‘When I arrived in Taiwan, there was no fund formation practice at all’
Victor Chang of LCS & Partners charts the development of Taiwan’s vibrant fund formation, private equity and M&A markets and its efforts to welcome foreign investment
As the only private equity and M&A lawyer in Taiwan recognised in IFLR Asia Best Lawyers 2020, what do you consider to be the greatest achievements of your career?
In private equity, when I arrived in Taiwan, there was no fund formation practice at all. Over the last 15 to 16 years, with the support of the great partners and associates at my firm, I have managed to build a robust, full time fund formations practice that is larger, in attorneys and in revenue, than most IPO practices in Taiwan.
In M&A, again with the support of my great partners - especially our managing partner Rich Lin who is the finest corporate tax attorney in Taiwan, about 12 years ago Rich and I kicked off the first wave of leveraged buy-outs (LBOs) and management buy-outs (MBOs) of public companies in Taiwan. Today, you can trace virtually all the deal mechanics, agreements, and practices from the deals done during that period.
What advice would you give to lawyers in junior positions to encourage them to work towards success?
To begin with, there are many types of lawyers and practice styles and there is plenty of room for junior lawyers to grow into their own practice style successfully. So be yourself, do your best and don’t give up.
I believe junior lawyers need to have a greater appreciation of how important it is to have positive work experiences that they can absorb, retain and build off. A successful junior associate learns just as much from the process of a deal as from the actual subject matter of the work. There are many components and skills that have to come together, regardless of the practice area: appreciating that there is enough work so that experience can be gained by all; being able to work long hours effectively; being attentive to detail; having an ability to shift gears quickly; sharing and questioning experiences; experiencing retention; understanding when to ask questions; and being able to enhance teamwork.
We are more willing to let associates fall flat on their faces once in a while in order to accelerate their growth
For example, some junior associates can shy away from what is perceived as grunt work, such as conducting a due diligence review of hundreds of documents, almost always under significant time pressure, which adds to the distaste. But grunt work needs to be crystallised into advice and shared with the team drafting the agreements, and ultimately with the client (who will also be managing many workstreams and must therefore take what they are given and share that with their wider team). It takes skill and experience to do that, and it also takes skill and experience to know that when a workstream is stuck, it will have a ripple effect; a junior lawyer needs to be able to communicate any issues so that work can flow again.
Not only that, after a task well done it is not enough to go onto the next thing; a junior associate needs to take a breath and internalise what happened so that the experience “sticks” - this is especially important for junior lawyers who are beginning to draft and negotiate agreements. Therefore, junior lawyers must try, for the next deal, to remember the critiques that came out of a client’s internal discussions, as well as the issues that the other deal parties’ faced and their resolutions.
What do you feel are the biggest obstacles for young and aspiring lawyers in your country?
There is a strange dynamic of not being patient enough and being too patient.
Junior lawyers in Taiwan tend to underappreciate that experience needs to be gained, accumulated and retained in order to build a critical mass of experience that can be used later, not just in their legal careers, but possibly in any other career they choose to follow or businesses they want to start. I see too many junior associates wanting to go back to school one to two years into their careers, with the goal of finding something new.
Some lawyers who have five to six years of experience get stuck doing the same thing over and over again, and eventually they hit a wall and decide (sometimes incorrectly) that the life of law is not for them. I must admit this is not just a Taiwanese issue, as the same thing happened to me when I was a seventh year M&A senior associate at a major law firm in Boston, US. The malaise persisted until I was seconded to Paris, in my eighth year, which made me understand the diversity of experience that I had accumulated and the joy of using that as a foundation for working out solutions to business problems in different countries. Although I was technically proficient and could negotiate with the best of them, I later realised that I lacked an understanding how different types of practices have different ecosystems. This re-kindled a deeper love for this wonderful career we have in the private practice of law.
What does your firm do to nurture and promote talent? Do you think it compares well to others in your market in this area?
We have a standard system of recruiting, mentoring and promoting as other large law firms in Taiwan. Using largely the same system and getting the same type of top recruits from around the country, I feel that we have had greater success for, at least, the following reasons. We are the newest and youngest among the large Taiwan law firms, with significantly lower average age ranges for associates and partners. As a result, we have a wide open culture and more tolerance for different personalities and work habits, and we are more willing to let associates fall flat on their faces once in a while in order to accelerate their growth. More importantly, the aspiration among our partners is to build a firm where each partner gives each other partner the room to be the best lawyer in their own way.
If you could introduce one policy across the entire legal profession what would it be?
There should be a two systems of succession planning. One type, which most firms have, is when senior partners retire from leadership positions and/or their careers entirely. There should also be a second type of succession planning concerning client credit, where client credit can be fairly passed on to another, possibly younger partner, who is successfully developing that client relationship. We have both at LCS and we are still looking for ways to improve both systems.
Are there any initiatives in the firm to help your clients deal with the repercussions of the Covid-19 pandemic?
We were fortunate to have started a process even as early as December 2019. Before the pandemic had taken a hold of the world, we had already upgraded our IT capabilities so that our lawyers would be able to work remotely, with full access to their emails and their key files. We have also provided in-depth training for our lawyers to understand and work with the latest software tools for scheduling, making and hosting group calls and to be able to effectively split working time at home and at work. Finally, we have adopted a policy for sustaining good work and health habits during the pandemic (for example, dealing with steadily increasing frequency of late night conference calls due to clients not being able to travel to Greater China).
Given the current conditions in Taiwan, what would you consider to be the market outlook over the coming year?
