Taiwan Chapter for The Guide to Mergers and Acquisitions 2005 (International Financial Law Review) 

April, 2005 - Rich Lin、Brian Yu、Victor I-Hsiu Chang、Mark J. Harty

General overview What legislation governs M&A activity in your jurisdiction? M&A activities in Taiwan are primarily governed by the Enterprise Mergers and Acquisitions Law, the Securities and Exchange Law, the Company Law, the Fair Trade Law and the Regulations Governing Tender Offers for Purchase of the Securities of a Public Company. The Law Governing Mergers of Financial Institutions and the Financial Holding Company Act are also relevant if the merger or acquisition involves a financial institution or a financial holding company. If the companies involved are companies whose securities are traded on an exchange, the rules and regulations of the relevant securities exchange also govern the transaction. What impact have recent legislative changes had on the nature and amount of M&A activity? To achieve economies of scale and improve international competitiveness, the Taiwan government has openly encouraged mergers and acquisitions of companies. One example is the enactment of amendments to the Enterprise Mergers and Acquisitions Law and the Company Law, which created exemptions from a shareholder’s or employee’s preemptive rights to subscribe for new shares issued in connection with an acquisition of a company. Previously the need to obtain a waiver of these preemptive rights from each shareholder was a practical obstacle to M&A transactions. As a result of the enactment of various laws facilitating mergers and acquisitions, in the past few years there has been an increasing amount of M&A activity in Taiwan. There has been much discussion recently regarding the overbanking situation in Taiwan and the need for consolidation. The Taiwanese government has openly requested that the number of financial holding companies in Taiwan be reduced from the existing 14 to seven. At the same time the government has frozen new applications for financial holding company licences. An increase in M&A activity among financial holding companies and other financial institutions in Taiwan is anticipated in the next couple of years. The creation of the cabinet-level Financial Supervisory Commission (FSC) on July 1 2004 signals the arrival of a mergers and acquisition wave in Taiwan. As part of its creation, the Bureau of Monetary Affairs, the Department of Insurance, the Securities and Futures Commission, and the Bank Examination Department were reassigned under the FSC. The FSC has regulatory and supervisory powers over Taiwan’s financial industry, and has been charged with hastening the modernization of Taiwan’s banking and financial institutions. What have been the most significant M&A transactions in your jurisdiction over the past year? The merger between Far EasTone Telecommunications and KG Telecom was the largest ever telecom merger in Taiwan. TaipeiBank’s merger with Fubon Financial Holding Company was another significant recent M&A transaction. TaipeiBank and its advisers successfully managed five prospective buyers through the first M&A auction in Taiwan. How, and to what extent, is foreign involvement in M&A transactions in your jurisdiction regulated or restricted? In Taiwan, foreign investments in certain industries are restricted and regulated. These industries include, and are not limited to, mining, utilities, transportation, media, real estate, and financial industries. Foreign direct investment in the shares of Taiwanese companies requires foreign investment approval from the Investment Commission of the Ministry of Economic Affairs and will be subject to the Law Governing Investments by Foreigners. Due diligence What are the principal disclosure requirements in a typical M&A transaction? The Taiwan government has promulgated detailed guidelines setting out the disclosure requirements in M&A transactions. In M&A transactions involving a public company, a comprehensive prospectus needs to be prepared. In a public tender offer situation, as specified under the Criteria for Information to be Published in Public Tender Offer Prospectuses, the principal disclosure requirement is a prospectus setting out information such as the terms of the public tender offer, the nature of the consideration, and background information on the offeror. In a merger situation, if new shares are issued by a Taiwanese company as consideration for the merger, a prospectus is also required to set out information on the issuing company and terms of the transaction as specified under the Criteria Governing Information to be Published in Public Offering and Issuance Prospectuses and Criteria Governing Information to be Published in Financial Industry Prospectuses for Offering and Issuance of Securities. If the relevant parties are public companies and/or listed companies, the Securities and Exchange Law, the Company Law and the regulations promulgated by the applicable securities exchange also require timely and detailed public disclosure of the terms of the deal and a fairness opinion. To what extent do disclosure requirements achieve market transparency? The disclosure requirements are fairly comprehensive and violation of them might subject the violators to both civil and criminal liabilities. An adequate level of market transparency has been achieved by these strict disclosure requirements. How significant an issue is prospectus liability in a typical M&A transaction? Prospectus liability in a typical M&A transaction can be significant in Taiwan and can subject the relevant parties both to civil and criminal liabilities. Under the ROC Securities and Exchange Law, investors who suffer damages due to an inaccurate, misleading or incomplete prospectus are entitled to seek damages from the company that made the disclosure; however, under the ROC laws, the burden of proof is on the investor, who needs to prove the damages suffered and the negligence and/or intentional misconduct of the company. There have been few cases brought by investors against companies in the past based on an inaccurate prospectus. To reduce this burden on the investor, under the Securities Investor and Futures Trader Protection Act, which became effective on January 1 2002, a Securities and Futures Investors Protection Centre was formed to protect investors and to prosecute claims on their behalf. The Centre has, since its formation, brought several cases