Private Equity 2024 Comparisons

2024 sees a modest recovery in private equity transactions and M&A deals in Taiwan, and this trend has continued into 2024. Following the pandemic, private equity funds are primarily focusing on the TMT sectors, but the overall momentum is still slow-paced. Transactions in the renewable energy industry are generally unaffected, with major divestments in offshore wind farms and new deployments in the solar and power storage businesses.

The authors have also seen outbound investments driven by local industrial giants through partnerships with private equity funds in response to regional economic growth. For example, Universal Scientific Industrial, a subsidiary of ASE Technology Holding, acquired TE Connectivity’s Hirschmann Car Communication segment with Phi Capital. With extensive experience in capital markets and cross-border transactions, the private equity fund can assist Taiwanese industrial forerunners in business expansion, industrial integration, and future growth.

Taiwan’s robust manufacturing and R&D capabilities in semiconductors, 5G telecommunications, AI, and the internet of things (IoT) have positioned it at the heart of high-technology supply chains. The semiconductor and AI-related industries continue to attract investors despite the pressure of inflation and geopolitical uncertainty.

Geopolitical tensions across the strait are no longer an issue for sophisticated private equity funds when evaluating deals in Taiwan. Moreover, as the world’s geopolitical landscape is reshaping, cross-strait tension, while a risk, is not so much of a deterrence for investors as long as countermeasures can be planned. Instead, the authors have seen investment trends shifting to Taiwan as a result of a tightened investment environment in neighbouring jurisdictions such as China and Hong Kong. Long-term investments in solar, offshore wind farms and power storage are active, as supported by governmental policies and green financing.

To enhance the private equity investment environment, local stakeholders established the Taiwan Private Equity Association (TPEA) in 2023. TPEA members include private equity, securities, investment, venture capital, and other financial institutions.

As the authority in charge, the National Development Council (NDC) has promulgated the Guidelines for Facilitating Private Equity Fund Investing in Industries as part of the development of Taiwan’s core strategic industries. These guidelines allow qualified private equity funds to solicit funding from insurance companies.

To join forces with the NDC, the Financial Supervisory Commission (FSC) also amended the Regulations on Outbound Investments by Insurance Businesses to loosen restrictions on insurance companies investing in core strategic industries through private equity funds. These regulatory changes have boosted investments by private equity funds in industries including green energy, biotechnology, intelligent machinery, and new agriculture.

Primary Issues Relating to Potential National Security Concerns

Taiwan regulates inbound investments by separating foreign or PRC investors through two different regimes, both reviewed by the Department of Investment Review (DIR) of the Ministry of Economic Affairs (MOEA). A foreign investor is generally permitted to invest in a Taiwan company unless the company engages in prohibited or restricted businesses. On the other hand, due to the political tensions across the strait, a PRC investor can only invest in a limited number of industries on the “positive list” published by the government. A PRC investor means (i) an individual, juristic person, organisation or any other institution of the People’s Republic of China (the “PRC National”); and (ii) any company located in any third area (an area other than the PRC or Taiwan) (a) in which, in aggregate, more than 30% of its equity or capital is held by PRC National(s) or (b) which is controlled by PRC National(s).

If an investment involves a PRC investor or sensitive business (such as critical infrastructure, telecommunications business, or other restricted business), the DIR will request detailed information on the investor’s shareholding structure and an explanation on the intended purpose, and seek relevant governmental bodies’ opinions. In terms of private equity investments, the DIR will normally require the list of LPs (including its place of incorporation and source of funds). As the GP is responsible for making the investment on behalf of the fund/limited partnership, the DIR will also request the GP to disclose (i) the nationality/place of incorporation of each tier of investment vehicle, and (ii) the name and nationality of the respective shareholders and directors in each tier of investment vehicle, up to the ultimate beneficial owner(s).

The DIR approval is usually a condition precedent to closing. To this end, the detailed disclosure on the structure of the private equity fund may result in a protracted process, which could undermine the deal certainty and targeted timeline if not appropriately planned ahead.

