Corporate M&A 2024 Comparisons

M&A transactions in Taiwan were hardly affected by COVID-19 in 2023. Nonetheless, there have been fewer cross-border transactions, and more domestic transactions. The authors are of the opinion that this may be due to the global high interest rate environment and the geopolitical circumstances.

We have seen in the Taiwan market several purchases of logistics and electronic devices companies. In 2023, Taiwanese companies have significantly increased their investments and acquisitions abroad. Notably, WT Microelectronics’ acquisition of Future Electronics stands out as a prominent transaction.

Also, green energy continues to thrive. International Ocean Group acquired CWind Taiwan. Investors’ interest in solar energy projects also fuelled the M&A market.

There is growing demand for green energy, and large companies, especially manufacturers, have entered into agreements with private power plants for procuring green energy due to the ESG advocacy and promotion of ESG awareness in the society. 

There may have been fewer investments by PRC/PRC-invested companies in Taiwanese companies through M&A due to the change of political climate and the sensitive cross-strait situation.

The logistics, electronic devices and green energy sectors have experienced significant M&A activity as mentioned in 1.2 Key Trends.

Transactions for acquiring a company in Taiwan are usually structured as a business transfer, share swap, merger or tender offer. A general description of these types of transaction are as follows.

Business Transfer

This type of transaction refers to a transaction in which a company assumes all or a material part of the business, assets and liabilities of another company. A special approval of the shareholders of the parties participating in the transaction is required.

Share Swap

A company may be acquired by another company or a newly incorporated company by a share swap, whereby the acquiring company issues new shares, cash or other assets, or a combination of shares, cash and/or other assets to the shareholders of the target company in exchange for their shares in the target company, which will result in the acquiring company holding 100% of the issued shares of the target company, and the shareholders will either be flipped to hold shares of the acquiring company or cashed out, depending on the form of consideration paid.

Merger

A merger (with the consideration of cash, shares or their combination) is available for acquisition. In a statutory merger, special approval of the board of directors and shareholders at the meeting of each of the participating parties is required.

Tender Offer

Tender offers are available and commonly conducted for acquiring listed shares. In accordance with the Securities and Exchange Act and Regulations Governing Public Tender Offers for Securities of Public Companies (the “TO Regulations”), a mandatory tender offer bid is required for an acquisition of 20% or more of the issued shares of a public company within 50 days.

The main regulator in charge of public M&A transactions is the Securities Futures Bureau (SFB) of the Financial Supervisory Commission (FSC), which is the government agency responsible for public companies. The other relevant regulatory bodies include the Fair Trade Commission (FTC), the authority in charge of antitrust clearance, and the Department of Investment Review (DIR, formerly the Investment Commission) of the Ministry of Economic Affairs, the authority in charge of reviewing foreign and PRC investments. If the target company holds any special licence, the authority in charge of that special licence may also need to review the transaction.

Under the Statute for Investment by Foreign Nationals (SIFN), foreign investors may be subject to prohibitions or restrictions on owning certain classes of Taiwanese businesses. Pursuant to the Negative List for Investment by Overseas Chinese and Foreign Nationals promulgated by the Executive Yuan, last amended on 8 February 2018 (the “Negative List”), industries in which foreign ownership may be prohibited or restricted include certain sectors in agriculture, husbandry, fishing, forestry, manufacture of chemical materials, telecommunications, television and radio programming or broadcasting, transportation, and legal and accounting services, among others. All foreign investors (other than foreign investors making portfolio investments in Taiwan under the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals (the “FINI Regulations”), as discussed below) wishing to make direct investments in the shares of Taiwanese companies are required to obtain foreign investment approval from the DIR or other government authorities.

Taiwan and China have a unique political relationship which has resulted in restrictions on inbound and outbound investments concerning China. For example, under the Act Governing Relations between the People of the Taiwan Area and the Mainland Area and the implementation rules and relevant regulations, Chinese businesses cannot invest in Taiwan unless they have obtained prior approval from the DIR. Also, Chinese businesses cannot invest in any business that might create monopolies, threaten Taiwan’s national security, or damage Taiwan’s economic development or financial stability.

