Acquisitions are primarily financed through equity and debt financing in Taiwan. Equity financing is mostly structured in the form of equity injection or short-term shareholder loans, which may be converted into equity with the applicable approval of the Investment Committee of Taiwan. Debt financing is usually structured to include, among others, a bridge loan or a mezzanine financing arrangement for the flexibility such arrangement offers, and typically, senior secured term loans to finance the acquisition. The participants usually include conventional financial institutions (such as international banks and local banks) and private equity funds that have extensive experience in debt financing arrangements.
According to data announced by the Department of Commerce of the Ministry of Economic Affairs of Taiwan, the total number of M&A deals in 2022 in Taiwan was 117, down 14% from 2021. Despite the decrease in the total deal value, among the top ten M&A deals, seven deals are cross-border mergers and foreign investment acquisitions, three deals are related to global operation strategy adjustment, and three deals are to upgrade and expand IC markets. In light of this trend, in general, it is projected that the M&A market in Taiwan will show steady growth in the second half, or at least from the last quarter, of 2023.
In addition, following KKR’s take-private of LCY, a Taiwanese listed company, via a cash-out share swap in 2018, the leveraged buyout structure has become more widely used for acquisitions than it was before, as a financing mechanism to retain more financial and operational flexibility.
Taiwan was severely impacted by COVID-19 during the first half of 2022 and saw a surge in COVID-19 cases. However, the ongoing or contemplated M&A do not seem to have been adversely affected, as most of the documents and communication are prepared and done electronically, and the relevant transaction parties have adapted to the rapidly changing COVID-19 situation. Still, given that the COVID-19 crisis and its unpredictable global impact keep evolving, the fallout in relation to outbound M&A transactions remains to be seen.
On the other hand, as a result of the inflationary pressures and price hikes triggered by the Russia-Ukraine war, central banks around the world have been forced to raise interest rates. Rising interest rates and prices have led to financing difficulties and declining profits, which affect corporates’ willingness to merge and acquire. However, the M&A market in Taiwan, although also in an inflationary environment in 2022, seemed largely unaffected by the Russia-Ukraine war, which may be due to the booming semiconductor industry in Taiwan in recent years.
The parties to corporate loan/acquisition financing/LBO transactions may freely choose a governing law as agreed upon and are not mandatorily required to choose Taiwanese law except in the case of certain security documents such as real estate and chattel mortgage agreements (see 5.1 Types of Security Commonly Used). In practice, local banks and state-owned banks prefer to choose the laws of Taiwan as the governing law, while international banks would opt for the laws of England, New York, Singapore or Hong Kong on the grounds of familiarity and ease in further distribution in the global secondary market. However, for certain security (eg, real estate mortgages and chattel mortgages), the governing law should be the laws of the jurisdiction where such security is located.
There is no official standard form for facility agreements in Taiwan’s local market. Most lenders in the syndicated loan market generally use the standard forms published by the Asia-Pacific Loan Market Association (APLMA). As for bilateral loans, the bank forms of the lenders are commonly used, but templates based on APLMA documentation would mostly be preferred and adopted by the participants. On the other hand, where a syndicated facility is arranged by European banks, the template would generally be prepared based on the documentation published by the Loan Market Association (LMA).
There is no statutory requirement regarding the language used in the documentation of a financing transaction, except that if the security package of the financing transaction involves any real estate mortgage or chattel mortgage in Taiwan, the real estate mortgage agreement and the chattel mortgage agreement must be in Chinese. By and large, where the lenders are local banks and the acquisition involves only Taiwanese elements, the facility agreement would usually be in Chinese. Likewise, where lenders include international banks and/or the acquisition involves foreign jurisdictions, English is mostly preferred as the dominant language in the documentation.
Legal opinions are generally required to be provided by legal counsels for transactions, and this is one of the conditions that must be met prior to the financing, as well as:
Where a post-closing covenant includes the borrower or the relevant obligor providing security in favour of the lenders or the security agent, legal opinions are also required to be provided by the legal counsels after the initial drawdown, to ascertain that the security provided by the borrower or the relevant obligor is valid and enforceable in accordance with the laws of the location of the security.
In practice, senior loans are typically used to finance all or a major part of the consideration of an acquisition. In general, the purchaser would set up a special purpose vehicle (SPV or “Bidco‟) for the acquisition and sponsor it through capital injections and/or shareholder loans. The lenders of a senior loan will, in addition to obtaining a pledge of the shares of the SPV, require the sponsors/shareholders to sign a subordination agreement and also assign the rights under the shareholder loans to the lenders as security under the senior loan.