EU FSR Regime for Private Equity Fund Transactions in Taiwan

The EU FSR regime mainly regulates “M&A activities of EU enterprises” and “participation in EU government procurement procedures”, which may lead to distorted transactions in the EU market. Therefore, if a private equity fund transaction involves a Taiwanese target company operating in the EU and participating in the government procurement project, the parties will need to carefully assess the implications of the EU FSR regime.

Change in Law

There have been no significant legislative movements in anti-bribery, sanctions, and other related areas in the past year. In terms of ESG compliance, the Securities Futures Bureau (SFB) has recently issued the “Corporate Governance 3.0 – Sustainable Development Blueprint” to encourage public companies to improve their corporate governance and align with international ESG standards, such as the Task Force on Climate-related Financial Disclosure (TCFD) guidelines and Sustainability Accounting Standards Board (SASB) Standards.

The level of legal due diligence will vary depending on whether it is a takeover or minority stake investment, and subject to factors such as the target’s operation, the investor’s risk appetite, and so on. In most instances, legal due diligence will entail a thorough examination of corporate, permits and approvals, real estate, material contracts, financial and liabilities, intellectual property, employment/labour, litigation, and insurances, with designated thresholds to filter the collected information/documentation. The work product could be a red-flag or full-blown report. For private equity deals, liability exposure in material contracts, financial and regulatory compliance are usually the primary focus.

Vendor legal due diligence is quite often seen in the auction process, presented in the form of a high-level legal due diligence report, fact-book or similar documents to be provided to the bidders on a non-reliance basis so as to fast-track the due diligence conducted by the bidders and narrow down the potential issues. For example, the coverage of a vendor legal due diligence report in local energy deals is usually limited to corporate, licences, material contracts, and real properties.

Private equity acquisitions may involve minority stake investment, 50/50 joint venture structure, controlling stake, and equity buyout. The acquisition of a minority stake can be made through a sale and purchase agreement. Merger, share swap, share exchange, and tender offer are often seen in takeover or equity buyout deals.

Court approval is not required in the deal structures mentioned above, but foreign or China investors must obtain approval from the DIR. Private equity funds tend to tailor their acquisition strategies and conditions based on the deal size, industry, and the target company’s ownership structure.

In auctions, the seller will lead the process and will have more bargaining power on the transaction terms and conditions. On the other hand, privately negotiated transactions require more flexibility in dealing with multiple stakeholders, such as the seller(s), management team, and key employees, usually leading to a longer time frame and additional costs.

Private equity funds usually make their investments in Taiwan through multiple layers of entities, such as an offshore joint venture/consortium or special purpose vehicles (SPV), in order to mobilise funds, manage portfolios, minimise liability exposure, and facilitate a clean exit.

In the event the transaction is conducted through a bidco or SPV, the private equity fund is typically not included as a party to the transaction; nonetheless, the fund will issue a letter of intent, parent guarantee, or equity commitment letter to satisfy different needs when consummating the transaction.

Subject to the deal size, investor appetite, and target industry, private equity deals can be financed in the following ways.

• Project finance, where a project company seeks medium- or long-term loans from banks, relying on the expected returns of the specific project. This is often seen in infrastructure investments such as offshore wind farms in Taiwan.
• Leveraged buyout, where the private equity-based buyers obtain funds from bank loans secured by the target’s asset/shares or expected returns.
• Management buyout, where the target’s management team acquires the company from the shareholders with the management team’s own funds, debt financing from banks, and/or financing from private equity funds.

An equity commitment letter from the shareholders of the buyer SPV is sometimes required to show that the SPV has sufficient funds to complete the deal. If the funds will come from loans, the transaction documents may include an agreed form for the finance documents and/or a request for relevant representations on the execution of these documents. In such cases, the financial close (including the fulfilment of all conditions under the finance documents) will often be the condition to closing the deal to ensure a seamless closing on the equity side.