Foreign portfolio investors who are permitted under the FINI Regulations to invest in securities listed on the Taiwan Stock Exchange (TWSE) or the Taipei Exchange (TPEx) or other securities approved by the FSC are classified as foreign institutional investors (FINIs) or foreign individual investors (FIDIs). FINIs and FIDIs wishing to invest in the Taiwan securities markets must register with the TWSE or TPEx and obtain a foreign investor investment ID (FID).

Except in certain exceptional circumstances (including when an entity is obtaining 10% or more of the issued shares of a Taiwanese listed company in a single transaction), investments in Taiwanese listed companies by FINIs or FIDIs are not subject to individual or aggregate foreign ownership limits. FINIs and FIDIs may make investments into the Taiwan securities markets at any time after obtaining the FID without any limitation on the amount of investment.

The Fair Trade Law (FTL) regulates monopolies, mergers, concerted actions and unfair competition. If, as a result of a share acquisition, one company holds shares or capital contributions representing one third or more of the total voting shares or capital stock of the target company, the transaction will constitute a “combination” for the purpose of the FTL. In addition to share acquisitions, combinations under the FTL also include mergers, transfers or leases of all or a substantial part of an enterprise’s business or assets, the establishment of joint ventures, and having direct or indirect control over the operation or personnel of another enterprise.

Under the FTL, prior clearance must be sought from the FTC for any combination in any of the following circumstances:

• where the combination results in the combined entity having a market share in Taiwan of one third or greater;
• where the combination involves a company having a market share in Taiwan of one quarter or greater; or
• where: (i) all enterprises in a combination collectively have global sales for the preceding fiscal year reaching TWD40 billion and at least two enterprises both have domestic sales for the preceding fiscal year reaching TWD2 billion; or (ii) for enterprises not in the financial sector, an enterprise in a combination has domestic sales for the preceding fiscal year reaching TWD15 billion and another enterprise in the combination has domestic sales for the preceding fiscal year reaching TWD2 billion; or (iii) for enterprises in the financial sector, an enterprise in a combination has domestic sales for the preceding fiscal year reaching TWD30 billion and another enterprise in the combination has domestic sales for the preceding fiscal year reaching TWD2 billion.

No combination can be effected during the period of 30 business days starting from the filing date (on which complete documents and information have been filed). If the FTC does not give any notice of extension of the waiting period or make a decision objecting to the transaction, the enterprises may proceed with the combination upon the expiry of the 30 business day period. The waiting period can be shortened or extended up to 60 business days if the FTC deems it necessary. However, if the FTC decides not to exercise its jurisdiction over the combination (usually in an extraterritorial combination case), the parties are free to proceed with the combination upon the receipt of the FTC’s decision letter.

When considering whether to accept or reject any applications for business combinations, the guiding principle of the FTC is whether “the overall economic benefit of the combination outweighs the disadvantages resulting from restraint of competition”. As such, the FTC has full discretion to set special conditions to the approval of a combination.

Failure to notify the authorities of (i) a combination; (ii) the implementation of a combination despite a prohibition decision or prior to receiving clearance; or (iii) a breach of conditions imposed in a conditional clearance decision, may attract fines ranging from TWD200,000 to TWD50 million. In addition to these administrative fines, the FTC can order parties to unwind the combination or make specified divestments.

For a transaction structured as a merger or asset transfer an acquirer is required to notify the affected employees to be retained at least 30 days prior to the closing date, and each employee who receives the retention notice must notify the acquirer of their decision to accept or reject the offer of retention within ten days of receiving the notice. Failure to reply by employees will be deemed as consent. The employees’ seniority at the target company must be recognised by the acquirer. 

