Taiwan: A change in practice

Author: | Published: 1 Apr 2012
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Both the Taiwanese Company Act (applicable to all types of M&A transactions) and the Securities Exchange Act (applicable to M&A transactions involving public companies) were substantially amended in 2011, affecting the technicalities of M&A transactions in Taiwan. Most of the amendments took effect in January 2012.

As many as 26 articles of the Company Act were amended in 2011. Most of the amendments are aimed at strengthening corporate governance by, for example, allowing shareholders to pass a resolution electronically.

Those amendments made to the Securities and Exchange Act are aimed to tighten supervision on foreign issuers, to offer more protection to minority shareholders, and to promote accounting harmonisation.

There are a number of key implications of the amendments. The first is that a shareholders' resolution required to change back to a private company. Before the amendments, it was unclear whether an unlisted public company should obtain a shareholders' resolution in order to change back to a private company. To fill this gap, the Company Act now prescribes that if an unlisted public company wishes to change back to a private company, a shareholders' resolution approving the change must be adopted.

There is now more flexibility in the redemption of preferred shares. Issuing redeemable preferred shares has been one of the strategic steps to take control of a targeted company. In the past, redemption of preferred shares had to be financed by earnings of the company or cash the company obtained through a share issue. This restriction was abolished giving companies more choices on the source of funds for redeeming preferred shares.

Given that sometimes it would be necessary for a company to restrict its employees' transfer of company shares, the Company Act has introduced an exception to the freedom of shareholders to transfer their shares, allowing companies to prohibit employees from transferring the restrictive shares that they receive within a period of up to two years of receiving such shares. The Company Act also regulates how such a restrictive share scheme should be implemented.

Furthermore, companies may now distribute non-cash assets to shareholders when conducting a capital reduction. This gives companies more financial flexibility. However, details of the distribution must be approved by shareholders at a shareholders' meeting and agreed to by the shareholders that would receive non-cash assets. Also, the value of the assets concerned and the amount of capital they may represent must be verified by a CPA.

There is now a restriction on directors' rights as shareholders. If a director of a public reporting company pledges over 50% of his/her shares in the company that he/she held at the time of being elected, the director will have no voting rights for the portion of the shares exceeding such 50% shareholding. For example, if a director held 1 million shares when he/she was elected and then pledged over 600,000 shares during his tenure, he/she would have no voting rights for 100,000 shares. Originally, for a director to pledge his/her shares in a company, he/she only needs to comply with the relevant disclosure requirements and there was no restriction on his/her voting rights.

This new rule may affect the financial arrangement of directors of public companies, especially those corporate shareholders that act as directors or appoint individuals to be directors of public companies. They may need to negotiate with their banks to replace the collateral they have provided so as to maintain control over the company. This may also affect the financial ability of a potential buyer of a public company, because the shares in the targeted public company are no longer an ideal collateral for loans to finance the acquisition.

The right to appoint directors and supervisors by a single corporate/government shareholders has been abolished. In fact, the right has been severely criticised for undermining corporate governance given that the role of a supervisor is to supervise the performance of directors. The scope of this right was first limited when the Securities and Exchange Act was amended in 2006 to prohibit public companies from having directors and supervisors appointed by the same corporate/government shareholder. The government took a further step in 2011 to amend the Company Act to prohibit all companies, whether private or public, from having directors and supervisors appointed by the same corporate/government shareholder.

The concept of shadow directors has been introduced by the amendments . In the past, only registered directors owed fiduciary duties to their company. From now on, anyone who actually performs the duties of a director, or controls the personnel, financial or business affairs of a company and gives instructions to its directors will be held liable as if he/she were a registered director of the company. As this concept is new in Taiwan, how relevant regulations will be enforced and interpreted by the law enforcement authorities is an important issue for local legal practitioners.

Finally, the amendments have removed the requirement for foreign companies seeking listing in Taiwan to set the par value of their shares at NT$10 ($0.34) per share. This would mean lower costs, a shorter listing process and less tax liability for those foreign companies because they do not have to set up a holding company in a third jurisdiction such as the Cayman Islands for the purpose of ownership restructuring in order to satisfy the par value requirement.


Pursuant to the tender offer rules in Taiwan, 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.

In Taiwan, there is no statutory squeeze-out mechanism. A majority 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.

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 implementation 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.

One of the major changes was made due to the trend of management buy-outs and hence the authorities moved to reinforce the principle of "equal treatment" of the selling shareholders in tender offer transactions, which has been set forth in our 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 and therefore resulting in a difference in the terms and conditions for the tender 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 must 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 can not be from the proceeds that it is to receive from tendering its shares to the tender offeror.

Government approval has now become a condition precedent. 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 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 must 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 condition of a tender offer was 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.

