Taiwan: Mergers & Acquisitions

Mergers and acquisitions (“M&A”) in Taiwan are governed by the Business Mergers and Acquisitions Act (the “M&A Act”).  For matters not specifically provided under the M&A Act:

• The Company Act governs the general corporate matters and supplement the procedures that are not otherwise provided under the M&A Act;
• The Securities and Exchange Act governs the procedures if the target company or acquirer is a Taiwan company that attains public company status with the Financial Supervisory Commission (“FSC”) (hereinafter referred to as a “public company”, and those Taiwan companies that do not attain public company status are referred to as a “private company”). In addition, the following is a list of the key regulations applicable to M&A activities in Taiwan involving a public company:
  • Regulations Governing the Establishment and Related Matters of Special Committees of Public Companies for Merger/Consolidation and Acquisition;
  • Regulations Governing the Acquisition and Disposal of Assets by Public Companies;
  • Operating Rules of the Taiwan Stock Exchange Corporation (“TWSE”);
  • Operating Rules of the Taipei Exchange (the “TPEx”); and
  • Regulations Governing Public Tender Offers for Securities of Public Companies;
• If there is an antitrust concern, the combination filing and other requirements under the Fair Trade Act need to be considered;
• Labor Standards Act supplements the treatment of employees provided under the M&A Act; and
• If the acquirer is an individual or entity outside of Taiwan then, depending on the incorporation jurisdiction of the acquirer, the transaction will be subject to requirements set forth in the Statute for Investment by Foreign Nationals, the Statute for Investment by Overseas Chinese, and/or the Investment by People in Mainland China.

Finally, 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 M&A involves a financial institution, The Financial Institutions Merger Act, Financial Holding Company Act would prevail over the M&A Act, and Regulations Governing the Investing Activities of a Financial Holding Company.

Taiwan’s economy has been resilient through 2020 and during the COVID-19 pandemic, with its gross domestic product expanded 2.98% in 2020, outpacing Mainland China for the first time in 30 years. Taiwan’s industrial players continued to explore M&A opportunities domestically and internationally, with an aim for vertical and horizontal integration.  This is evidenced by the acquisition of KEMET Corporation, a leading supplier of high-end electronic components by Yageo Corporation, a leading passive electronic components provider, , which closed in June 2020; and Bora Pharmaceuticals’ acquisition of GSK Mississauga-based facility.

Another trend of M&A market in Taiwan is Taiwanese companies are using M&A as a means to, transform or expand its business offerings, or form business alliances. In addition, given the economic downturn in the European regions, we have found a growing interest by Taiwanese companies to acquire companies headquartered in the Europe, such as the UK and Finland.  We expect this trend to continue in 2021.

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 activities.

As the world begins to recover from COVID-19 pandemic, businesses in the sectors that suffered due to the pandemic but have solid fundamentals should be active in M&A either as acquirer or a target.  We can see that Taiwan’s various industries continue to explore M&A opportunities domestically and internationally, particularly when some businesses are undervalued due to the pandemic.

Horizontal integration and vertical integration have continued to be a significant contributor to M&A activities, as Taiwan’s businesses seek to expand its offerings in key technology sectors and become a one-stop shop as key supplier.

Business transformation continues to drive Taiwan’s businesses into exploring M&A opportunities, at times due to needs to make drastic changes to its operation through M&A.

Acquisitions of a publicly traded company will ordinarily be carried out by a public tender offer, merger, or stock swaps.  Depending on the objectives 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 shareholders, the number of shares held by each shareholder, and the address of its registered address or factory, if any.  There is no obligation on the target company to disclose diligence related information.  The scope of the disclosure will depend on the contractual agreement.

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

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 target company’s operations.  To trace 3–5 years of documents is common.  A public company tends to resist comprehensive due diligence since Taiwan has strict securities regulations regulating public companies in Taiwan, and the acquirer would normally focus on the publicly available information of the target company.

Domestic acquirers are generally more cost-sensitive and 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 a special committee or an audit committee, if any.

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 M&A-related laws and regulations also govern the information and documents that must be included in the shareholders meeting notice.

Under the Company Act, directors have a duty of care as a good administrator to the company and shareholders.  This is similar to the fiduciary duties under common law.  In addition, the 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 that it holds at the time of acquisition, and in case any director of the target is a representative of the acquirer, such director may vote, in the board meeting in relation to 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 a special approval or consultation right.  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 service-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 a spin-off (or division), the M&A Act provides for protection of the creditors.  Upon the resolution approving such a transaction, the target company shall immediately notify or make a public notice to each creditor, and specify a period of not less than 30 days to allow an objection to be filed by the creditors of the target company. A target 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 appropriate security, to create any trust exclusively for the creditors, or to certify that such transaction is without prejudice to the rights of creditors, shall not assert the transaction as a defense against such creditors. 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 spin-off may be severed, shall, within the scope of contributions made by the transferee company, be jointly and severally liable to discharge the liabilities incurred by the company that was spun-off, prior to the spin-off. However, the creditors’ right to claim for the performance of the joint and several liabilities shall be extinguished, if such right is 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 or audit committee before they are submitted to its board for approval.