On the other hand, the target company must lay off those employees who reject the offer or are not retained by the acquirer by paying them pension or severance pay and serving them prior notice. 

For a transaction structured as a tender offer or share swap, notice is not required to be provided to the employees as there will not be a change of employer.

Chinese businesses cannot invest in Taiwan unless they have obtained prior approval from the DIR. Also, Chinese businesses cannot invest in any business that might create monopolies, threaten Taiwan’s national security, or damage Taiwan’s economic development or financial stability.

The latest amendments to the Business Mergers and Acquisitions Act (the “M&A Act”) were promulgated by the President on 15 June 2022 and came into force on 15 December 2022 (the “Amended M&A Act”). The key changes under the Amended M&A Act aim to strengthen the protection of shareholders’ rights and interests, expand the defined scope of whale-minnow mergers, and increase the flexibility of the relevant tax arrangements, as detailed below. Also, in order to fulfill the supervisory function of the audit committee, to protect the rights and interests of minority shareholders, and to stabilise the operation of company, amendments to the Securities and Exchange Act were passed by the Legislative Yuan on 30 May 2023 and promulgated by the President on 28 June 2023. Under the amended Securities and Exchange Act, among others, an independent director can no longer initiate a lawsuit against the director, convene a shareholders’ meeting or represent the company in a director’s self-dealing matter. Such matters shall be resolved by the meeting of the audit committee after thorough discussions.

Strengthened Protection of Shareholders’ Rights and Interests

In order to strengthen the protection of shareholders’ rights and interests and to ensure the information transparency of M&A transactions, Article 5 of the Amended M&A Act stipulates that, where a director has a conflict of interest in a proposed M&A transaction, the company must disclose the material information on the conflict and the rationale for approving or opposing such transaction in the notice for the shareholders’ meeting convened therefor.

Expanded Scope of Whale-Minnow M&A

Before the amendments to the M&A Act came into force, shareholder approval was waived where a whale-minnow M&A meets the following criteria:

• the new shares issued by the acquiring company for the purpose of the merger do not exceed 20% of the total number of its outstanding voting shares; and
• the total value of the shares, cash and other properties paid by the acquiring company for the M&A do not exceed 2% of the net value of the acquiring company.

However, in order to increase the flexibility and efficiency of M&A transactions, the Amended M&A Act expands the scope of such waiver by increasing the limit on the total value of the shares, cash and other properties paid by the acquiring company for the M&A to 20%. To implement a whale-minnow M&A, a company only needs the approval of its board of directors and not that of the shareholders’ meeting.

Increased Flexibility of the Relevant Tax Arrangements

The newly added Article 40-1 under the Amended M&A Act stipulates that the types of assets that may be recognised as intangible assets in a M&A transaction include business rights, copyrights, trade mark rights, patent rights, integrated circuit layout rights, plant variety rights, fishing rights, mineral rights, water rights, trade secrets, computer software and various concessions. Also, under the Amended M&A Act, the period of amortisation for intangible assets acquired through a M&A is extended to the remaining period of the legal entitlement thereof or ten years, which rectifies the current conundrum that some M&A costs cannot be deducted from taxable income.

Furthermore, Article 44-1 of the Amended M&A Act provides that, upon a corporation’s dissolution due to a merger or spin-off, for individual shareholders who acquire the shares of the surviving company, the newly incorporated company or the foreign corporation as a result of a merger or spin-off, the tax assessment of the dividend income under the Income Tax Act may be deferred until the third year following the year of acquisition and taxed in equal instalments over three years with an aim to promote a friendly regulatory environment for start-up M&As.

There have not been any significant changes to takeover law in the past 12 months. 

An application for constitutional interpretation has been made with the Constitutional Court to challenge and argue that the current provision regarding mandatory offer under the TO Regulations, which provides that a mandatory tender offer bid is required for an acquisition of 20% or more of the issued shares of a public company “within 50 days” is too vague and unconstitutional, as the violation thereof includes criminal penalties. One of the major issues is that it is unclear how the 50-day period is calculated. The Constitutional Court ruled on 28 April 2023 that such challenged provisions are constitutional. As such, no amendment will be required.