A mezzanine loan combines debt and equity financing under which the lender may charge the interest and fees and set terms to convert all or a portion of the loan into equity after a certain period. The financing method may also be recognised as a form of financing with stock options.
However, the current laws and regulations in Taiwan are not friendly to commercial banks undertaking mezzanine financing due to the strict controls over investments by commercial banks. Article 74 of the Taiwan Banking Act, for instance, clearly states that:
The above being said, the Financial Supervisory Commission of Taiwan has been considering amending the relevant regulations to allow for mezzanine financing to facilitate the financing of micro-enterprises and start-ups, although no further progress or amendments to the Taiwan Banking Act have been made to date.
A bridge loan is commonly used for acquisition financing for flexibility and swift provision of funds. In Taiwan, bridge loans are structured as short-term funding (with a tenor of less than 365 days – mostly around a few months) prior to a senior loan. Documentation wise, the structure of bridge loans is similar to that of syndicated loans, except that due to the short-term feature, the availability period is relatively short, and it is structured to encourage swift refinancing.
Bonds are also one of the common tools for acquisition financing. In particular, listed companies may raise funds by issuing bonds to meet all or part of the costs in an acquisition in accordance with Taiwanese law after the announcement of the acquisition deal.
On the other hand, the issuance of high-yield bonds for acquisition financing by corporates is rarely seen in Taiwan. Since the issuers of high-yield bonds are usually highly leveraged companies or smaller or emerging companies with risky financial plans, they are not typical acquirers in the local M&A market.
Private placements and loan notes are not commonly used for acquisition financing in Taiwan due to the strict regulations on private placement and local banks′ unfamiliarity with accepting loan notes.
Asset-based financing is commonly used by corporates to obtain facilities based on the provision of security over certain real property and movable assets, which typically include aircraft, vessels and so on. See 5.1 Types of Security Commonly Used for further information.
The elements of intercreditor agreements vary between local and international financing deals.
Where acquisition financing is led by (and most of the participants are) local banks, an intercreditor agreement is rarely required as the syndicated loan structure is relatively simple compared to international deals. Usually, there are only senior lenders with the same ranking, and a subordination undertaking would only be required to be issued by the shareholder of the borrower, if any. That said, in some cases, local lenders may still form an intercreditor agreement to set out the ranking of the creditors. However, the elements of the agreement are mostly straightforward and include, among other things, whether the debt obligation is joint and several, the rights and obligations of the syndicate members, and the enforcement and distribution arrangements.
On the other hand, where an acquisition financing is led by an international bank or the financing agreement is governed by foreign law, the structure of the intercreditor agreement would be similar to those commonly seen in other jurisdictions as well as international practice, and the terms would include, among others, the ranking and priority, senior secured creditor liabilities, junior debts, hedge counterparties and hedging liabilities, an event of default and enforcement and distribution clauses.
Corporate bond investors are rarely seen as a party to an intercreditor agreement, and it is unusual for such investors to receive any security to rank pari passu with the senior creditors under an acquisition financing.
As Taiwan has foreign exchange controls, where an acquisition deal requires payment in New Taiwan dollars, but a large portion of the funds (eg, equity injection by foreign shareholders) is in foreign currencies, the borrower would need to hedge the exchange rate fluctuations in addition to the interest rate risk. As a result, the hedge counterparty will usually be one of the secured lenders and sign the intercreditor agreement to rank at least pari passu with the other senior creditors.
Under Taiwan law, there is no “all-asset lien‟, “floating lien‟, or “general security‟ concept with respect to security provision. The security provider and the security interest holder must enter into an agreement to identify the specific asset over which the parties contemplate creating the security. In addition, regulatory approval is generally not required for the security interest creation, except for certain types subject to the registration requirements, including security over shares, real estate mortgage, chattel mortgage and pledge over intellectual properties. The types of security used in Taiwan are explained below.
Security interest is commonly created over shares in certificated and scripless form by entering into a share pledge agreement between the pledgor and the pledgee. A public company in Taiwan is obliged to issue the former type of shares to its shareholders, whereas a Taiwan-incorporated private company may freely determine whether it will issue share certificates in certificated or scripless form to its shareholders.