In Taiwan, it is not uncommon for investors (such as institutional or strategic investors) to form a consortium with private equity funds to sponsor the deals. The consortium can be structured by forming an SPV onshore or offshore. For example, Orsted brought in a consortium of CDPQ and Cathay PE as co-investors in the 605.2 MW offshore wind farm Greater Changhua 1. In 2023, Phi Capital and Universal Scientific Industrial, a local electronics company, joined forces to acquire TE Connectivity’s Hirschmann Car Communication segment. This deal combined the corporate investor’s industrial knowledge with the private equity fund’s finance and management strength, achieving synergies in various aspects.

For deals with a larger number of investors, the consortium can also be set up through a limited partnership or similar fund structure. Multiple LPs can be passive investors who generally defer investment decisions to the GP and the investment committee.

For private equity transactions in Taiwan, consideration structures may vary depending on factors such as whether the target company is publicly listed or private, the valuation gaps between the buyer and seller, and the volatility of the target’s industry, and they are often heavily negotiated by the parties.

A private equity seller typically prefers consideration mechanisms without post-closing adjustments or contingent arrangements – eg, fixed price with or without locked box (especially in a public deal) so as to achieve a clean exit. On the contrary, a private equity buyer may seek for price adjustments such as completion accounts, earn-outs, or deferred consideration to ensure the purchase price closely reflects the underlying valuation/financials.

Rollover is a preferred way to consolidate the target company’s shareholding structure, align the management team objectives with the investors, and reduce the cash outlay or unnecessary limbs in the shareholding structure. For consideration mechanisms without any setoff against post-closing price adjustment or deferred payment, protection in the transaction largely depends on warranty and indemnity insurance if private equity funds are involved.

Fixed price locked-box consideration structures are preferred in private equity-backed acquisition of public companies in Taiwan. These are not uncommonly seen in private transactions where private equity funds wish to exit. In the experience of the authors, the parties would usually not otherwise charge (reverse-) interest for any leakage that occurs during the locked-box period, but this can be subject to the parties’ negotiation in each case.

A dedicated expert (often an independent CPA firm) is essential especially when a completion account, earn-outs or a deferred consideration mechanism is adopted in the deal. If the parties fail to reach a consensus on the financials or basis of calculation, the pre-agreed third-party expert will step in and the determination thereof will be binding on both parties.

If the dispute remains unresolved or either party attempts to dispute the decision from the dedicated expert process, the general dispute resolution outlined in the transaction documents will then apply either through litigation or through arbitration.

In local private equity-backed transactions, it is not uncommon to have conditions other than mandatory and suspensory regulatory conditions, such as corporate authorisations, financing, third-party consents, shareholder approval, satisfactory due diligence, and no material adverse event (MAE).

Third-party consent is usually required in the event that the transaction will trigger the change of control clauses in the facility agreements with the banks or material contracts with top customers or suppliers, in order to avoid the risk of breach under such agreements that may compromise the target’s usual or expected business operations.

An MAE clause is also considered a fairly standard inclusion in private equity transactions. Whether to adopt a qualitative or quantitative threshold will largely depending on the target’s industry/business and the result of negotiation. 

From the authors’ observations, risk-averse private equity buyers tend to avoid a “hell or high water” undertaking which imposes heavy burden on the buyer side to complete the deal, especially considering the increased regulatory uncertainty in recent years. In practice, a “hell or high water” undertaking will involve obtaining regulatory approvals such as foreign investment approval, antitrust clearance and, where the targets are in highly regulated fields (such as the telecommunications and financial industries), ad hoc approval from the competent authorities.

The new EU FSR may come into play for Taiwanese targets participating in public projects in the EU. Therefore, when structuring the deal, the parties will need to carefully negotiate these types of undertakings in terms of the required approval for completion or any potential conditions that may be imposed by the authority to enhance the deal certainty.

A break fee in favour of the seller may not be prevalent in deals with a private equity-backed buyer. However, these arrangements are sometimes used in cross-border public transactions or auctions as a deal protection mechanism. In highly regulated industries such as banking, insurance, or financial holdings, break fee arrangements may incite the regulator’s oversight and prolong the review process.