Although some bidders have built a stake in a target company before an offer is launched, it is not customary because of the restriction under the TO Regulations described above, and potential insider trading violation concerns. 

Insiders must not trade in shares based on non-public information that materially affects share price movement before the publication of this information or within 18 hours after publication of the information. Insiders include:

• directors, supervisors, managers and their spouses, minor children and nominees, and shareholders who (together with their spouses, minor children and nominees) hold more than 10% of the issuing company’s shares;
• any individual designated by a governmental or corporate director or supervisor to act on behalf of the government or corporation;
• any person who has acquired material non-public information due to an occupational or controlling relationship with the issuing company;
• any person who has been discharged from the status or position in the three bullet points above for not more than six months; and
• any person who has learned material non-public information from any of the above.

A tender offer is material inside information so it is possible that the bidder could violate the insider trading rule if it purchases the target company’s shares on the market.

On a separate note, the bidder can still exercise its voting power with respect to the existing shares in the target company it already acquired before the offer.

Any person who acquires, either individually or jointly with other persons, more than 10% (5% starting from 10 May 2024) of a public company’s total issued shares must file a statement with the FSC within ten days of the acquisition. They must state the acquisition’s purpose and sources of funds and any other information required by the FSC. Timely amendments must be filed when there are any changes to the information reported. In addition, a shareholder holding more than 10% of the issued shares of a public company must report the status of their shareholding to the company by the fifth of each month. The company must file a report on its directors, supervisors, officers, and shareholders who hold more than 10% of the company’s issued shares with the FSC by the 15th of each month.

In December 2022, the Executive Yuan proposed certain draft amendments to the Securities and Exchange Act, among which includes lowering the threshold of insiders from 10% to 5% to bring more transparency from a regulatory perspective. The amendments were passed by the Legislative Yuan on 21 April 2023 and promulgated by the President on 10 May 2023, and the amended threshold will come into force on 10 May 2024.

A company cannot introduce different rules to create additional hurdles to stakebuilding in Taiwan.

Dealings in derivatives are generally allowed in Taiwan. However, if a derivatives transaction is linked to securities of listed companies, it is very likely that the rules regarding insider trading and conflict of interest may apply.

The formula for the calculation of the shareholding disclosure thresholds is: Threshold percentage equals numerator over denominator, multiplied by 100.

The numerator comprises the holder’s total shareholding of all classes of a public company’s shares, including preferred shares and stock dividends, aggregated with the holdings of other relevant entities if required by relevant aggregation rules. The denominator comprises the aggregate of all classes of shares in issue (irrespective of whether those shares carry voting rights), including treasury shares and preferred shares.

Derivatives do not comprise the numerator for calculating the disclosure thresholds since they are not in the form of issued shares that have been acquired and owned by the person concerned. This is the case even where the holder of derivatives can elect to physically settle, since the disclosure regime is concerned with disclosure of holdings of issued shares that have been actually acquired and owned by the person concerned.

As mentioned in 4.2 Material Shareholding Disclosure Threshold, any person who acquires, either individually or jointly with other persons, more than 10% (5% starting from 10 May 2024) of a public company’s total issued shares, must file a statement with the FSC within ten days of the acquisition. The purpose of the acquisition must be stated in the filing as required by the FSC. However, in practice, a major shareholder usually would not disclose a specific purpose in such filing unless there was a concrete plan in connection therewith.

The target company’s requirement to disclose a deal only applies if the target is a public company. Usually, the target company will announce a deal right after its board of directors approves the deal, and the definitive agreement will be signed on the same date the board approves the deal.

Market practice regarding disclosure is generally consistent with the requirements described in 5.1 Requirement to Disclose a Deal.