For the creation of security over shares in certificated form, a written agreement must be executed, and the certificates of the pledged shares should be duly endorsed by the pledgor and be delivered to the pledgee. In general, as the certificates of the shares are endorsed and delivered to the pledgee, the pledge of shares will become valid and form a binding effect on the parties. Nevertheless, as the company whose shares are pledged in the share pledging arrangement ought to register the pledge on its shareholders′ roster, it should also be notified of the creation of the pledge. Both the pledgor and the pledgee may not claim against the company without said notice.
On the other hand, the pledge of shares in scripless form is differently executed, as the shares are transferred through the book-entry system of the Taiwan Depository and Clearing Corporation (TDCC). In addition, in rare cases, the pledgor and pledgee may choose foreign governing law for the share pledge contemplated by the parties, such as New York or English law, as long as the creation and perfection of the pledge are executed in a manner compliant with the procedures and requirements described above to ensure its validity and enforceability under the laws of Taiwan. For other requirements for the pledge of shares in scripless form, see 5.2 Form Requirements.
As mentioned above, the concept of “floating charge‟ is not recognised under Taiwanese law. Since the fluctuation of the inventory value would affect the validity of the pledge over the original inventory value identified, security over inventory is not commonly used in Taiwan.
The accounts of the borrower or security providers (or, more precisely described, the cash deposits maintained in the relevant bank account) are usually required to be pledged to control the fund flows. In terms of formality, the pledgee and pledgor must enter an account pledge agreement that identifies the name of the account, the account number and the bank with which the account is maintained, and such pledge will not become enforceable against the account bank until the account bank is notified of its creation. Because Taiwanese law does not recognise a “floating charge‟, any fluctuation of the account balance would affect the validity of the pledge over the original cash deposit identified in such account. In other words, the pledge would not cover any cash deposited after creating the pledge of the account, given that a floating charge is not a recognised security interest under Taiwanese law. In this regard, pledgors in Taiwan would normally be required to periodically confirm with the pledgees that the updated balance in the bank account is under pledge to ensure that the security interest has included the cash deposited after the creation of the pledge.
Security interests over receivables are commonly created by a pledge or assignment agreement in Taiwan. Take assignment, for instance, the assignment of receivables is effected between the assignor and assignee when the assignment is agreed upon by both parties. As such assignment is only between the parties to the assignment agreement and may not be known to the debtor, the Civil Code of Taiwan provides that the assignment will not be effective against the debtor until the debtor has been notified of it by the assignor or assignee. Therefore, notification of assignment must be served to the debtor under Taiwanese law for an assignment of receivables to be enforceable against the debtor. The debtor’s acknowledgement is not required, but in practice, many assignees would ask for such acknowledgement as evidence that the notice has been served.
Intellectual Property Rights
Security interests over intellectual properties are commonly created by a pledge agreement, and intellectual properties that can be pledged include patents and copyrights. To create and perfect a pledge of intellectual property, the pledgor and the pledgee are required to first enter into a written pledge agreement that specifies the intellectual property (eg, a specific patent along with its patent number) that is to be pledged as security. The parties should then register the pledged intellectual property with the competent authority to perfect the pledge. The registration typically requires the certificate awarded to the pledged intellectual property, the pledge agreement and any other documents evidencing the validity of the pledged intellectual property. The pledge is not enforceable against a bona fide third party until said registration is complete.
If the borrower or any of its subsidiaries (after the acquisition) owns valuable real estate (such as land and buildings), a first priority ranking real estate mortgage is usually preferred by the lenders, as the value of the real estate is relatively steady compared to shares or intangible assets. To create a mortgage, the mortgagor and the mortgagee must enter into a written real estate agreement that identifies the object subject to the contemplated mortgage. The parties will then need to register the mortgage with the competent authority to perfect the mortgage, and such registration would be the material factor when determining the priority of multiple mortgages over the same piece of real estate.
For security over inventory and movable assets, such as machinery and equipment, the security may be created in the form of a chattel mortgage in accordance with the Personal Property Secured Transactions Act of Taiwan. The legal formality includes executing a written chattel mortgage agreement that identifies the name, the type, the brand, the manufacturer, the number of pieces, the value and the location of the pledged equipment or machine. Although the chattel mortgage can be effective upon the execution of the chattel mortgage agreement, the mortgagee must still register the mortgage with the competent authority so as to claim the chattel mortgage against a bona fide third party because the mortgagor is not required to deliver possession of the mortgaged chattels to the mortgagee.
In practice, there are no formality requirements for security agreements except for the following.