Based on the authors’ observations, a typical trigger for the break fee or reverse break fee is tied to the failure to obtain key governmental/regulatory approvals in the relevant jurisdictions. The break fee can range from 1% to 5% of the total purchase price, whereas the reverse break fee can be 1.5 to 2 times the break fee. The specific amount and conditions will still be determined through negotiations between the parties.

Private equity deals may be terminated due to the following circumstances:

• occurrence of a material adverse event;
• failure to obtain shareholders’ approval;
• deal prohibited by applicable laws or by the authorities; or
• failure to fulfil the conditions before the longstop date.

The longstop date generally aligns with the expected timeline to fulfil the condition precedents agreed upon by the parties, especially for obtaining the necessary governmental/regulatory approvals for the deal, with a certain buffer built in for prudence. In general, a standard foreign investment approval involving a PE investment in non-highly-regulated industries might take at least two to three months, so the longstop date would typically be five months or longer from the signing, subject to adjustments in view of the merit in each case.

A private equity seller may seek to shift the operational risks of the target company to the buyer or other sellers given that a private equity seller usually provides limited representations and warranties without exposing itself to any contingent liabilities. On the other hand, a corporate seller involved in the day-to-day operations and business decisions usually will be requested to undertake comprehensive representations and warranties on the general business operations of the target company.

In case of a private equity buyer, the warranty and indemnification insurance could be used to externalise potential risks, especially when the disclosures collected from due diligence are limited.

Typically, a private equity seller will offer rather limited warranties and indemnities with customary limitations of liability, such as liability period, de minimis, tipping/spilling liability basket, liability cap, matters disclosed, and/or claims arising from the buyer’s acts or omissions.

When the management team also sells their stakes in the target company, the management will usually provide operation-related representations and warranties. To ensure a consistent standard in the transaction documents, the private equity fund’s limitation on liability is generally extended to the management team. In addition, directors’ and officers’ insurance is a common risk management tool used to insulate the management team from financial losses.

When the buyer is backed by private equity, the buyer will request comprehensive warranties and indemnities to align with their prior deals and risk tolerance. Nonetheless, the terms will usually be open to negotiation in each case.

While a general disclosure of the data room is acceptable for affirmative disclosures in representations and warranties, it is typically not allowed for negative disclosures, as the scope of exception could be too broad or vague. In practice, negative disclosures against, or as exceptions or qualifiers to, the representations and warranties should be made specifically.

Overall, limitations on liability for warranties or indemnities in Taiwan generally follow the practices in the US or EU market, given that US or EU-based private equity funds have played an important role in the past private equity activities.

Warranty and indemnity insurance is also preferred in private equity transactions. In addition to the general fundamental and business warranties and representations, tax liability insurance (TLI) can be procured to address potential tax liabilities identified during the due diligence process or associated with the general business operations of the target company.

On the other hand, an escrow or retention could be rarely seen in private equity exit transactions which might defeat the purpose of exit.

Litigation could be scarce for private equity transactions, as the parties will usually try to resolve disputes in a more expedited manner to avoid a protracted litigation timeline and burden on costs. If the parties cannot resolve the dispute via commercial negotiation, private equity funds tend to opt for arbitration over court litigation, considering arbitration is a non-public procedure with higher confidentiality and flexibility.

In Taiwan, disputes could arise from consideration mechanics, valuation gap between the parties, scope and limitations on warranties, indemnities, or dissenting shareholders exercising the appraisal rights for share buyback.

Public-to-private deals involving private equity-backed bidders have become increasingly common in Taiwan in recent years. Such take-privates are often initiated by tender offers.

The target company will, within 15 days after receiving the tender offer from the bidder:

• establish a special review committee to review the fairness and reasonableness of the tender offer conditions;
• report to the FSC; and
• announce the tender offer and the comments of the board and special review committee to the shareholders.