relating to prospectus disclosure on behalf of investors. How have recent M&A transactions and/or current legislation dealt with the issue of material adverse change clauses? ROC legislation allows the change of share swap ratio and price adjustments in case of material adverse change. In Taiwan’s M&A transactions, material adverse change clauses are common in merger or share acquisition agreements to take into consideration material adverse changes before closing. What are the key unresolved issues in your jurisdiction? The recent enactment of M&A laws by the ROC government has resolved many M&A issues in Taiwan. However, some technical unresolved issues still need to be addressed. One of these unresolved technical issues is how the consideration received by the shareholders in a merger should be taxed. If the shareholders of the merged company receive shares of the acquiring company as consideration, then the shareholders will not be subject to income tax at the time of the merger or when they dispose of the shares. If the shareholders of the merged company receive cash or other assets in the merger then, under the current tax regime, the gain they realized might be deemed income and subject to income tax. One of the other unresolved issues is the voting rights of interested shareholders/directors in different types of M&A deals. In a merger situation, voting by interested parties in a shareholders meeting and board of director’s meeting is specifically permitted, but the laws are not clear on whether interested parties can vote in other types of M&A transactions, such as share swaps or share acquisitions. Another unresolved M&A issue in Taiwan relates to Taiwan’s public tender offer rules, which require that any acquisition of 20% or more of a public company’s shares within a 50-day period, with certain exceptions, must be conducted through public tender offer. It is unclear whether this rule applies to GDRs or convertible bonds that are issued using existing shares of the company that are in excess of 20% of its outstanding shares. Takeovers Are there any specific regulations and/or regulatory bodies governing takeovers in your jurisdiction? The principal legislation governing company takeovers includes the Securities and Exchange Law, the Company Law, the Financial Holding Company Act, the Fair Trade Law and the Regulations Governing Tender Offers for Purchase of the Securities of a Public Company. If any of the relevant parties in a takeover is an ROC public company, then the governing bodies include the Financial Supervisory Commission and the Securities Futures Bureau. If any of the relevant parties in a takeover is a Taiwanese listed company, then the governing bodies include the Taiwan Stock Exchange and/or the GreTai Securities Market. If any of the relevant parties in a takeover is a foreign company, then the governing bodies include the Investment Commission of the Ministry of Economic Affairs and the Central Bank of China. If any of the relevant parties is in one of regulated industries such as banking, public media and utilities, then the approval from the competent authority of that regulated industry will also be required. And lastly , the Fair Trade Commission’s pre-approval is required for certain types of takeovers where certain thresholds are reached. What are the various methods by which a takeover can be achieved? In Taiwan, a takeover can be achieved by various methods, including share acquisitions, share swaps, asset acquisitions and mergers. If shareholders approval cannot be obtained, then share acquisition is the chief method of obtaining control over a company. If the target company is a public company, the Regulations Governing Tender Offers for Purchase of the Securities of a Public Company provides that any person who individually or jointly with another person intends to acquire within 50 days 20% or more of the total issued shares of a public company must do so by means of a mandatory public tender offer. How differently are hostile and voluntary takeover bids treated? There is no difference in the treatment of hostile and voluntary takeover bids under Taiwanese law, and no hostile takeover by public tender offer has ever been made in Taiwan. For a voluntary takeover situation where a public tender offer is not involved, the parties need not pre-disclose the terms of the deal or the deal itself. However, if the selling shareholder is a major shareholder (10% or above), a director, or a supervisor of the target company that is a public company, then the selling shareholder will need to notify the competent authority and make public, as required by the Securities and Exchange Law, at least three days in advance of the selling, their intent to sell shares in the company within the next 30 days without specifying the exact timing and terms of the deal. What penalties are imposed for parties that violate takeover regulations (or equivalent)? Violation of the tender offer rules could subject the relevant party to both civil and criminal liabilities. Prison terms and fines may be imposed if the violator is found criminally guilty. The maximum fine and imprisonment term for tender offer rule violations varies depending on the exact nature of the violation. What are the thresholds for disclosing bids and offers? Under the Regulations Governing Tender Offers for Purchase of the Securities of a Public Company, if a party attempts to acquire over 20% of a public company within a 50-day period, then, with certain exceptions, the party must make a public tender offer for the shares of the public company. Competition/Antitrust What have been the major recent developments in competition policy and legislation as they relate to M&A in your jurisdiction? The Fair Trade Law, which came into effect in 1992, governs two broad categories of anti-competitive business conduct: restrictive business practices and unfair competition. The Fair Trade Commission, established under the Fair Trade Law, handles its caseload in accordance with these two broad categories, and further sub-divides them under the following subject matters: (1) restrictive business practices – monopolies, business combinations, concerted actions, resale price maintenance and other restrictive business practices; and (2) unfair competition – impediments to fair competition, counterfeit commodities or trademarks, false, untrue and misleading advertisements, damage to business