Usually, the scope of due diligence is full coverage, which includes the following:

• business operations;
• company incorporation documents;
• corporate and shareholding structure;
• securities issued;
• licences or permits required for the target company’s business;
• accounting information;
• correct tax payment;
• all of the target company’s employees, particularly on the topics of labour disputes, employment terms, and pension plans;
• assets;
• intellectual property rights;
• any litigation, dispute, or investigation involving the target company and its directors;
• material contracts;
• insurance policies and any indemnification records; and
• sanctions received by the target company for violation of laws or regulations and any other sanctions which may have material impact on the target company.

The only impact may be that the parties are more inclined to use online data rooms instead of onsite due diligence during the pandemic.

Standstills and exclusivity are commonly demanded by bidders/potential buyers in M&A transactions.

In the case of a friendly tender offer, the offeror usually will enter into the tender agreement with major shareholders of the target company to ensure that such major shareholders will tender their shares to the offeror once the tender offer is launched. All contractual arrangements between the offeror and the insiders of the target company (including major shareholders holding more than 10% of the shares and directors, etc) must be fully disclosed in the tender offer prospectus to be made available to the public by the offeror pursuant to the TO Regulations.

The timeline for acquiring/selling a business in Taiwan heavily depends on whether the target company is a public company, whether the approval of the shareholders’ meeting is required, and whether any regulatory approval is required to be obtained, but generally speaking, six to 12 months if all of the above elements are involved. 

M&A transactions in Taiwan were hardly affected by the pandemic or any governmental measures taken to address the pandemic.

A mandatory tender offer bid is required for an acquisition of 20% or more of the issued shares of a public company within 50 days.

Both cash and shares are commonly used in M&A transactions. In terms of public takeover deals, cash is more commonly used as it would be easier for the acquirer to obtain a 100% equity interest using the cash-out share exchange structure.

A fairness opinion from an independent expert such as CPA, together with a reasonable premium, are usually required. In practice, a 10% to 30% premium is commonly seen to be offered by bidders. However, there would be a limited solution for a gap in the target company’s value; the main reason may be that a post-completion payment or hold-back arrangement is infeasible for a public company deal under Taiwan law. A warranty and indemnity (W&I) insurance may be helpful if the gap is related to certain contingent liabilities/loss of the target company.

The common conditions of a tender offer are as follows.

• The threshold for the offer. For example, the bidder may specify in the tender offer prospectus that it intends to acquire 100% of the target company’s shares and if it fails to acquire 50% of the target company’s shares, the offer will fail.
• Regulatory approvals. The commonly seen regulatory approvals are the DIR’s approval for a foreign bidder’s investment in the target company, and the FTC’s approval if the tender offer is a combination and meets the filing threshold (see 2.4 Antitrust Regulations).

The bidder may also specify in the tender offer prospectus the maximum number of shares it intends to acquire. If the number of shares tendered exceeds the number of shares intended to be acquired, the bidder shall purchase the shares pro rata from all the tenderers.

No other conditions other than the above would be allowed by the regulator in a tender offer.

In a tender offer, usually the offerors set the threshold of the offer at 51% of the issued shares of the target company, as a 51% equity interest usually means the offeror would have control of the target company including the majority of the board. Some would even set the threshold at 67% to gain an absolute control of the target company because under the Company Act, material decisions require the approval from shareholders holding two-thirds of the voting shares present at a meeting. 

However, in practice, given that not all shareholders attend shareholders’ meetings, to control the management or operation of a listed company, it is sometimes sufficient for one investor to control 30% to 40% of the voting rights in a listed company. In sum, this would largely depend on the shareholding structure of the listed company.

Though generally speaking, a business combination in Taiwan may be conditional on the bidder obtaining financing, most negotiated transactions do not include this condition. Commitment letters issued by financial institutions might be required by prudent sellers in a leveraged transaction.