The board of the target company has a fiduciary duty to its shareholders. Therefore, it is rare for the target company to enter into an agreement with the bidder on the tender offer, as such agreement often obligates the board to support the tender offer. An agreement signed between the bidder and the target company would be subject to mandatory disclosure prior to the launch of the tender offer.

Shareholding Disclosure Thresholds

Any person who, either individually or jointly, acquires more than 5% of the total issued shares of a public company must report to the FSC. Any change in the shareholder’s shareholding of 1% or more of the public company’s total issued shares should also be reported. The directors, supervisors, managerial officers and shareholders holding more than 10% of the public company’s total issued shares are also subject to regular reporting obligations.

Tender Offer Disclosures

A bidder should first submit the tender to the FSC and make a public announcement of the tender offer, including the following information:

• basic information on the bidder;
• terms and conditions of the tender offer;
• type and funding source of the purchase price for the tender offer;
• risks of participation and non-participation in the tender offer;
• status of the bidder’s shareholding in the target company;
• any agreement concerning the tender offer signed by (i) the bidder, and (ii) the target company, its management team, or shareholders within two years before the filing of the tender offer (if any);
• the bidder’s business plan for the target company;
• the bidder’s board resolution; and
• fairness opinion on the purchase price.

The bidder should report to the FSC and announce publicly the results of the tender offer within two days after the expiry of the tender offer period.

The above disclosure obligations apply to all bidders of a tender offer, regardless of a private equity-backed bidder.

A mandatory tender offer is triggered if anyone, alone or in concert with others, plans to acquire 20% or more of the issued shares of a public company within 50 days unless any exceptions apply. An acquisition will be deemed in concert with others if the acquirers acquire such shares by means of a contract, agreement, or other form of agreements for a joint purpose.

In general, cash is more commonly used as consideration in M&A transactions in Taiwan. In a tender offer, if the consideration is in cash, a performance guarantee from a financial institution or a written confirmation from a qualified financial adviser or CPA must be included in the offer documents as proof of funding. If the consideration is in the form of shares, such shares must be (i) domestic securities traded on the Taiwan Stock Exchange or the Taipei Exchange or (ii) foreign securities prescribed by the FSC.

In practice, the tender offer price is usually above the market price to incentivise the shareholders to tender their shares. An independent expert’s fairness opinion is generally required, and the directors of the companies participating in the transaction must fulfil their fiduciary duties by reviewing and negotiating reasonable terms and conditions.

In practice, common conditions of a tender offer are (i) the threshold for the tender offer and (ii) the required regulatory approvals.

A tender offer conditioned on the bidder obtaining financing is generally not permissible. A bidder should disclose details of its funding source for the consideration, substantiated by relevant supporting documents, in the tender offer. Moreover, a bidder cannot withdraw or cease a tender offer once it is launched unless approved by the FSC due to any of the following events:

• the bidder has proven a material change to the financial or business conditions of the target company;
• the bidder is subject to bankruptcy or reorganisation, death, or being declared incompetent; or
• other reasons specified by the FSC.

In practice, a bidder often seeks the principal shareholders’ commitments to vote for the deal at the shareholders’ meeting and to tender the shares. Whether to request further deal security provisions (such as break fees, match rights, force-the-vote provisions, non-solicitation, etc) will be subject to the parties’ negotiation. In the event that the principal shareholder is also a director of the target company, a fiduciary-out provision will often be included.

The Taiwan Company Act prescribes a set of matters requiring a majority (majority vote from at least 1/2 quorum) or supermajority (majority vote from at least 2/3 quorum) approval at a shareholders’ or board meeting. Moreover, except for the voting agreement among the shareholders during the deal process, the Company Act generally prohibits shareholder voting agreements on a public company’s governance matters. Hence, except for the shareholders’ rights prescribed by the law, the minority private equity bidder generally has no governance rights over the target company by a shareholders’ agreement.

A private equity-backed bidder may not be able to achieve a debt push-down following a successful offer, as a public company is bound by stringent financial and accounting rules as well as governance requirements.