With respect to security over real estate, the mortgagor and the mortgagee are required to execute a Land Registry standard form and register the pledge with the Land Registry. Such form must be in Chinese and filed with the land office where the mortgaged property is located.
For security over movable assets, the mortgagor and the mortgagee are required to fill in certain forms set by the authority and submit the same for registration. The required information for the registration application generally includes the name, type, brand, manufacturer, the number of pieces, and the value and location of the mortgaged movable assets, as required by the authority.
For companies issuing shares in scripless form, the pledge of such shares will be transferred through the book-entry system of the TDCC. For the creation and perfection of the pledge, the pledgor and the pledgee would be required to sign and execute a TDCC standard form and register it with the TDCC, instead of endorsing and delivering the actual shares.
See 5.1 Types of Security Commonly Used.
There is no specific restriction on providing upstream security under Taiwanese law; however, the issues of corporate benefit (see 5.6 Other Restrictions) and the guarantee restriction (see 6.2 Restrictions) are worth noting.
In Taiwan, no prohibition of financial assistance currently exists.
Pursuant to the Taiwan Company Act, a director must faithfully conduct the business of the company and has a duty of care as well as a fiduciary duty to act as a good administrator for the benefit of the company. In the context of acquisition financing, a director voting for a grant of security in favour of the lenders should demonstrate the benefit of such decision, whether direct or indirect, to the company. This corporate benefit requirement is reviewed on a case-by-case basis to prevent the risk of a director being challenged in violation of their fiduciary duty. The perceived benefits should be recorded in the board meeting minutes. In practice, when there is any doubt about the corporate benefit of providing security, it is always advisable to obtain a unanimous shareholder resolution to mitigate the risk of any minority shareholder’s claims for damage.
Security will normally become enforceable in accordance with the terms set forth in the relevant security document. Subject to the different types of security and the contractual arrangements provided in the security documents, enforcement procedures may generally be implemented as follows.
A real estate mortgage is generally enforced through court auction in accordance with the Taiwan Compulsory Enforcement Act. The mortgagee must obtain an execution title issued by the court prior to the court enforcement action. After the conclusion of the auction, the ownership of the real estate will be transferred to the winning bidder, and the unpaid loans should be satisfied by the mortgagee receiving proceeds derived from the sale of the real estate.
The pledgee or mortgagee may also sell the security (eg, mortgaged chattels or real estate) to a third party through a private auction, which does not require the involvement of a court or the need for a public auction. However, the pledgee/mortgagee must seek to obtain a fair market value for the security and follow the correct procedural steps to effect the sale. In this respect, the parties would usually agree under the relevant security agreement that the pledgee/mortgagee is authorised to sell the security to a third party on enforcement.
The Taiwan Civil Code provides that if the agreement of title transfer has been duly registered with the authority at the time the security becomes enforceable, making such agreement public and known to third parties, the ownership of the mortgaged property may be transferred to the mortgagee if the mortgagor or the debtor fails to pay or defaults, enabling the mortgagee to enforce such security.
Assignment of Contractual Rights
By entering an assignment agreement with the borrower, the ownership of the security or pledges of personal property may be transferred to the lender, thus enabling the lender to enforce the security or become a contracting party itself. Where the security is created by way of assignment (eg, assignment of insurance or material contracts), the enforcement action can be conducted without going through court proceedings because the assignee is entitled to exercise and enforce the rights upon assignment. Time-wise, the assignment will take effect once the assignment agreement is duly executed by the parties thereto and the relevant notice of assignment is delivered to the counterparty of the project document. In practice, the assignor and assignee should agree that prior to notification of the occurrence of an event of default, the assignor can still exercise its rights as if it is still the party to the assigned contract; but if notified that an event of default has occurred and is continuing, the assignee may exercise its rights under the assigned contracts.
Guarantees are commonly used in Taiwan for credit enhancement in acquisition financing. Documentation-wise, banks are used to adopting the template facility agreements published by APLMA in which the standard clauses for a guarantee are typical to the guarantee provisions in the Taiwanese market.
In addition, the Taiwan Civil Code allows for joint and several guarantees, pursuant to which the guarantor will be jointly and severally liable with the borrower as primary obligor and not merely as surety for the due and punctual payment of all the obligations of the borrower. To strengthen the lender’s right, the guarantor would usually be required to waive all rights of process and other rights under Article 745 of the Taiwan Civil Code such that the lender may claim on the guarantee without having to exhaust its rights against the borrower.