For a tender offer, it is not permitted for the bidder to have the tender offer consideration payment being subject to obtaining financing. Under the TO Regulations, if the consideration is cash, the offeror must provide proof that the offeror has sufficient funds to make the payment of the tender offer consideration (eg, a performance bond issued by a financial institution with the offeror’s agent as beneficiary).

In local practice, a buyer may require that the definitive agreement includes non-solicitation provisions that prohibit the target company from soliciting alternative transaction proposals.

Transactions may also involve agreements with major shareholders of the target company to vote to approve the transaction at the shareholders’ meeting of the target company.

In the case of a friendly tender offer, the offeror usually will enter into the tender agreement with major shareholders of the target company to ensure that such major shareholders will tender their shares to the offeror once the tender offer is launched. All contractual arrangements between the offeror and the insiders of the target company (including major shareholders holding more than 10% of the shares and directors, etc) must be fully disclosed in the tender offer prospectus.

It is not common for the target company, or the bidder, to agree to pay a break fee if the bid is not successful.

For transactions involving a period between signing and closing, the parties usually will negotiate standstill covenants requiring the target company to conduct its business in the ordinary course of business consistent with past practice. Due to COVID-19, some target companies may require specific exceptions to these covenants to permit management of the target company flexibility to react to the changing conditions caused by the pandemic and prevent the buyer from walking away or renegotiating the transaction due to those developments.

If the buyer does not seek 100% ownership of the target company, the buyer may seek to amend the constitutional documents of the target company (as a condition to the completion of transaction) to include certain protection (such as a higher voting threshold for director or shareholder decisions over certain matters). In a private company context, the buyer may also enter into a shareholders’ agreement with major shareholder(s) and ask the major shareholder to support the directors and c-level executives nominated by the buyer, cause the target company to provide information requested by the buyer, etc.

Shareholders can vote by proxy in Taiwan. A shareholder may appoint another person as their proxy by specifying the scope of appointment in the proxy instrument prepared by the target company to attend and vote at a shareholders’ meeting, provided that a shareholder may appoint only one proxy to attend and vote at such meeting.

In practice, if the bidder is not certain or confident that the merger/share exchange will be approved by the target company’s shareholders’ meeting, they can take a two-step approach. First, the bidder can launch a tender offer to acquire the majority of the target company’s shares. After the completion of the tender offer, the bidder can conduct a cash merger/share exchange with the target company to squeeze out the target company’s minority shareholders.

In a private company, the merger must be approved by the majority of shareholders present at the shareholders’ meeting. The meeting must be attended by shareholders holding two-thirds of all the target company’s issued shares. In a public company, if the meeting is attended by shareholders holding the majority of the voting shares in the target company, a two-thirds majority of those shareholders is sufficient.

Transactions may involve agreements with major shareholders of the target company to vote to approve the transaction at the shareholders’ meeting of the target company.

In the case of a friendly tender offer, the offeror usually will enter into the tender agreement with major shareholder(s) of the target company to ensure that such major shareholder(s) will tender their shares to the offeror once the tender offer is launched. However, all contractual arrangements between the offeror and the insiders of the target company (including major shareholders holding more than 10% of the shares and directors, etc) must be fully disclosed in the tender offer prospectus.

In the context of a transaction between private companies, a bid would not generally be made public. 

If either party is a public company, the material terms of the transaction, including price and conditions to closing, must be uploaded to the website designated by the FSC. The announcement is usually made within one day after the board of directors approves the proposed transaction and execution of the definitive agreement.

In the case of a tender offer, before launching the tender offer, the bidder must publicly announce it and file it with the FSC.

If the bidder is a public company, issuance by the bidder of shares as consideration in a proposed transaction requires the bidder to make a registration with the FSC, unless an exemption is available, such as private placements to specific persons only. If registration is required, the bidder shall prepare a prospectus, which shall be uploaded to the website designated by the FSC.