In practice, take-privates in Taiwan may be implemented through a two-stage process – (i) the bidder acquires over a certain level (such as two-thirds) of the shares via tender offer and (ii) a back-end merger or share swap between the bidder (or its vehicle) and the target company. The minority shareholders will be squeezed out as a result of the second step merger or share swap. In such case, dissenting shareholders may exercise their statutory appraisal right against the target company for the court to adjudicate the fair market value of the shares being cashed out.

While the courts of Taiwan do not deem all voting agreements to be valid, the Business Mergers and Acquisitions Act allows shareholders to enter into a written agreement on the joint exercise of their voting rights and related matters when a company enters into a merger or acquisition. In practice, agreements under which the major shareholders commit to vote in favour of the deal at the shareholders’ meeting and to tender shares are common. Negotiations on such agreements and transaction documents are usually undertaken concurrently. The undertakings usually include irrevocable commitments to tender or vote by principal shareholders of the target company, typically contingent on obtaining approvals of the board meeting and/or competent authorities. However, the manager shareholders would require a fiduciary-out if a better offer is made.

Offering equity incentives to management teams can be considered a common practice in Taiwan, with the Company Act and the Securities and Exchange Act providing the necessary framework for implementation. Either the Taiwanese company or an offshore holding company may provide equity incentives to streamline the holding structure.

Equity incentives are typically implemented after the transactions, tailored to and rolled out as per the specific needs of the private equity. The options available for equity incentives, as prescribed under the Company Act and the Securities and Exchange Act, include profits distributed as shares, employee treasury stocks, employee stock options, and restricted stock units. Additionally, companies may negotiate phantom stock arrangements with their employees.

For stocks issued by an offshore holding company, in general, the offering of securities issued by an offshore company under a global omnibus employee stock option plan to specific employees in Taiwan will not be deemed an offering to non-specific persons, which is exempted from the regulations on public offerings and issuance of securities.

In management buyout (MBO) transactions, the current management team of a company buys out a majority of the shares from existing shareholders to gain control of the company. When the MBO involves the direct purchase of issued shares, management will less likely face conflict of interest. However, if the MBO involves a share swap, directors who are also the purchasers may need to disclose their conflict of interest.

In Taiwan, preferred stocks are permitted under the Company Act and can be structured with various rights, including dividend, voting, and veto rights. In practice, private equity investors often use preferred stocks to limit the management shareholders’ rights, such as by restricting voting and dividend distribution rights. Additionally, sometimes the management team may only sell their shares upon exit along with the controlling shareholders.

Vesting provisions for equity incentives are common in Taiwan, and companies have the flexibility to design arrangements for any stock options and RSUs. The Company Act is generally silent on restrictions attached to stock options or RSUs, allowing issuers to determine the relevant terms and conditions. Vesting periods and other restricted rights, such as restrictions on share transfer, voting rights, dividend rights, and/or share withdrawal, are generally permitted as long as they are stipulated under the terms and the conditions and approved by the board of directors of the issuer and related committees (if applicable).

Issuers have the freedom to set vesting and performance conditions for stock options or RSUs based on their objectives and reward plans. Different vesting conditions or issuance prices may apply for the same round of stock options or RSUs. If an employee fails to meet the vesting conditions, such as being disqualified or leaving the company, the issuer may reclaim or repurchase the outstanding stock options or RSUs in accordance with the relevant terms and conditions.

It is common practice for management shareholders to enter into restrictive covenants with the company. Typically, standard non-compete, non-solicitation/poaching, non-disparagement undertakings, and non-dealing covenants are included in equity packages or employment contracts.

In Taiwan, aside from post-employment non-compete clauses, restrictive covenants should not be subject to excessive restrictions. Article 9-1 of the Labour Standards Act provides that the period, area, and scope of occupational activities limited by the post-employment non-competition clause should not exceed a reasonable range. Particularly, employers must have legitimate business interests that require protection, and a post-employment non-compete period should not exceed two years.

