Ken-Ying Tseng, Robin Chang, Lihuei Mao and Patricia Lin of Lee & Li assess the regulatory landscape for mergers and acquisitions in Taiwan
1. REGULATORY FRAMEWORK
1.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The main statutes governing M&A activities in Taiwan are the Mergers and Acquisitions Act, the Company Act, the Securities and Exchange Act and the Fair Trade Act. In addition, under the Securities and Exchange Act, a set of tender offer rules are prescribed. Other statutes may also be relevant, such as the Labour Standards Act and tax-related laws and regulations.
The main regulatory body in charge of public M&A transactions is the Securities Futures Bureau (SFB) of the Financial Supervisory Commission (FSC). Other relevant regulatory bodies include the Fair Trade Commission (FTC), the authority in charge of anti-trust clearance, and the Investment Commission (IC), the authority in charge of reviewing foreign investment. If the target holds a special licence, the authority in charge of the licence may need to review the transaction.
1.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
There is no specific statute or regulation governing takeovers. All of the statutes and regulations listed in 1.1 could be relevant to a takeover, when applicable, and are enforced in the same manner as other types of M&A transactions.
2. STRUCTURAL CONSIDERATIONS
2.1 What are the basic structures for friendly and hostile acquisitions?
Acquisitions can be conducted through share purchase (such as through tender offers), share subscription (such as through private placements), and statutory share exchange. Sometimes, a back-end merger would be implemented in order to buy out minority shareholders. In Taiwan, hostile takeovers are sometimes conducted via proxy fights through which the acquirer will attain control at the board level without making any substantial purchase of outstanding shares in the target company.
2.2 What determines the choice of structure, including in the case of a cross-border deal?
There are various factors determining the structure, including: the purpose and goal of the acquisition; the status and financial ability of the buyer; potential tax implications arising from the transaction; the buyer's own holding or tax structure; and, the target's status (whether with special permits or not, or whether there is any entitlement to any tax benefits or not). For cross-border take-over cases, the foreign acquirer often sets up a local special purpose vehicle to conduct the acquisition and back-end merger and the structure may be tax-driven.
2.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
The tender offer rules require the tender offer period to be between 10 to 50 days, with an extension of 30 days (subject to prior approval from the authority). Local tender offers (as often no regulatory approval is required) can be closed as soon as within two weeks. If the proposed tender offer requires regulatory approval, such as a foreign investment approval or antitrust clearance, the tender offer period would normally be 50 days and may be extended for another 30 days. The competing bidder would need to launch its offer before the fifth business day before the end of the tender offer period.
2.4 Are there restrictions on the price offered or its form (cash or shares)?
For tender offers of public companies, the consideration can be paid by way of cash, qualified listed shares or assets. For mergers, the consideration can be paid by way of shares, cash, or assets. For statutory share exchanges and demergers, payment of the consideration is limited to shares only. The government is proposing an amendment to the Mergers and Acquisitions Act so that consideration for statutory share exchanges and demergers may also include shares and assets.
2.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
Other than conducting a cash-out merger or a statutory share exchange with redemption of preferred shares, there is no other statutory squeeze-out mechanism under Taiwan law. To conduct a merger or statutory share exchange of a public company, the buyer would need to control at least a majority of, but advisably, two-thirds of the outstanding shares, depending on the shareholders composition of the target company. Also, to facilitate the delisting process, it was recommended that the buyer acquire as many of the outstanding shares as possible at the first stage of the acquisition. However, based on draft amendments to the Mergers and Acquisitions Act, the buyer will in future need to acquire at least two-thirds of the outstanding shares when the target is delisted.
2.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
In Taiwan, control premium is not common, especially when the acquirer intends to acquire up to 100% ownership in a public company within a short period of time. In such a situation, the law requires that the acquirer offer the same consideration to all shareholders; otherwise, the major shareholder of the target company, who also controls the management, would be exposed to a breach of fiduciary duty claim. Also, in tender offers, mergers, statutory share exchanges, and demergers, the consideration paid to all selling shareholders must be the same.