If the merger consideration is the shares issued by the bidder and the bidder is required to prepare a prospectus, the prospectus shall include (i) the audited financial statements of the target company for the most recent two fiscal years and (ii) the audited financial statements of the bidder for the most recent two fiscal years and the latest quarterly financial statements reviewed by the auditor. No pro forma financial statements are required.

The financial statements shall be prepared in accordance with the International Financial Reporting Standards, as adopted in Taiwan and as issued by the International Accounting Standards Board.

If either party to the proposed transaction is a public company and such transaction shall be approved by the shareholders’ meeting, the definitive agreement (eg, the merger agreement) shall be attached to the shareholders’ meeting handbook, which shall be uploaded to the website designated by the FSC and made available to the shareholders.

Further, in the case of a tender offer, all contractual arrangements between the offeror and the insiders of the target company (including major shareholders holding more than 10% of the shares and directors, etc) must be fully disclosed in the tender offer prospectus.

Under the Company Act, a director shall perform their fiduciary duties of loyalty and due care of a good administrator in the course of conducting the company’s business, and shall indemnify the company for any loss incurred or suffered by the company arising from breach of their fiduciary duties.

In the M&A process, the board of directors shall, in the course of conducting the transaction, fulfil its duty of care in the best interest of the company. In addition, the directors shall also comply with the relevant laws and regulations, the company’s articles of incorporation and shareholders’ resolutions. If any directors fail to comply with the aforesaid and cause loss or damage to the company, those directors who voted for the adoption of the relevant resolution (as recorded in the meeting minutes) will be liable for compensating the company for such loss or damage.

A director who is directly or indirectly interested in any matter under discussion at a board meeting or a contract or proposed contract or arrangement with the company shall declare the nature and the essential contents of such interest at the relevant board meeting. If the company proposes to effect any form of merger and acquisition, a director who has a personal interest in such transaction shall declare the essential contents of such personal interest and the reason why they believe that the transaction is advisable or not advisable at the relevant board meeting and the shareholders’ meeting. If the company is a public company, the company shall, in the notice of a shareholders’ meeting, disclose the essential contents of such director’s personal interest and the reason why such director believes that the transaction is advisable or not advisable. The essential contents shall be announced on the website designated by the FSC.

Under the M&A Act, before the board of directors resolves any M&A transaction, a public company shall form a special committee to review the fairness and reasonableness of the plan and transaction, and then report the review results to the board of directors and, if a resolution by the shareholders’ meeting is required, to the shareholders’ meeting. For a company that has established an audit committee consisting of three independent directors, the review shall be conducted by the audit committee instead of the special committee.

In the case of a tender offer, the target company must set up a review committee consisting of three independent members to assess the tender offer and provide its recommendation to shareholders within 15 days of receiving the offer. If the target company has independent directors, the independent directors will be the members of the review committee.

The business judgement rule is a legal doctrine that helps to guard a company’s board of directors and the board is presumed to act within the standards of fiduciary duty that directors owe to shareholders. Such concept is not expressly provided by Taiwan law, but recognised in certain court precedents.

There have not been many court precedents addressing directors’ duties in M&A transactions. However, it is generally understood that a court would uphold the decisions of the board of directors unless the plaintiff can prove that the director acted in negligence or bad faith, or the plaintiff can prove that the director had a conflict of interest which may affect their decision.

It is common for the board of directors of a company in M&A transactions to obtain financial and legal advice from outside experts. In addition, pursuant to the M&A Act, before the board of directors resolves any M&A transaction, a public company shall form a special committee to review the fairness and reasonableness of the plan and transaction. The special committee must engage an independent expert to issue a fairness opinion on the consideration.

In the case of a tender offer, when the offeror files the tender offer with the FSC, they must engage an independent expert to issue a fairness opinion on the consideration, which opinion should be included in the tender offer prospectus.