An employer is also required to provide reasonable compensation to the employee for complying with a post-employment no-compete clause. The monthly compensation should at least be one-half of the employee’s monthly wage upon departure, as stipulated under the Enforcement Rules of the Labour Standards Act.

The rights of management shareholders are often restricted as private equity investors prefer not to provide management shareholders with the same level of protection afforded to key minority shareholders. In practice, the voting rights, dividend distribution rights, and the exit rights vested in the preferred shares held by management shareholders may be limited to the fullest extent permitted by law.

Notwithstanding the above, the Company Act provides a minimum level of protection for preferred shareholders. Any amendment to the Articles of Incorporation that is detrimental to preferred shareholders is subject to approval by a special resolution at a preferred shareholders’ meeting; such protection cannot be contractually waived.

A private equity shareholder typically requires the following rights to ensure control over its portfolio companies.

• Board appointment rights under which the shareholder can appoint a specific number of director(s) to the board.
• Supervisor appointment rights for the shareholder to appoint a supervisor for the portfolio companies.
• Information rights relating to the periodical financial information of the portfolio companies and any other specific operational information on a case-by-case basis.
• Shareholder reserved matters, such as any change to the preferred shareholders rights, redemption of preferred shares, change to the capital or board seats of any portfolio companies, liquidation of any portfolio company, among others. The shareholders may also set a higher voting threshold on the reserved matters. However, if the shareholders intend to stipulate higher quorum/voting requirements in the company’s articles of incorporation (AOI), the MOEA’s latest view is that this is only allowed for reserved matters that are explicitly permitted under the Company Act. Hence, when formulating the reserved matters to be incorporated in the AOI, shareholders should ensure compliance with the Company Act.

A shareholder of a company limited by shares is generally liable for the company up to the amount of share capital it has subscribed to. Nonetheless, the corporate veil will be pierced if the shareholder abuses the limited liability protection and causes the company to incur debts it cannot repay. In the event a private equity-backed major shareholder causes a portfolio company to engage in abnormal business operations, the controlling company will be liable to compensate the portfolio company for such losses. A private equity fund backing the majority shareholder would generally not be held liable for the actions of its portfolio company unless the corporate veil is pierced under exceptional circumstances.

Private sales, auction sales, and IPOs remain the most common ways for private equity funds to exit. The exit strategies vary depending on the milestones achieved, the expected financial return, the stakes owned by the private equity investor, maturity of the target company and its industry, and the inclination of other shareholders.

While multiple exit plans will be evaluated at the outset, a single process will be implemented as multiple tracks running in parallel may lead to a longer deal timeline, involve different levels of regulatory reviews (competing with each other), incur additional expenses and weaken the deal certainty.

It is rare for private equity sellers to roll over or reinvest upon exit; nevertheless, private equity sellers may sometimes reinvest through private investment in public equity (PIPE) to provide funding to the portfolio and to subsequently sell the shares on the market.

Drag rights and tag rights are common features in private equity deals. However, such rights are not often enforced in practice because the investors normally prefer to act in concert when there is an opportunity to exit.

The exercise of drag rights is usually conditional on the sale of controlling or up to 100% of the target’s share, sometimes with a valuation floor. When the private equity fund only holds a minority stake, the drag right is still heavily negotiated, aiming to allow the private equity to drag other founder/management shareholders or co-investors to better its chances of exit.

The common threshold for tag rights is the disposal of more than 50% of the target’s shares by the controlling shareholders. Minority financial investors often request tag rights to protect themselves against a change of control that could result in a change in management. As for founder/management shareholders, the tag right may be limited by their incentive schemes as tag rights go against the purpose of the incentive scheme.

According to the IPO-related rules, major shareholders (ie, those holding more than 10% of the company’s total issued shares) are subject to a lock-up period of at least six months, which may be extended to up to two years. Post-IPO relationship agreements between private equity sellers and the target are rare. In recent years, overseas IPO via de-SPAC has become a popular way of private equity exit due to the reduced time and cost compared to traditional IPOs.