The determination of price is mainly a matter of commercial negotiation. In a tender offer transaction, the tender offeror usually negotiates with the controlling shareholders to ensure a successful tender offer and the tender offer price would normally be at a premium of the recent trading price. Otherwise, other shareholders would rather sell their shares on the market than tender their shares to the tender offeror. If the acquisition is conducted through private placement, the subscription price would often be at a certain discount of the recent trading price on the basis of the financial status of the target company.
Legally speaking, Taiwan law places great emphasis on the fairness of the consideration. Often, a fairness opinion is required from shareholders when a public company is being acquired. The proposed amendment to the Mergers and Acquisitions Act requires that the board of directors establish a special committee to review the fairness of the acquisition price, in addition to retaining an impartial expert to issue a fairness opinion.
2.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
A tender offeror is permitted to insist on the following closing conditions: (i) that regulatory approval is granted; (ii) that no material adverse change occurs; and (iii) that the number of shares tendered reaches the minimum threshold. When launching the tender offer, the tender offeror is required to disclose the source of its funds to demonstrate its financial ability to close the deal. A bank guarantee is not mandatory
3. TAX CONSIDERATIONS
3.1 What are the basic tax considerations and trade-offs?
In general, for mergers, de-mergers, and transactions for acquisition of assets or shares (for which over 65% of the consideration is paid with shares with voting rights), all the taxes incurred during the transfer of business and assets are either exempted (except for land value incremental tax) or deferred (the land value incremental tax). However, capital gain, if any, is not exempt from income tax. Moreover, a fraction of the net operating losses incurred by the participants may not be carried over to the surviving or acquiring company.
3.2 Are there special considerations in cross-border deals?
In a merger, the consideration received by a shareholder of the dissolved company exceeding their acquisition cost of the underlying shares is treated as dividends income and is subject to income tax. Therefore, a foreign shareholder would be subject to 20% withholding tax on the consideration unless the shareholder is from a jurisdiction with which Taiwan has entered into a tax treaty with a reduced withholding rate. Moreover, capital gain generated by a foreign individual shareholder from a share transfer transaction is subject to Taiwan income tax at 15%.
4. ANTI-TAKEOVER DEFENCES
4.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
The so-called poison pill mechanism, such as those commonly adopted in the US, is rarely seen in Taiwan. In practice, government intervention is the most powerful anti-takeover defence. Laws and related regulations on antitrust, protected industry reviews, protection of minority shareholders, and protection of employees, have been successfully used as anti-takeover defences in Taiwan.
4.2 How do targets use anti-takeover defences?
To prevent takeovers, the target company usually seeks protection from the government to deter the proposed transaction, by reporting the matter to the anti-trust authorities, or the competent regulator for the target company's specific industry. Sometimes, a deal can be delayed by target company employees filing a complaint with the labour authorities. In local hostile takeovers, the bidder and the management fight for board seats and the chairman position in the shareholders' meetings, in which case the management is usually in a better position to deter the action of the bidder. A preliminary injunction may also be applied for as an anti-takeover measure, but this has become increasingly difficult to obtain.
4.3 Is a target required to provide due diligence information to a potential bidder?
The disclosure of due diligence information, including the degree or level of the details to be disclosed, is normally subject to commercial negotiation between the parties. If the target is a public company, as it is already subject to certain disclosure requirements prescribed by the stock exchanges or under the applicable statutes or rulings, the target would be reluctant to disclose due diligence information. In addition, the board of the target would need to consider their fiduciary duty to their shareholders when determining the disclosure of due diligence information.
4.4 How do bidders overcome anti-takeover defences?
In the case of government intervention, the bidder would need to convince the government to approve the proposed takeover. If the bidder and the management are fighting for control of the board, the bidder may also seek a preliminary injunction against actions taken by the management, or even file a law suit against the management. But again, it may not be easy to obtain an injunctive order.
4.5 Are there many examples of successful hostile acquisitions?
There are not many precedents dealing with hostile takeovers. Most hostile takeovers concern local shareholders fighting each other for the control of the management of a listed company, which usually takes place at the shareholders' meeting of the target company.