Conflict of interest issues in M&A transactions have been subject of disputes and scrutinised by regulators in the relevant approval process. For instance, a case was filed by minority shareholders (the applicant) in relation to a cash-out merger in 2014. The merger was a management buyout where four directors of the target holding approximately 69% shares of the target are also directors and shareholders of the buyer. The minority shareholders argued that the management stood on both sides of the transaction and did not fully disclose their personal interests. The minority shareholders claimed that the merger was not duly approved at the board meeting and shareholders’ meeting as the management did not abstain from voting. 

The Taipei District Court and Taiwan High Court upheld the decision made at the target’s board meeting and shareholders’ meeting and held that the management did not have a conflict of interest since they would not obtain special rights or waiver of obligations as a result of the cash-out merger. However, the Supreme Court remanded the case and held that the protection of minority shareholders is crucial in a cash-out merger and a director who has a personal interest in such transaction shall declare the essential contents of such personal interests and the reason why they believe that the transaction is advisable or not advisable at the relevant board meeting and the shareholders’ meeting.

Hostile bids are permissible. There are very few hostile bids and most of them have failed. Hostile bids are not common because they are usually met with fierce defensive actions. This results in an uncertain outcome, delays and increased costs to complete the transaction compared to a recommended bid. In addition, past hostile bids have had bad press and the competent authority was unhappy with the resulting stock turbulence.

Following the announcement of a tender offer, the target company’s board of directors shall review the terms of a tender offer and publicly announce whether they support it or object to it within 15 days of receiving the offer. In particular, the board of directors should review the offeror’s identity and financial status, the fairness of the offer’s terms and conditions, and whether the offeror’s source of funds is credible.

The target company must set up a review committee consisting of three independent members to assess the tender offer and provide its recommendation to shareholders within the 15-day period. If the target company has independent directors, the independent directors will be the members of the review committee.

A competing tender offer can be launched no later than five business days before the first tender offer’s expiry period. In addition, the target company can introduce friendly new shareholder(s) by private placement transactions and/or a share exchange deal to dilute the hostile bidder’s shareholding in the target company. Therefore, to defend a hostile bid, it is permissible for the target company’s directors to find a white knight to make a competing tender offer and/or subscribe for new (common or preferred) shares of the target company.

Defensive measures commonly seen in practice include (i) issuing new shares to dilute the hostile bidder’s shareholding in the target company and (ii) launching a competing bid.

In addition, if the hostile bidder has not acquired a majority shareholding in the target company, the target company’s management can try to solicit as many proxies as possible to get support from the shareholders and solidify their control over the target company.

However, as Taiwan law provides limited flexibility in respect of the constitutional document of a company, the approach of “poison pill” may not be a feasible defence strategy.

If the board of directors of the target company adopts defensive measures to resist a tender offer, the board of directors still needs to fulfil its duty of care in the best interest of the target company when carrying out the relevant transactions, including the determination of the terms and conditions thereof.

While the law does not prohibit directors from “just saying no” (except for the review and response process in respect of a tender offer required under the TO Regulations) and taking action that prevents a business combination, the directors are required to make such decision in compliance with their fiduciary duties. In particular, if the chairman of the board of directors receives a formal offer from the bidder, as part of their duty, the chairman cannot just ignore such offer and shall at least submit such offer to the board of directors for their consideration.

Litigation is not common in connection with M&A deals in Taiwan. Disputes are usually related to conflict of interest issues. Please see 8.5 Conflicts of Interest.

Litigation is usually brought following the approval of the M&A transaction at the shareholders’ meeting of the target company.

To the authors’ knowledge, there is no material litigation regarding pending M&A transactions in 2023.

Shareholder activism is not an important force in M&A transactions in Taiwan. If a shareholder would like to use their equity interest to bring change within a company, investor relations is often used as the channel for two-way communications.

It is not common for shareholder activists to seek to encourage companies to enter into M&A transactions, spin-offs or major divestitures in Taiwan.

It is not common for shareholder activists to seek to interfere with the completion of announced M&A transactions in Taiwan.