Under the Company Act of Taiwan, unless otherwise permitted by relevant laws and regulations (such as a bank as permitted under the Banking Act) or its Articles of Incorporation (AoI), a Taiwanese company may not act as a guarantor. If the AoI places any restrictions on the proposed guarantor, an amendment would be required prior to such company acceding as an additional guarantor. In addition, if a public company wishes to act as a guarantor, it must also comply with its internal regulations, such as the Rules for Endorsements and Guarantee. Recently, the Taiwanese courts have ruled that if a company provides its assets as security for others (eg, a chattel mortgage over equipment), the provision, by its nature, is not different from providing suretyship for others and acting as a guarantor and, therefore, will also be subject to the aforementioned restriction. Furthermore, representatives of a juridical person agreeing to be the guarantor of the obligation of the juridical person are liable only for the obligation of the juridical person occurring within the duration of their office. As such, the lender may, if applicable, ask the company to appoint a successor to act as a guarantor.
There is no requirement for guarantee fees under Taiwanese law, nor is there any practice of arranging guarantee fees in Taiwan′s local market.
The Taiwan Company Act has adopted equitable subordination rules by stipulating that if a controlling company has caused, directly or indirectly, its subordinate company to conduct any business contrary to normal business practice or in a way that is not profitable, and if the controlling company has a claim upon the said subordinate company, then the controlling company may not claim for offsetting such claim against its indemnification liability, if any, to the subordinate company. In addition, where the subordinate company enters into bankruptcy or composition procedures under the provisions of the Bankruptcy Act of Taiwan, or enters into the process of reorganisation or special liquidation of its company in accordance with the Company Act, the aforementioned claim, with or without the right to exclusion or priority, will be satisfied second in the order of all other obligatory claims of the subordinate company.
For borrowers becoming insolvent during the acquisition process, the Bankruptcy Act of Taiwan expressly incorporates the claw-back rules, providing that the lenders could request the Taiwanese court to revoke a transaction conducted by the borrower before it declared bankruptcy. In addition, the lender is entitled to revoke the following transactions conducted by the borrower:
Stamp duty is imposed on certain documents, including receipts for monetary payments, deeds for the sale of movables, contracts for work for hire, and contracts for sale, transfer or partition of real property executed in Taiwan. Where a finance document in an acquisition financing deal bears characteristics of any of the aforesaid documents, it will be subject to stamp tax.
Where a lender is a domestic financial institution (eg, a Taiwanese bank or the Taiwanese branch of a foreign bank), the interest and fees payable on the loan extended by that lender are subject to profit-seeking enterprise income tax at a rate of 20%, and there is no withholding tax on the interest or fees received by them.
On the other hand, if a lender is not a resident of Taiwan or is a profit-seeking entity without an established place of business in Taiwan, the withholding tax rate applicable to a corporate borrower obtaining a loan from that lender is 20% for the interest and fees payable on the loan (if the loan is provided as short-term commercial papers, 15%). This rate could be further reduced to 10% in accordance with tax treaties that Taiwan has entered into with the relevant country.
As to the portion of the proceeds of the loan made by the lender to indemnify the principal of the loan, that portion will not be subject to the income tax withholding requirement. However, if the portion of the proceeds is to indemnify the default interest sustained by the lender, then that portion may be subject to income tax. If the proceeds include a penalty pursuant to an agreement between the lender and the borrower, that penalty will also be subject to income tax unless the lender can prove that the penalty is to indemnify the losses that the lender has sustained.
In practice, transacting parties would typically include the tax gross-up provision in the financing agreement so that the lender’s receipt of payment or repayment would not be reduced because of the tax withholding requirement.
With respect to thin-capitalisation rules, the Income Tax Act of Taiwan stipulates that from 2011, excess interest will not be considered as an expense or loss if the proportion of related party debt to equity of a profit-seeking enterprise exceeds a specified ratio, and the entity will, when filing its tax return, disclose the information regarding the debt-to-equity ratio of the debt owed to related parties and other relevant information in its annual income tax return; provided however that banks, credit co-operatives, financial holding companies, bills finance companies, insurance companies and securities firms would not be subject to such rules.
Certain industries are heavily regulated in Taiwan, including but not limited to financial institutions, telecommunications, broadcasting companies, securities exchange firms, trust businesses, securities investment trust enterprises, foreign exchange brokers and electricity enterprises. The relevant laws and regulations generally prescribe that the acquisition of such companies and enterprises will require prior approval from the competent authorities, or there will be certain investment limitations on the targets.