5. DEAL PROTECTIONS
5.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
There are no precedents relating to competing bids in local tender offers. To protect a friendly deal from being interrupted, the best way is to expedite the transaction process, or to shorten the tender offer period. Once a tender offer is launched, the competing bidder needs to launch its bid no later than the fifth business day before the end of the tender offer period. This may not be an easy task, as the tender offer period is only between 10 to 50 days. Alternatively, the bidder may offer a purchase price with a higher premium.
5.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
Deal protection is not limited by restrictions on impediments to bidding competition, break fees or lock-up agreements, as there is no specific statute in that regard. However, some practice barriers may exist. With regard to the break-up fee, the main concern would be the management's fiduciary duty to ensure that the fee is reasonable. As for the share lock-up agreement, there may be practical enforcement difficulties if the share certificates are not secured in advance.
6. ANTITRUST/REGULATORY REVIEW
6.1 What are the anti-trust notification thresholds in your jurisdiction?
An M&A transaction is subject to anti-trust notification requirements in Taiwan if any of the following thresholds is met:
(i) Market share test: if any of the parties acquires one-third or more of the market share as a result of the transaction; or, any of the parties holds a market share of one-fourth or more before the transaction;
(ii) Turnover test: if the annual turnover amounts of the participating parties in the previous fiscal year meet the threshold publicly announced by the Fair Trade Commission (FTC), the transaction would be subject to the anti-trust notification requirement. Given that the Fair Trade Act has been newly amended in February 2015, it is anticipated that the FTC will announce new thresholds for the turnover test. In addition, according to the amended Fair Trade Act, when calculating the turnover of a participating party, one would need to consider the turnover of the affiliated companies of such a party. The details of such calculation are to be announced by the FTC separately.
6.2 When will transactions falling below those thresholds be investigated?
Normally, the FTC will not initiate any investigation, unless it is informed of any non-compliance. In a hostile takeover, the management of the target company may inform the FTC to deter or stop the takeover. Sometimes, the FTC may make inquiries of the relevant parties based on news reports of an M&A transaction.
6.3 Is an anti-trust notification filing mandatory or voluntary?
If an M&A transaction meets the notification threshold, notification is mandatory and should be submitted prior to the closing of the transaction.
6.4 What are the deadlines for filing, and what are the penalties for not filing?
There is no deadline for an anti-trust notification, but parties are not permitted to close the transaction before the anti-trust clearance is obtained. If the notification requirement is not complied with, the FTC may impose penalties such as prohibiting the transaction to proceed, or ordering the acquirer to transfer the company or divest itself of the assets it had acquired. The FTC also has the power to impose an administrative fine of between NT$200,000 ($6,500) and NT$50 million.
6.5 How long are the anti-trust review periods?
Once the notification is submitted and the authority deems that the information in the filing is complete, there is a 30 day waiting period for the FTC to raise its objection. If the FTC does not object during the 30 day period, the clearance is deemed to be automatically obtained and the deal may be closed. The FTC has the power to shorten the 30 day period or extend it by up to a further 60 days. To start the 30 day waiting period, all of the required information and documents should be submitted to the FTC and the FTC will confirm the commencement of the waiting period.
6.6 At what level does your anti-trust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
According to the FTC's policy, all cross-border or offshore transactions that meet the thresholds are subject to the notification requirements. In practice, the FTC only exercises its jurisdiction over a deal when it has local competition effect. However, one needs to be cautious when determining whether there is any local competition effect. If not, the FTC is not likely to exercise its jurisdiction over such a transaction.
6.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
Protected industry review, foreign ownership restrictions, and employment regulation could all be potential obstacles to a public M&A. With regard to PRC acquisition of a Taiwan regulated industry, national security could also be an obstacle.
7. ANTI-CORRUPTION REGIMES
7.1 What is the applicable anti-corruption legislation in your jurisdiction?
Under the Criminal Code and the Anti-Corruption Act, a government official would be held criminally liable if they accept a bribe either for actions within their power or for breaching their duty. An individual who bribes a government official will also be subject to criminal liabilities. Such crimes will not be imposed on an employee of a private company that accepts bribes from the company's supplier, although such an employee may still be held criminally liable for breach of trust.