In line with the amendments to the Regulations, the following amendments to the Guidelines were made to reflect new disclosure requirements. First, 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 is otherwise permitted pursuant to the Regulations.

Secondly, 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 must 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 will 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 have elaborated the term "material adverse change", so 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, the 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 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.

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 Department of Commerce of the US 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 supervision 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 (mergers or acquisitions) 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 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.

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.

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, the tender offer filing must be published in the newspapers, and the tender offer filing and the prospectus must 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 must submit the relevant information to the relevant agencies (including, the Securities and Future Bureau, the Securities Association, the Securities & Futures Institute, the Taiwan Stock Exchange, and the Taiwan Securities Centralised Depository Corporation) and make a public announcement on the Market Observation Post System (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 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 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.

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, must 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.

Ken-Ying Tseng
  Ken-Ying Tseng is head of Lee and Li’s M&A practice group (non-financial sector), and specialises in merger and acquisition, corporate governance, and privacy law. She received an LLM from Harvard Law School after obtaining an LLM and an LLB from National Taiwan University. Having advised both sellers and buyers on various forms of mergers and acquisitions, she is experienced in resolving both legal and commercial issues. Significant transactions she has handled in recent years include, 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, MBK’s acquisition of CNS, and MStar’s pre-IPO restructure.

Lee and Li
7F, 201 Tun Hua N. Road, Taipei 10508, Taiwan, R.O.C.
T: +886 2 2715 3300
F: +886 2 2713 3966
E: attorneys@leeandli.com
W: www.leeandli.com

Robin Chang
  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. He received his Bachelor of Law degree in 1993 from National Taiwan University, and a Master of Law degree from the University of Pennsylvania in 1999. He is a member of the Taipei Bar Association.

Chang advises international commercial banks and investment banks on their operations in Taiwan. He advised SAC 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 so-called dual branch structure in the country. 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% investments in E Sun Financial Holdings Company and Chinatrust Financial Holding Company’s acquisition of Grand Commercial Bank in Taiwan.

Lee and Li
7F, 201 Tun Hua N. Road, Taipei 10508, Taiwan, R.O.C.
T: +886 2 2715 3300
F: +886 2 2713 3966
E: attorneys@leeandli.com
W: www.leeandli.com

Patricia Lin
  Patricia Lin is a senior counsellor at Lee and Li. Her practice focuses on banking, securities, capital markets, international corporate finance, financings (including syndicated financing, structured financing and aircraft/ship financing) and mergers and acquisitions. She has assisted on 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 indirectly listed in Hong Kong and to list the Taiwan Depositary Receipts in Taiwan and other foreign entities to successfully complete IPOs in Taiwan. She also assisted Deutsche Bank to successfully launch the first US dollar-denominated corporate bonds in Taiwan and several other foreign banks (including two Korean State-owned Banks) to subsequently launch US dollar-denominated corporate bonds in Taiwan.

Lin is also an expert in merger and acquisition transactions and has been involved in M&As 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 advised the Taiwan telecom company for the first Mainland China company (China Mobile)’s investment.

Lin is also an expert in aircraft/ship financing. She has assisted for more than a decade international banks and local airlines in connection with the financing with respect to lease, sale and lease back, conditional sale and other structured financing.

Lin received her Bachelor of Law degree in 1993 from National Cheng-Chi University and a Master of Laws degree in 1995 from Boston University. She is a member of the New York State Bar Association.

Lee and Li
7F, 201 Tun Hua N. Road, Taipei 10508, Taiwan, R.O.C.
T: +886 2 2715 3300
F: +886 2 2713 3966
E: attorneys@leeandli.com
W: www.leeandli.com

Lihuei Mao
  Lihuei Mao, a partner of Lee and Li, received a LLB from National Taiwan University and a LLM from New York University and is a member of the Taiwan Bar Association as well as the New York State Bar Association. She is the coordinator of the corporate and investment practice group at Lee and Li, and her main practice areas besides corporate and investment include mergers and acquisitions, securities antitrust law and labour law.

In addition to advising China Network Systems on the sale of cable systems to MBK for $1.3 billion, Mao also advised CVC, H&Q and ShopNet, among other large clients, on various acquisitions. Such expertise as well as her extensive experience in handling antitrust filings and insights from having assisted international companies in various industries enable her to provide her clients with sophisticated legal solutions to complex M&A issues. She further advised various foreign listed companies to issue Taiwan depository receipts in the Taiwan Stock Exchange, including Elpida, the first Japan-listed company to issue TDRs in Taiwan.

Lee and Li
7F, 201 Tun Hua N. Road, Taipei 10508, Taiwan, R.O.C.
T: +886 2 2715 3300
F: +886 2 2713 3966
E: attorneys@leeandli.com
W: www.leeandli.com