In addition, the Taiwan Statute for Investment by Foreign Nationals and the Statute for Investment by Overseas Chinese prohibits foreign investors and overseas Chinese from investing in certain entities where the investment may negatively affect national security, public order, good customs and practices, and national health or other entities as prohibited by the law.
If the aforementioned investor wishes to invest in accordance with the statutes above, they are required to submit an investment application, together with investment plans and relevant documents, to the competent authority for approval.
In Taiwan, requirements for the acquisition of public companies are mostly identical to those applicable to private companies (see 9.1 Regulated Targets), provided that the acquisition of the public company is generally subject to certain laws and regulations that safeguard the integrity of the acquisition process and the rights of minority shareholders.
In the event that the target public company is listed on the Taiwan Stock Exchange (TWSE) or Taipei Exchange (TPEx), the acquisition would then be subject to rules governing the delisting process, and all these additional laws, regulations, rules and requirements could lead to variations in terms of the financing timeframe, the structure of fund utilisation or the conditions precedent, all of which should be considered when structuring the financing deal.
Pursuant to the Taiwan Securities and Exchange Act, a mandatory tender offer would be triggered for a period of 50 days, if required for an acquisition of 20% or more of the total issued shares of a public company. In addition, the use of consideration other than cash in tender offers is permitted by the Financial Supervisory Commission (FSC) (eg, domestic or foreign securities that satisfy certain requirements prescribed by the FSC as consideration), provided that stocks traded on PRC stock exchanges may not be accepted as consideration for a tender offer. Moreover, the properties of an offer can be used as consideration if approved by the FSC on a case-by-case basis.
Requirement of Shareholders’ Approval
As the minority squeeze-out provisions are not stipulated in the Company Act of Taiwan, the public company acquisition and the terms are still required to be approved by the shareholders of the target company with:
Once the attending shareholders approve the acquisition and terms, all shareholders of the target company are bound by the approval of the proposed acquisition. As such, a public company may conduct a cash merger or a cash-share exchange to squeeze out its minority shareholders by obtaining approval from the shareholders’ meeting’s said quorum requirements and voting thresholds. However, if the acquiring company holds 90% of the target company’s shares, the acquisition can be carried out with the approval of both companies’ boards of directors without the shareholders’ approval.
In addition, the shareholders’ approval is often structured as the condition precedent for utilising funds in an acquisition financing context. In Taiwan, transacting parties would typically agree that substantial parts of the acquisition funds cannot be utilised unless the necessary shareholder approval is duly obtained.
Requirement for Information Disclosure to the Competent Authority
In the event that any acquirer acquires more than 10% of the total issued shares of a public company, such acquisition must be reported to the competent authority and announced publicly; the same applies when there is any change to the specifics reported.
In addition, public companies in Taiwan are generally required to disclose certain material information, such as the material resolution of the board of directors or shareholders’ meeting or other circumstances having a material effect on the shareholders’ equity or the price of the shares. If the entry into a loan agreement, guarantee agreement or the provision of security for acquisition financing is considered material information, an instant disclosure of the major terms (eg, facility amount and guarantee limit) is required (note that the details, terms on fees or otherwise are not required).
In addition, if the acquisition involves a tender offer, the competent authority will require the acquirer to provide documents evidencing the certainty of funds when the application for the tender offer is submitted for approval. Information required by the competent authority typically includes, without limitation, the financing amount prepared or obtained by the acquirer for the proposed tender offer and the identity of the party that provides or structures the financing arrangement. On the other hand, as no regulatory approval is required for non-tender-offer acquisitions (eg, done through merger or share swap), no review of the certainty of funds would be required given that such acquisition is purely private between the parties.
Under Taiwanese law, there is no specific regulatory requirement as to who can provide funds, and a lender is not required to obtain a licence when financing an acquisition. However, the following caveats are worth noting when structuring debt financing in Taiwan.
Restriction on Intercompany Loans
The Taiwan Company Act (hereinafter, the “Company Act”) provides that the fund of a Taiwan-incorporated company shall not be lent to the shareholders of that company or any other person unless the borrower has a business relationship with the lending company or such lending is necessary short-term financing. As a result of this restriction, banks, insurance companies or pawn shops in Taiwan would normally engage in acquisition financing as part of their regular business, and companies that are non-financial institutions would primarily refrain from entering into any similar arrangement.
