Taiwan: Mergers & Acquisitions

Mergers and acquisitions (M&A) in Taiwan are governed by the Business Mergers and Acquisitions Act (the “Business M&A Act”).  For matters not provided under the Business M&A Act, the other relevant laws and regulations would apply. If the acquirer is an individual or entity outside of Taiwan, then depending on the incorporation jurisdictions of the acquirer, the transactions will be subject to requirements in the Statute for Investment by Foreign Nationals, Statute for Investment by Overseas Chinese, and Investment by People in Mainland China.

If the target company or acquirer is a Taiwan company that attains public company status (hereinafter referred to as “public company”, and those Taiwan companies that do not attain public company status are referred to as “private company”), then the following laws and regulations, among others, should be taken into account:

1. Securities and Exchange Act;
2. Regulations Governing the Establishment and Related Matters of Special Committees of Public Companies for Merger/Consolidation and Acquisition;
3. Regulations Governing the Acquisition and Disposal of Assets by Public Companies;
4. Operating Rules of the Taiwan Stock Exchange Corporation (“TWSE”);
5. Operating Rules of the Taipei Exchange (the “TPEx”); and
6. Regulations Governing Public Tender Offers for Securities of Public Companies

If there is an antitrust concern, the combination filing requirements under the Fair Trade Act needs to be reviewed.

If the target company is in a regulated industry, then the laws governing that industry will be relevant, such as the Telecommunications Act for telecom companies.  If the mergers and acquisitions involve a financial institution, The Financial Institutions Merger Act and Financial Holding Company Act would prevail over the Business M&A Act.

Due to the ongoing outbreak of coronavirus disease 2019 (COVID-19), it remains to be seen how it will impact M&A activity in the market.

The health care, energy and high-tech sectors in the field of integrated circuit (“IC”) and artificial intelligence (“AI”) appear to attract more M&A deals.

Impact of coronavirus disease 2019 (COVID-19) in the region, vertical integration, and enterprise transformation.

Acquisitions of a publicly traded company usually will be carried out by a public tender offer or merger or stock swaps.  Depending on the goal of the acquisition, there may be a combination of a public tender offer followed by mergers or stock swaps in the case of privatization of a publicly-traded company.

There is no equivalent of SEC Rule 10b-5 disclosure in Taiwan.  If the target company is a private company, then there is very little publicly available information.  The key company registration information available on the governmental website includes only the name, the incorporation date, the last amendment date, the list of directors and supervisor the number of shares held by each of them, the address of its factory if any.  There is no obligation on the target company to disclose diligence related information.  The scope of the disclosure will rely on the contractual agreement.

If the target company is a public company, then there will be annual reports, semi-annual, quarterly and monthly financial information, public disclosures, prospectus for each capital increase and bond issuance, and any other information that a public company is required to disclosure under the relevant securities laws.  A public company has no obligation to disclose any additional information in the context of on-going or potential M&A activity.  All participants in an M&A of a public company are required to keep confidence of the information received and undertake not to trade the securities of such public company.

If the target company is a private company, it is customary for a foreign acquirer to conduct comprehensive due diligence covering all aspects of the company’s operations.  To trace 3–5 years of documents is common.  For a public company, then public companies tend to resist comprehensive due diligence since Taiwan has pretty strict securities regulations regulating the public companies in Taiwan.

Taiwan acquirers tend to conduct light due diligence to save cost.

For a private company, the decision making organs are directors and, if required, shareholders’ approval.  For a public company, the additional organ is special committee or audit committee if there is an audit committee.

Shareholders’ approval is required to effect mergers, stock swaps, spin-offs, general assumption of liabilities, or sale of all or substantially all assets.  In general, the approval threshold is the majority approval of the shares represented by shareholders present at the shareholders meeting attended by the holders of two-thirds of the total issued shares. In the case of a public company, if the shareholders meeting is attended by less than two-thirds of the total voting shares, but the majority of which has attended, then the approval can be obtained if the shareholders holding two-thirds of the attending shares approve the transaction.  In addition, if the M&A will result in delisting of the public company, then the threshold is approval by two-thirds of the total issued and outstanding shares of the company.

The laws and regulations relevant to M&As also govern the information and documents that must be included in the shareholders meeting notice.

Under Taiwan Company Law, the directors have the duty of care as a good administrator to the Company and shareholders.  This is similar to the fiduciary duties under common laws.  In addition, the Businesses M&A Act also provides for the following obligations of the directors in M&A transactions.

