Taiwan: Mergers & Acquisitions

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

• The Company Act governs general corporate matters and supplements the procedures that are not otherwise stipulated under the M&A Act;
• The Securities and Exchange Act governs the procedures if the target company or acquirer is a Taiwanese company that attains public company status with the Financial Supervisory Commission (“FSC”) (hereinafter referred to as a “public company”, and a Taiwanese company that does not attain public company status is referred to as a “private company”).
• 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;
• The Labor Standards Act supplements the provisions of the M&A Act relating to the treatment of employees; 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, or the Statute for Investment by People in Mainland China.

If the target company is in a regulated industry, then the laws governing such 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, the Financial Holding Company Act, and the Regulations Governing the Investing Activities of a Financial Holding Company would prevail over the M&A Act. Finally, any aspects of the transactions that are not otherwise provided for in the above laws would be supplemented by the Civil Code.

Taiwan’s economy continued to be resilient through 2021. According to various M&A data providers, the deal volume increased in 2021 compared to 2020 although the total deal value decreased. Taiwanese companies are using M&A as a means to transform or expand their business offerings or to form business alliances, and we expect this trend to continue.

The financial sector was particularly active in 2021 and will continue to be active in 2022. Several financial holdings are leading the way, highlighted by China Development Financial Holdings Corporation’s acquisition of China Life Insurance Company Limited; Taishin Financial Holding Co., Ltd.’s acquisition of Prudential International Life Insurance Co., Ltd.; and Fubon Financial Holding Co.’s tender offer for and proposed merger with Jih Sun Financial Holding Co., Ltd. (with Fubon being the surviving company). The proposed merger between Fubon and Jih Sun, if successfully consummated, would mark the first ever merger between financial holdings in Taiwan. Another particularly notable deal would be DBS’s acquisition of Citibank’s consumer banking businesses.

The telecommunications sector has also been active, with major deals including the proposed merger between Taiwan Mobile Co., Ltd. and Taiwan Star Telecom Corporation Limited (with Taiwan Mobile being the surviving company) and the proposed merger between Far EasTone Telecommunications Co., Ltd. and Asia Pacific Telecom Co., Ltd. (with Far EasTone being the surviving company).

We believe M&A activity in the tech sector and supermarket chains, will remain strong. Meanwhile, the healthcare and renewable energy sectors continue to attract M&A activity.

We also expect to see more and more de-SPAC transactions to facilitate Taiwan companies listing in the United States. This is highlighted by the business combination of Poema Global Holdings and Gogoro Inc. and the business combination of Global SPAC Partners and Gorilla Technology Group Inc. in 2021.

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

Horizontal integration and vertical integration continue to be a significant contributor to M&A activities, as Taiwan’s businesses seek to expand their offerings in key technology sectors and become one-stop solution providers. M&A by financial holdings focuses on acquiring the missing pieces of financial products, with Fubon and Taishin both acquiring life insurance companies.

Inflation will increase the cost of capital, as it is estimated that the Central Bank of China (Taiwan) will raise interest rate two more times this year. The increased cost of capital could render potential acquirers to be more conservative.

On the other hand, in December 2021, the Executive Yuan (the executive branch of Taiwan’s central government) approved proposed amendments to the M&A Act. The proposed amendments provide new tax incentives in two scenarios. First, for a share consideration received by the individual shareholders of an acquired start-up company (within five years from its incorporation, where it has not attained public company status), such individual shareholders may choose to defer full tax payment for five years. Second, the proposed amendments relax the calculation standard for the amortization of intangible assets acquired in an M&A, which can be based on the statutory period or ten years, making it easier for the acquirer to estimate its tax expenses. If the proposed amendments are passed, there could be more acquisitions involving start-up companies.

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 the privatization of a publicly traded company.

If the target company is a private company, then there is very little publicly available information besides the key company registration information, which is available on the government website. Such information 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 office or factory, if any. The target company has no obligation to disclose diligence related information. The scope of the disclosure will depend on the contractual agreement and the acquirer will rely heavily on the representations and warranties and the disclosure letter.

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 ongoing 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 three-five years of documents is common. The depth of due diligence usually depends on buyer’s knowledge of and familiarity with the target company and the management team.

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.

For a private company, the decision-making organs are the directors and, if required, the shareholders. For a public company, the additional organ is the audit committee (or a special committee in the absence of an audit committee).

