He advised SAC in its NT$11.3 billion syndication financing of the acquisition of Cosmos Bank, and advised six local banks on their customers’ investments in structured notes issued by Lehman Brothers entities. He also assisted Credit Suisse with the establishment of its Taipei Bank Branch under the universal banking structure in Taiwan. |
Contact information
Robin Chang
Lee and Li
7F, 201 Tun Hua N. Road, Taipei 10508, Taiwan, R.O.C.
Tel: +886-2-2715-3300
Fax: +886-2-2713-3966
Email: attorneys@leeandli.com
Web: www.leeandli.com |
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About the author
Mao leads the corporate and investment practice group. Her main practice areas besides corporate and investment include M&A, securities, anti-trust and labour. In addition to advising China Network Systems on the sale of cable systems to MBK for US$1.3 billion, she has also advised CVC, H&Q, ShopNet on various acquisitions. She has extensive experience in handling anti-trust filings and gives sophisticated legal solutions to complex M&A issues. |
Contact information
Lihuei Mao
Lee and Li
7F, 201 Tun Hua N. Road, Taipei 10508, Taiwan, R.O.C.
Tel: +886-2-2715-3300
Fax: +886-2-2713-3966
Email: attorneys@leeandli.com
Web: www.leeandli.com |
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About the author
Lin’s practice focuses on banking, securities, capital markets, international corporate finance, financings (including syndicated financing, structured financing and aircraft/ship financing) and M&A. She assisted Want Want Holding and DNI with their indirect listing in Hong Kong and listing of Taiwan Depositary Receipts, and assisted Deutsche Bank with its launch of the first US$-denominated corporate bonds in Taiwan. Lin also advised on Morgan Stanley’s investment in Chinatrust Financial Holding.
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Contact information
Patricia Ya-chun Lin
Lee and Li
7F, 201 Tun Hua N. Road, Taipei 10508, Taiwan, R.O.C.
Tel: +886-2-2715-3300
Fax: +886-2-2713-3966
Email: attorneys@leeandli.com
Web: www.leeandli.com |