In the merger/consolidation and acquisition by a company, the board of directors shall, in the course of conducting the merger/consolidation or acquisition, in the best interest of the company, fulfill its duty of care. Any director involved in decision-making for a merger/consolidation or acquisition shall be liable for any damage to the company as a result of breach of applicable laws, ordinances, Articles of Incorporation or the resolution of the general meeting in dealing with the merger/consolidation and acquisition; provided, however, that upon producing sufficient evidence of minutes or written statement concerning disagreement, the director may be exempted from the liability.  In the merger/consolidation and acquisition by a company, a director who has a personal interest in the transaction of merger/consolidation and acquisition shall explain to the Board meeting and the general meeting the essential contents of such personal interest and the cause of approval or dissent to the resolution of merger/consolidation or acquisition.

Please note that the acquirer may exercise the voting rights of the shares of the target it holds, and in case any director of the target is a representative of the acquirer, such director may vote, in the acquirer’s proposed M&A with the target.

In the case of a public company, the members of the special committee or audit committee, as the case may be, are also required under the Regulations Governing the Establishment and Related Matters of Special Committees of Public Companies for Mergers/Consolidation and Acquisition to exercise the care of a good administrator in faithfully performing its official duties.

Employees do not have special approval or consultation rights.  However, the employees are given the right to choose whether to be transferred to the acquirer.  The acquirer must notify the employees of the target that it wishes to retain their employment terms at least 30 days prior to the effective date of the transaction.  The employees may decline to be retained and receive severance pay or pension payment, as the case may be.  If they accept the retention, then their tenure with the target will be recognized by the acquirer.

In addition, in the case of a merger, general assumption of liabilities, sale of all or substantially all assets, or spin-off (or division), the Business M&A Law provides for protection to the creditors.  Upon the resolution approving such transaction, a company shall immediately notify or make a public notice to each creditor and specify a period of not less than 30 days to allow objection filed by the creditors. A company that has not given notice or made public announcement, or fails to satisfy a creditor who has raised an objection to the division, to furnish an appropriate security, to create any trust exclusively for creditors’ satisfaction, or to certify that such transaction is without prejudice to the rights of creditors, shall not assert the transaction as a defense against such a creditor.In a spin-off, the surviving or newly incorporated transferee company (that receives the assets from the spin-off), unless the liabilities existing before the division may be severed, shall, within the scope of contributions made by the transferee company, be jointly and severally liable to discharge the liability incurred by the divided company prior to the spin-off. However, the creditors’ right to claim for the performance of the joint and several liabilities shall become extinguished, if not exercised by the creditors within two years from the reference date of the spin-off.

For public companies, the mergers/acquisitions must be first reviewed by the special committee/audit committee before they are submitted to the board for approval.

Every M&A project in Taiwan would have conditions to closing.  The commonly seen conditions include shareholders’ approval, governmental approval, no material adverse change, accuracy in representations and warranties and satisfactory due diligence result.  It is also common to add additional closing conditions for special circumstances, such as rectifications of certain deficiencies discovered in the due diligence.

The letter of intent or memorandum of understanding (or other documents serving the same purpose) may incorporate a binding exclusivity clause and breakup fee, if necessary.  Another possible deterrent is to build in a penalty clause for breach of exclusivity.  Under Taiwan laws, penalty clauses are enforceable although the court has the discretion to reduce the penalty amount considering the degree of the breach and financial condition of the breaching party.

In addition to the breakup fee and penalty, legal fee and due diligence reimbursement are frequently included in the letter of intent or memorandum of understanding.

Cash is the most common form in Taiwan.  In some cases, shares of the acquirer may also be used. However, there are restrictions on the use of shares.

If the target company is a private company and if the acquirer is a foreign entity, under the current regulations of the Investment Commission, the agency in charge of reviews of foreign investment applications, the acquirer must be either an operating company or belongs to the same group with the target company.  This makes companies in tax haven countries such as the Cayman Islands unfit for the acquirer in a stock-for-stock acquisition or merger.

If the acquirer is a public company in Taiwan, use of its own shares as consideration will be subject to additional requirements, which include profitability or net equity value tests of the acquirer and the target company and the prior approvals of the Financial Supervisory Commission (“FSC”) and the TWSE for the TWSE-listed companies and the TPEx for the TPEx-listed companies.

The acquirer must notify the target company within one month after it holds one-third or more of the total issued shares of the target company, and again when it holds one-half or more.  The target company must then publicly disclose the identity of the acquirer and its shareholding within five days.

In addition, if the target is a public company (i.e., a company that attains public company status with the FSC), then, once the acquirer (together with any other persons that act in concert) holds 10% of such company’s shares, the acquirer is required to be reported to the FSC and publicly disclosed.  Any subsequent increase or decrease of the shareholding of 1% of the total issued shares of the target company would need to be reported until the acquirer’s shareholding falls under 10% of the target company’s total issued shares.  There are a few exceptions where public disclosure is required regardless of the acquirer’s shareholding percentage in the target company: (i) In a tender offer of public company’s shares the offeror is required to publicly disclosed its stake in the target company, regardless of whether such stake is 10% or more; (ii) if the acquirer becomes a director of the target company, then it is required to disclose its shareholding on a monthly basis.