Shareholders’ approval is generally 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 majority approval from the shares represented by the shareholders present at a shareholders meeting attended by the holders of two-thirds of the total issued voting 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 the total voting shares is present, 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 owe a duty of care “as a good administrator” to the company and shareholders. This is similar to the fiduciary duty under common law. In addition, the M&A Act also stipulates the following obligations of the directors in M&A transactions.

In the event of merger/consolidation and acquisition by a company, the board of directors shall, in the course of conducting the merger/consolidation or acquisition, fulfill its duty of care in the best interest of the company. 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 with respect to the merger/consolidation and acquisition, provided, however, that upon producing sufficient evidence of minutes or a written statement concerning their disagreement, the director may be exempted from such liability. In the merger/consolidation and acquisition by a company, a director who has a personal interest in the merger/consolidation and acquisition transaction shall explain to the board meeting and the general meeting the essential contents of such personal interest and the cause of their approval or dissent with respect to the resolution on the merger/consolidation or acquisition. In March 2022, the proposed amendments to the M&A Act would require, if passed by the Legislative Yuan, the legislature of Taiwan’s central government, that the essential contents of the personal interest and the reasons to support or reject the merger/consolidation or acquisition be included in the notice for the shareholders’ meeting, in order to ensure that the shareholders receive information in a reasonable time ahead of the shareholders’ meeting.

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 the event that 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 audit committee (or a special committee in the absence of an audit committee), 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 their 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 and inform them of the relevant 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 a 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 the protection of the target company’s 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 a public announcement, or that 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 will 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 break-up fee, if necessary. Another possible deterrent is to include 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 taking into account the degree of the breach and the financial condition of the breaching party.

In addition to the breakup fee and liquidated damages for breach of exclusivity, reimbursement of legal fees 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 either be an operating company or belong to the same group as the target company. This makes holding companies in tax haven countries such as the Cayman Islands usually unfit to act as 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 (i) 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 obtains one-third or more of the total issued shares of the target company, and again when it obtains 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 with the acquirer) obtains 10% of such company’s shares, the transaction is required to be reported to the FSC and publicly disclosed. Any subsequent increase or decrease of the shareholding totaling 1% or more 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 a 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 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 – the 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 two 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 on which the counterpart and monetary amount of the transaction can be ascertained, 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, deal exclusivity, and the certainty 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 at a premium, depending on the amount of shareholders’ support the acquirer needs to complete the transaction. Also, as dissenting shareholders may exercise their appraisal right asking for a court to decide on the fair price, the acquirer should also consider whether the offer price could be upheld in court. If the court decides on 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 Act 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 provide a loan of an amount exceeding 10% of the net value of the borrowing enterprise.

Depending on the parties involved in the mergers and acquisitions, we often see Taiwan, Hong Kong, Singapore, Delaware, or English laws, as the governing law. If the acquisitions are governed by laws other than Taiwan laws, the parties would customarily specify that Taiwan’s M&A Act would govern the mechanism of acquisitions to allow such acquisitions to be entitled to various tax benefits.

Taiwan’s M&A Act requires written contracts for the transactions 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. Among the notable examples are Fubon Holdings’ tender offer for Jih Sun’s outstanding shares in December 2020 and Advanced Semiconductor Engineering’s (ASE) tender offer for Siliconware Precision Industries’ (SPIL) shares in 2015. This is mainly because the government puts a high value on minority shareholder protection and the target company therefore the objections from the minority shareholders can be leveraged as a way of defense, leading to uncertainty regarding 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 the consent of the target company’s board 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.

Directors who are also shareholders can enter into a shareholders’ agreement or a voting trust arrangement with other shareholders for any matters relating to M&As.

Also, the amendments to Taiwan’s Company Act in recent years have allowed Taiwanese private companies to issue special shares with multiple votes, veto rights, or a different ratio for conversion to common shares (previously, each special share was 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; and
• 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.

On the other hand, minority shareholders cannot require the acquisition of their shareholding other than the dissenting shareholders’ right to request repurchase in an M&A.

In an M&A, a dissenting shareholder may reject the M&A and request that the target repurchase their shares at the fair price. If the shareholder does not raise an objection and instead stays with the target company and becomes or remains a minority shareholder, then that shareholder 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.

A merger or a share swap, which would result in the buyer acquiring the entire stake at the target company, has the effect of squeezing out the minority stakes. The minority shareholders may raise objection and exercise appraisal right to request the target company to repurchase its stakes as a fair market value.

Without the above process, the minority shareholders cannot initiate a process to require acquisition of their shareholding.