reputation, improper multi-level sales (for example, through pyramid schemes) and other deceptive or unfair business conduct. The Fair Trade Commission also oversees the approval of the combination of different business entities to prevent excess market concentration. A business combination under the Fair Trade Law includes any situation where: (i) an enterprise merges with another through a legal or statutory merger; (ii) an enterprise acquires at least one-third of the shares or capital contributions of another enterprise; (iii) an enterprise acquires by lease or assignment the major businesses or assets of another enterprise; (iv) an enterprise operates jointly with another enterprise on a regular basis or is entrusted by the other enterprise to operate such other enterprise’s businesses; or (v) an enterprise directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise. How are the competition/antitrust regulations enforced in your jurisdiction? The Fair Trade Commission is empowered, among other things, to prepare and formulate fair trade policy and regulations (to the extent consistent with the Fair Trade Law), investigate activities of businesses (either in an ex officio capacity or pursuant to private party complaints), review any matters related to the Fair Trade Law, and hear and adjudicate cases under the Fair Trade Law. The Fair Trade Law gives the Fair Trade Commission broad powers of enforcement. Depending on the nature of the non-compliance at issue, the Fair Trade Commission could mandate corrective action or monetary fines, or both. In circumstances of repeated violations, the Fair Trade Commission could recommend imprisonment of offenders. How do legislation and regulation approach the issue of abuse of dominant position? The Fair Trade Law prohibits a monopolistic enterprise from: (1) directly or indirectly preventing any other enterprise from competing through unfair means; (2) improperly setting, maintaining or changing the price of goods or the remuneration for services; (3) compelling a counter-party to give it preferential treatment without justification; or (4) otherwise abusing its market power. A monopolistic enterprise is defined by the Fair Trade Law to mean any enterprise (or any group of enterprises that do not engage in price competition with each other) that faces no competition or has a dominant position to enable it to exclude competition in a relevant market. The relevant market is flexibly defined as any geographic area or coverage in which enterprises compete in respect of any goods and services and is determined on a case-by-case basis. Notwithstanding the foregoing, an enterprise might be presumed to be exempt from being monopolistic (barring other circumstances) if its relevant market can be shown to have all of the following characteristics: (i) the market share of the enterprise in question is less than half; (ii) the combined market share of the two largest enterprises is less than two-thirds; and (iii) the combined market share of the three largest enterprises is less than three-quarters. These conditions establish a presumption that the relevant market is competitive, but such presumption can be overcome by further showing that the relevant market is subject to substantial barriers of entry or other obstacles to competition. If a monopolistic enterprise is found to have abused its power, the Fair Trade Commission can order the offending enterprise to cease its offending conduct and/or take corrective actions. If the actions are not undertaken within the timeframe prescribed by the Fair Trade Commission, those responsible for the offending enterprise may be punished by imprisonment of up to three years and/or fined up to NT$100 million ($3.2 million). Administrative penalties might also be assessed. Lastly, to the extent that grievances have been filed by injured enterprises, a court may award actual damages as well as punitive damages of up to three times the actual damages. To what extent are parties to an M&A transaction subject to prior notification requirements? In general, any M&A transaction involving at least one Taiwanese enterprise that gives rise to one of the following three situations may not be completed without the Fair Trade Commission’s prior approval: (1) where, as a result of the transaction, the enterprises will have at least one-third of the relevant market share; (2) where at least one of the relevant enterprises has one fourth of the relevant market share; or (3) where the sales for the preceding fiscal year of the relevant enterprises exceeds the threshold of NT$10 billion for one party and NT$1 billion for another party to the M&A transaction. The current sales volume threshold for the M&A transaction of financial enterprises is higher at NT$20 billion for one party and NT$1 billion for another party to the M&A transaction. The 2002 amendments of the Fair Trade Act implemented several exemptions to the approval requirement. These exemptions deal mainly with internal reorganizations, such as a spinoff situation. In addition, redemptions of shares that would otherwise trigger the merger controls of the Fair Trade Law are also exempt. Once an application is made with the Fair Trade Commission, unless the Commission affirmatively rejects an application or requests an extension of its review period within 30 days of the application, the parties may proceed to close the M&A transaction. The Fair Trade Commission may shorten the waiting period by accepting the M&A transaction, reject the application, or extend its review period. But the extension may not exceed 30 days. In approving an M&A transaction, the Fair Trade Commission could, however, require the parties to agree to various undertakings or conditions to its approval. Violations of the merger approval process could result in a number of consequences. First, the relevant transactions could be nullified, and the parties’ existing business operations could even be suspended or terminated. In addition, administrative penalties might be assessed, up to NT$50 million, and administrative penalties might be successively issued for similar amounts until the parties have undertaken corrective action. Lastly, the Fair Trade Commission also has the power to restrict the decision-making authority of the responsible executives of the relevant enterprises, or to compel their removal from office. LCS



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