For a private company, there is no public disclosure requirement.  In the case of a TWSE-listed or TPEx-listed company’s participation in the transaction, they are subject to the public disclosure requirements provided by the TWSE Procedures for Verification and Disclosure of Material Information of Companies with Listed Securities and TPEx Procedures for Verification and Disclosure of Material Information of Companies with TPEx-Listed Securities, respectively.  The general principle is that a public company must disclose on the designated website any matter that had a significant impact on shareholders rights or the price of the securities within two days following the date of occurrence (including the date of occurrence).  Further, the date of occurrence is further defined as “the date of contract signing, date of payment, date of consignment trade, date of transfer, dates of boards of directors resolutions, or other date that can confirm the counterpart and monetary amount of the transaction, whichever date is earlier; provided, for investment for which approval of the competent authority is required, the earlier of the above date or the date of receipt of approval by the competent authority shall apply”.  Therefore, any stage of the negotiation meets the foregoing definition of the date of occurrence, public disclosure is required. For example, if during the negotiation, the parties enter into a binding letter of intent, memorandum of understanding or term sheet, then a public announcement is required.

No, there is no maximum time period for negotiation or due diligence.  The length of negotiations and due diligence are determined by the parties.

No, there is no law setting the minimum price in an acquisition.

It is possible for target companies to provide financial assistance, subject to the lending restrictions applying to all Taiwan company – Taiwan’s Company Law prohibits a company from lending funds to its shareholders or any others unless (i) there are business transactions between the companies or firms, or (ii) there is a need for short-term financing between the companies or firms provided that the amount of such short-term financing does not exceed 40% of the lender’s net value.  In addition, for public companies, the restrictions under the Regulations Governing Loaning of Funds and Making of Endorsements/Guarantees by Public Companies would apply, such as a public company or its subsidiaries cannot loan an amount exceeding 10% of the net value of the borrowing enterprise.

Taiwan’s Mergers and Acquisitions Law is customarily used in an acquisition of Taiwan company as it provides various tax benefits.

Taiwan’s Mergers and Acquisitions Law requires written contracts for the transaction governed thereunder. To the extent that a shareholders’ meeting is required, such contracts will be submitted for the shareholders’ approval. If a shareholders’ meeting is not required, then the shareholders will be informed of the major contents of such contracts.  In a tender offer, as the offer is made to all shareholders of the target company, the acquirer needs to prepare a tender offer report and tender offer prospectus. All attachments to these documents, such as legal opinion and fairness opinion, will be public-facing documents.

Subject to any governmental approvals required for the consummation of the transactions, such as foreign investment approval if the acquirer is a foreign national, a merger control approval is the acquisition raises antitrust concerns, etc., transfer of a share requires entry on the shareholder roster.  If the transferred shares are represented by certificates, then the certificates are required to be duly endorsed for transfer and delivered to the transferee. If the shares are represented by the share certificates, then capital gain taxes are waived, but a securities transaction tax of 0.3% on the consideration shall be paid.

In Taiwan, hostile acquisition is not a common feature but happens occasionally.

The directors, if being a shareholder, can enter into shareholders agreement or voting trust with other shareholders for any matters relating to M&As.

Also, the amendments to Taiwan’s Company Law in recent years have allowed a company to issue special shares with multiple votes, veto rights, or different ratio for conversion to common shares (previously, each special share is convertible into one common share).  However, these special features are only applicable to a company that does not attain public company status.  Therefore, we have not seen protection, like a “poison pill”, in public companies.

From a personal liability perspective:

• Taiwan’s Mergers and Acquisitions Law permits the target directors appointed by the acquirer to vote on the acquisition, without need to abstain.
• In addition, a public company is required to establish a special committee to, or if there is an audit committee, such audit committee is required to, review and negotiate the plan of acquisition to ensure its fairness and reasonableness prior to the submission of such plan of acquisition to the board of directors for approval, which reduces the risk exposure of the directors when they vote in line with the recommendation of the special committee.

A buyer is required to launch a tender offer if it intends to, or it acts in concert with other persons to, acquire 20% or more of the issued shares of a public company within any 50-day period.

In a merger or acquisition, the laws provide for dissenting shareholders’ rights where a shareholder may reject the merger or acquisition and request the target to repurchase their shares at the fair price.  If the shareholder does not raise an objection and instead, stays with the target company where it becomes or remains a minority shareholder, then it will continue to possess all rights under the Company Act that are generally afforded to all shareholders.

In light of the highest voting thresholds under the Taiwan Company Act and the securities law, a shareholder holding two-thirds of the issued and outstanding shares, in general, would have control over all of the company’s matters.

No, minority shareholders cannot require the acquisition of their shareholding other than the dissenting shareholders’ right to request repurchase in a merger or acquisition.