Anti-money Laundering and Sanctions
Similar to other jurisdictions and international practice, when structuring an acquisition financing in Taiwan, the anti-money laundering and sanctions laws should also be taken into account, as the relevant regulatory regime and legal requirements in Taiwan have been brought in line with international standards. Such conditions would also form part of the “know your customer‟ check of the banks, in accordance with their respective internal policies.
Foreign Investment Approval Requirement
Where the acquirer is a foreign entity, the acquisition of the Taiwanese entity would require foreign investment approval from the Investment Commission (IC) of the Ministry of Economic Affairs of Taiwan. Hence, obtaining the IC’s approval, among other things, will normally be a condition precedent to the first utilisation of the debt financing.
Foreign Debt Registration Requirement
To deal with the annual quota mentioned above, Taiwanese corporate borrowers can register their medium and long-term foreign debt with the Central Bank of the Republic of China (CBC) in accordance with the Directions for the Declaration of Medium- and Long-Term External Debts by Private Enterprises. For Taiwanese corporate borrowers that have registered their foreign debts accordingly, the converted amount of their repayment of the interest and principal of those foreign debts that exceed the annual quota would not be subject to obtaining the CBC’s approval.
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In Taiwan, despite the COVID-19 situation, total acquisition deal volume in 2022 continued to grow, including several high-profile cross-border M&A deals. According to data published by the Department of Commerce of the Ministry of Economic Affairs of Taiwan, the total number of M&A deals in 2022 in Taiwan was 117, including the first financial holding companies’ M&A deal in Taiwan. In 2023, Taiwan’s M&A transactions are expected to continue to focus on developing the green energy industry and integrating various industries for businesses to control advanced technology, develop key resources and conduct strategic transformation. Alongside this steady growth, the demand for acquisition financing has also increased, and it is projected that, in 2023, M&A and the associated financing and refinancing transactions will follow the pace set in 2022.
Regulatory Issues and Market Practice
While acquisition financing deals generally follow international practice, there are some nuances to be aware of when structuring a syndicated facility. In this section, we will briefly introduce the regulatory issues, market practice and recent trends in the loan market in Taiwan.
Legal capacity of foreign entities
There are some regulatory caveats in the taking of security in Taiwan for acquisition financing deals arranged by foreign banks or other foreign entities.
Prior to the amendment of the Taiwan Company Act, which took effect on 1 November 2018, a foreign company not recognised by the competent authorities in Taiwan and which had not yet established a branch office in Taiwan in accordance with the relevant laws and regulations, had no legal capacity to act as a security interest holder in Taiwan. In order to build an international environment for business, the Taiwan Legislative Yuan amended the Act in 2018 to repeal the recognition mechanism for foreign companies. Therefore, foreign companies may enjoy the same rights and capabilities as local companies without being recognised, and if a foreign company decides to do business in Taiwan, it only needs to register a branch office in Taiwan. As a result, unless otherwise provided by the law, foreign entities may act as security interest holders.
However, according to a ruling issued by the Ministry of Interior of Taiwan, a foreign company that wishes to obtain a real estate mortgage as security still needs to register and have a branch in Taiwan. Although there is no similar ruling in connection with chattel mortgages, the relevant competent authorities in charge of chattel mortgages adopt the same approach as the Ministry of Interior and require that a foreign company that wishes to obtain a chattel mortgage as security needs to register and have a branch in Taiwan.
In respect of certain security provisions (eg, real estate mortgage, chattel mortgage, pledge of listed shares), the holder of such security interest should therefore be a Taiwanese entity or a branch of a foreign entity in Taiwan to overcome the registration hurdles. This is why, in practice, where a syndicated facility is arranged by a foreign bank to support an acquisition of a Taiwanese target, which, in turn, would provide security in Taiwan, the Taiwan branch of the foreign bank or of a Taiwanese bank (which is also a lender) will be appointed to act as the security agent for and on behalf of the syndicate lenders, with whom a joint and several creditors’ relationship will be established in accordance with the Taiwan Civil Code.
Facility agent role
Further to the issue of security agents mentioned above, there are certain regulatory issues around the role of facility agent when a syndicated loan is denominated in New Taiwan dollars (TWD).
Specifically, the Taiwan Banking Act states that unless otherwise provided by law, any person or institution other than a bank (licensed in Taiwan) is prohibited from conducting business in relation to accepting deposits, managing trust funds or public property under mandate, or handling domestic or foreign remittances or foreign exchange.