Almost 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 a breakup fee, if necessary.  Another possible deterrent is to build in a liquidated damage clause for breach of exclusivity.  Under Taiwan laws, liquidated damage clauses are enforceable although the court has the discretion to reduce the amount considering the degree of the breach and financial condition of the breaching party.

In addition to the breakup fee and liquidated damages for breaching exclusivity, reimbursement of legal fee and costs of due diligence are frequently included in the letter of intent or memorandum of understanding.

Cash is the most common form of consideration in Taiwan for M&A transactions.  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 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 (ii) the FSC; (ii) the TWSE for the TWSE-listed companies; and (iii) 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.

If the target is a public company, then, once the acquirer (together with any other persons that act in concert) holds 10% of such company’s shares, such transaction 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 a 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; or (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 where the transaction involves a TWSE-listed or a TPEx-listed company, such a company is subject to the public disclosure requirements provided by the TWSE Procedures for Verification and Disclosure of Material Information of Companies with Listed Securities, and the 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 – Market Observation Post System (Taiwan’s equivalent to EDGAR) that is hosted by the TWSE – any matter that had a significant impact on shareholders rights or the price of the securities within 2 days following the date of occurrence (including the date of occurrence).  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 another date that can confirm the counterpart and monetary amount of the transaction, whichever date is the earliest; provided that, for an investment which approval of the competent authority is required, the earliest of the above date or the date of receipt of approval by the competent authority shall apply.  Therefore, a public disclosure is required at any stage of the negotiation that meets the foregoing definition of the date of occurrence. 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 legal restriction as to the maximum time period for negotiation or due diligence.  The length of negotiations and due diligence are determined by the parties, taking into account the costs incurred and to be incurred, the business objectives, and the certainties of the deals.

No, there is no law setting the minimum price in an acquisition. However, it is typical to offer a price that is fair and may be with premium, given the amount of shareholders’ support the acquirer needs to complete the transaction. Also, as dissenting shareholders may exercise their appraisal right for the court to decide the fair price, the acquirer should also consider whether the offer price could be upheld at the court. If the court decides a higher price, there will be extra costs to be paid to these dissenting shareholders, though it would not affect the validity of the transaction.

It is possible for target companies to provide financial assistance, subject to the lending restrictions applicable to all companies in Taiwan – 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. For example, a public company or its subsidiaries cannot loan an amount exceeding 10% of the net value of the borrowing enterprise.

Taiwan’s M&As Act is customarily used in an acquisition of Taiwan company as it provides various tax benefits.

Taiwan’s M&As Act 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 a legal opinion and a fairness opinion, are 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, and merger control approval if 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.  This is mainly because the government puts high value on minority shareholder protection, and the target company therefore can leverage the objections from the minority shareholder as a way of defense, causing uncertainty on the completion of the deal.

In M&As involving financial holding companies, particularly, the FSC amended the Regulations Governing the Investing Activities of a Financial Holding Company in 2018 to encourage M&A between the financial holding companies by not requiring target company’s board consents in favor of the M&A, if the acquirer meets the conditions of capital adequacy, good management capability, global expansion capability and good corporate social responsibility.  In December 2020, Fubon Financial Holding Co., Ltd. announced a tender offer of all issued and outstanding shares of Jih Sun Financial Holding Co., Ltd. This deal is currently under merger control review by the Fair Trade Commission and, if completed, would be a hostile acquisition and the first M&A between two financial holding companies in Taiwan.

Directors who are also shareholders 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 Act in recent years have allowed a Taiwanese private 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 private company.  Therefore, we have not seen protection, like a “poison pill”, in public companies.

From a director’s personal liability perspective:

• Taiwan’s M&As law permits the target directors appointed by the acquirer to vote on the acquisition, without the 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 of exposure of the directors when they vote in line with the recommendation of the special committee.

A buyer is required to initiate a tender offer if it proposes to acquire, by itself or acting in concert with others, 20% or more of the issued shares of a public company within any 50-day period.

In an M&A, a dissenting shareholder may reject the M&A 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 shareholder rights prescribed under the Company Act.

In view of the highest voting thresholds under the Company Act and the securities law in Taiwan, 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