Despite the global pandemic, the market outlook continues to be favourable for large Taiwanese firms like LCS & Partners.
In M&A, prior to the pandemic, several notable cross-border deals were signed and closed, namely: WPG’s unsolicited takeover of WT Microelectronics; the acquisition by Quaser Machine Tools of two Winbro aerospace businesses in the US and UK; and the $930 million acquisition of Bumblebee Foods by FCF Co, via Bumblebee’s bankruptcy sale process.
During the pandemic, Taiwanese companies have continued to show interest in overseas acquisitions, as demonstrated by Yageo’s $1.6 billion purchase of Kemet Corporation and Bora Pharmaceutical’s acquisition of a large drug manufacturing site in Canada from GlaxoSmithKline. Domestically, consolidation also continues unabated, as exemplified by the $1.7 billion share exchange between Epistar Corporation and Lextra Electronics, via a newly created holding company that will house both companies as subsidiaries.
These deals bolster two strengthening trends that I had identified in 2018 in an interview published with Lawyer Monthly in February 2019, namely: a sustained interest by Taiwanese companies and investors in overseas acquisitions, within specific industry verticals and the increased sophistication and willingness of companies to engage in domestic horizontal combinations and consolidations.
What kind of work do you expect will keep you busy over the next 12 months?
I see the US - China trade war as a long-term trend. For large cap companies, the dual trend of pursuing outbound investments, especially into the US and of local consolidation, including via unsolicited tender offers, will both likely continue. I also foresee significant cross-border activity for mid-market companies, as they will have the opportunity to attract investment from private equity funds and Chinese investors (for those industries where Chinese investment is permitted), which will enable them to grow and replace some of the slack from the global supply chain due to international players being forced to drop Chinese customers in favour of retaining their businesses in the US.
Despite the global pandemic, the market outlook continues to be favourable for large Taiwanese firms like LCS & Partners
Those growth activities could result in more growth capital investments and MBOs. The industries that could be most affected by the foregoing are likely to be technology companies involved in the internet of things (IoT), 5G, semiconductors, enterprise computing and industrial equipment manufacturers.
In addition, healthcare and pharmaceutical companies are also experiencing growth and investor interest in Taiwan, due to the seismic transformations that are occurring in those sectors as a result of artificial intelligence and the Covid-19 pandemic. Taiwanese companies, especially those under the control of second generation entrepreneurs, enjoy strong connections with prominent Taiwanese Americans in the US (for example, Gilead), and this augurs a significant role for Taiwanese companies in these sectors. Indeed, in August 2020, Taiwan’s Food and Drug Administration approved the VStrip rapid Covid-19 test (15-20 minutes) that will be ready for mass production to meet domestic demand and for export to Southeast Asia soon thereafter.
When viable Covid-19 vaccines are in mass production, and world travel returns to normal (or a new normal), there could be a sudden burst of deal-making that Taiwan professionals will need to brace themselves for.
Are there any upcoming regulatory changes or initiatives that investors should be aware of?
Some significant changes in tax laws and regulations are anticipated to affect future deals. First, and for the first time, capital gains generated by private stock sales will be included as income for individuals. This change will come into effect in 2021 and has already triggered a fair amount of personal and corporate restructuring. Investors need to review this together with the look-through regulations on taxation of controlled foreign corporations, which is in effect but not yet widely enforced.
In addition to the foregoing, there are proposed amendments to the Regulations Governing Investment from Mainland Chinese and the Statute For Investment By Foreign Nationals that will tighten restrictions on PRC investors and make the paperwork for non-PRC foreign investors less onerous.
Finally, there is a proposed rule to require disclosure of potential conflicts of interests at the shareholder level in advance of shareholders meetings to approve any M&A transactions, for shareholders holding 10% of more.
What do you feel is the biggest misconception others have about your market?
Taiwan has sometimes been perceived as a closed market for foreign investors. This is perhaps warranted for inbound investments from PRC investors and PE funds. Over the last five to six years, the foreign investment application and approval process for non-PRC investors has been relaxed and expedited, and as one of the largest corporate law firms in Taiwan, we seldom see any significant delays for foreign investment approval. The non-PRC foreign investment approvals that do get delayed often have more complications to them, such as antitrust issues.
As for PRC inbound investment, the fact remains that the PRC continues to be the largest foreign investor. Over the last 15 years, more and more business categories have been approved for direct majority PRC control, and these deals are done routinely (sometimes with minimal outside legal assistance). While there is indeed heightened scrutiny on PRC investments in restricted business categories, there continues to be a lively PRC interest in all types of businesses in Taiwan, even in the traditional manufacturing sector, where commercial lending rates, business tax rates and real labour costs are lower in Taiwan than in coastal China.
What is the one thing you think the IFLR’s international audience should know about how to successfully do business in your market?
The Taiwanese legal and investment banking market is relatively limited, and it is often difficult to find experienced professionals with actual, relevant experience for both parties (or more than two parties, depending on the deal). Often, a deal gets bogged down because one side’s legal counsel or banker is not as experienced as the other side, and while this could sometimes inadvertently result in misunderstandings or unnecessarily “hard-boiled” negotiations, the more prevalent problems are delays and occasional surprises.
We would recommend that international parties approach counterparties like business partners, even for 100% acquisitions, and if there appears to be a disconnect among service providers, the parties should discuss it directly to see if the disconnect is actually a people and experience problem. Conversely, if a Taiwanese counterparty suggests that the international investor should seek to better understand local practice, perhaps that is a signal that the investor should get a second opinion or be more open minded to alternative approaches to a potential problem.