Therefore, it is advisable that the facility agent role should be undertaken by a licensed bank (either a Taiwanese bank or the Taiwan branch of a foreign bank) in a TWD-denominated syndicated loan, since the role of facility agent will inevitably involve the handling of New Taiwan dollars and other banking activities that require a licence, even though the relevant laws and regulations and precedents did not rule out the possibility for a foreign bank to act as a facility agent. Otherwise, certain contractual arrangements should at least be in place to avoid disputes.
Foreign exchange control
Foreign exchange issues could also be the main concern for relevant parties to an acquisition financing, especially when it comes to fund flows and the timeframe of the deal, which typically involve the conversion of investment funds denominated in a foreign currency to New Taiwan dollars.
New Taiwan dollars are not an internationally traded currency and the Taiwan government implements certain control of foreign exchange. All foreign exchange transactions must be executed by banks designated by the Central Bank of the Republic of China (CBC) and the Taiwan Financial Supervisory Commission (FSC), which is the authority for financial institutions and industries, in accordance with the Taiwan Foreign Exchange Regulation Act and related laws and regulations.
In Taiwan, local companies and individual Taiwanese residents may, without foreign exchange approval, remit to and from Taiwan foreign currencies of up to USD50 million, or its equivalent, and USD5 million, or its equivalent, respectively, in each calendar year. This threshold amount is subject to determination by the CBC from time to time, at its discretion, taking into consideration the economic and financial conditions in Taiwan and the need to maintain order in the foreign exchange market in Taiwan. These limits apply to remittances involving conversion between New Taiwan dollars and US dollars or other foreign currencies for non-trade or services-related activities. Private corporations are also advised to register all medium and long-term foreign debt with the CBC.
Except for certain limited circumstances provided by law (eg, foreign investment approved by the Investment Commission or foreign institutional investors registered with the Taiwan Stock Exchange), a foreign national may, subject to certain requirements but without foreign exchange approval, remit to and from Taiwan foreign currencies of up to USD100,000 (or its equivalent) per remittance if the required documentation is provided to the ROC authorities. This limit applies to remittances involving conversion between New Taiwan dollars and any foreign currency. If any of the above-mentioned limits is exceeded, approval from the CBC will be required (“CBC Approval”).
The CBC Approval mentioned above is usually at the CBC′s discretion, and the timeline for obtaining such approval would vary on a case-by-case basis, since the relevant laws and regulations do not specify the review period. Once approved by the CBC, the daily conversion amount will also be subject to the CBC′s instruction and will typically vary depending on the total deal amount, the current foreign exchange markets and the CBC′s view on foreign exchange control of the New Taiwan dollar. A pre-communication with the CBC is always preferred and advisable to understand the attitude of the CBC and to facilitate the application and ensure the fund flows run as smoothly as expected.
Green Loan Principles and Investment in Green Energy
In recent years, the Taiwanese government has focused its policy on energy and environmental, social and governance (ESG) objectives. With the promotion of green energy, the demand for green energy sources and the acquisition of green energy projects in the Taiwanese market continue to thrive. The trend accordingly led the market to the dynamic development of financing in renewable energy-related industries, and a growing number of local lenders have adopted green loan principles in the provision of acquisition financing for local companies in Taiwan.
In addition, the Taiwanese government has approved the Special Act for Forward-Looking Infrastructure in July 2017 and plans to invest an estimated total of TWD882.49 billion in this large-scale infrastructure programme. It aims to incentivise public and private corporate investment of TWD1.78 trillion. Of all the infrastructure projects, green energy is expected to get the largest investment, especially in relation to wind power energy plans. The Taiwanese government has set a target of installing 5.5GW of offshore wind power capacity by 2025. As a result, the FSC has made the green finance policy one of the most important policies and is encouraging domestic funds to invest in the green energy industry. The FSC has also publicly pledged to support private sector investment in offshore wind farms, and the green impact of the market is expected to grow over time.
By and large, despite the decrease in the total value of M&A deals in 2022, it is expected that the number of acquisition financing arrangements will grow in the second half or at least from the last quarter of 2023. This is due to an increasing number of multinational conglomerates or companies readjusting their global presence in Asia, while the green energy industries continue to flourish, both of which will lead to more active mergers and acquisitions in Taiwan, as well as acquisition financing needs. As such, there is reason to be optimistic about the volume of acquisition financing activities and to expect further developments in this practice area going forward.
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