7.2 What are the potential sanctions and how stringently have they been enforced?
Where an individual offers a bribe to a government official and the official breaches his official duties accordingly, such individual may be sentenced to imprisonment of between one to seven years or detention, or in addition, a fine of no more than NT$3 million. If the official does not breach his official duties accordingly, such individual may be sentenced to imprisonment of no more than three years or detention, or in addition, a fine of not more than NT$500,000. The Taiwan government has established a special anti-corruption agency under the Ministry of Justice to strictly enforce the anti-corruption rules since 2011.
8. OTHER MATTERS
8.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
The government is proposing amendments to the Mergers and Acquisitions Act, under which the consideration to an M&A transaction would be more liberalised and minority interests would be better protected. One should follow the relevant developments when structuring a deal in relation to Taiwan.
8.2 What are the key recent M&A developments in your jurisdiction?
The Fair Trade Act was newly amended in February 2015. Under the amendment, the method to calculate turnover amount has been revised and it is anticipated that the FTC would stipulate new turnover thresholds on an industry by industry basis. This may further affect future deal planning.
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Lee & Li
About the author
Ken-Ying Tseng heads Lee and Li's M&A group (non-financial sector). She received an LLM from Harvard Law School after obtaining an LLM and an LLB from National Taiwan University.
Having advised on various forms of M&A, Tseng is experienced in resolving both legal and commercial issues. Her significant transactions include 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 the subsequent delisting, MBK's acquisition of CNS, MStar's pre-IPO restructure, Yahoo!'s investment in Gomaji, ScinoPharm's investment in Tanvex, Komatsu's acquisition of Gigaphoton, and Micrel's acquisition of Phaselink.
Tseng was recognised as a Leading Lawyer in the M&A field by Asialaw in 2013 and 2014, and by IFLR 1000 in 2014 and 2015.
Lee & Li
About the author
Robin Chang is a partner at Lee and Li and head of the firm's banking practice group. He focuses on banking, capital markets, international finance, and M&A.
Chang has a Bachelor of Law from the National Taiwan University and a Master of Law from the University of Pennsylvania. He is a member of the Taipei Bar Association.
Chang advises major international commercial banks and investment banks on their operations in Taiwan. He has advised six local banks on their customers' investments in structured notes issued by Lehman Brothers entities. He has been involved in many M&A transactions for financial institutions, including AIG's sale of 97.57% shares of Nan Shan Life Insurance Company to Ruen Chen Investment Holding Company.
Lee & Li
About the author
Lihuei (Grace) Mao, has an LLM from New York University and is a member of the bar in Taiwan and New York. Her practice areas include corporate and investment, M&A, securities, anti-trust and labour law.
Mao has advised private equity funds and international groups in different industries on various complex acquisitions. She has also assisted foreign companies with IPOs in Taiwan. Additionally, Mao advises on all aspects of liquidation and corporate restructuring. She was involved in Elpida's restructuring process and assisted it in handling investor claim related matters in Taiwan.
Recently, Mao has been advising PRC companies in evaluating and structuring their investments in Taiwan and has been invited to give speeches on PRC investment issues.
Lee & Li
About the author
Patricia Lin is a senior counsellor at Lee and Li. Her practice focuses on banking, securities, capital markets, financings (including syndicated, structured, and aircraft/ship financing) and M&A. She has assisted on many international capital market transactions, including the issuance of GDRs, ADRs, TDRs, ECBs and EEBs. Since 2007, she has helped PRC and foreign banks and corporate entities issue Formosa Bonds denominated in renminbi, dollars and other foreign currencies in Taiwan.
Lin is also an expert in M&A in both general and highly regulated industries. She advised on the first PRC investment in the LED industry.
Lin is also an expert in aircraft and ship financing and for more than a decade has assisted international banks and local airlines in financing lease, sale and lease back, conditional sale and other structured financing.