Although the M&A market in Taiwan for 2019 was less active than that for 20there are significant developments that favour growth in 2020. Notably, there have been a few international private equity funds conducting privatisation of listed companies with the blessing of the Taiwanese government’s approvals during 2019 a marked contrast from the previous regulatory reluctance.
Domestic private equity funds are also increasingly turning their attention to profitable small and medium sized enterprises (SMEs) that are either led by aging entrepreneurs seeking to address succession issues or needing business transformation and upgrading to cope with their mainland Chinese competitors.
Further, compared to the over-heating stock market in 2019, Taiwan’s stock market is going through a significant downward adjustment starting from the beginning of 2020 due to COVID-19 related disruptions, which may stimulate M&A deals.
Lastly, while there has been no consolidation of financial institutions in Taiwan for over a decade, over-banking continues to be a serious issue in Taiwan. Therefore, it is expected that there will be investors looking for such opportunities in consolidating certain financial institutions during 2020.
In late 2018, a consortium by US private equity firm KKR & Co announced to acquire a majority and controlling interest in LCY Chemical Corp, formerly listed on Taiwan Stock Exchange; the acquisition and de-listing thereof was completed in January 2019.
During 2019, a proposed acquisition of Microlife Corporation by an affiliate of Morgan Stanley Private Equity Asia, another taking-private acquisition, also received regulatory approval from the Investment Commission of Taiwan’s Ministry of Economic Affairs (the “Investment Commission”).
In addition, in mid-2019, a consortium led by Taiwan’s CDIB Capital successfully completed a leveraged buyout and de-listing of Jintex Corporation Ltd, a manufacturer of textile and leather chemical auxiliary agents. This acquisition was designed to address the succession issues many SMEs face in Taiwan. It is expected that this deal will attract private equity funds’ attention to tap into Taiwan’s M&A niche for SMEs - which account for the vast majority of Taiwan’s companies in various industries.
It is anticipated that key industries for the 2020 M&A markets will include those in technology (semiconductor industries in particular), media and certain traditional industries facing succession and transformation issues.
Under the Business Mergers and Acquisitions Act (the “M&A Act”), an acquisition can be achieved by way of merger, share exchange, asset acquisition, share acquisition or spin-off. If the target company is a public company, the Regulations Governing Tender Offers for Purchase of the Securities of a Public Company (the “Tender Offer Regulations”) provide that, any person who individually or jointly with another person intends to acquire, within 50 days, 20% or more of the total issued shares of a public company must do so by means of a mandatory tender offer, except for certain exceptions. Generally, the consideration for acquiring a company can be either shares, cash or other assets.
The principal legislations governing merger and acquisition include the M&A Act, the Securities and Exchange Act, the Company Act, the Fair Trade Act and the Tender Offer Regulations. Further, if buyers are Chinese companies (compared to foreign companies), there are separate laws and regulations governing both the transactions and the regulatory approval procedures.
Different types of companies involved in an acquisition are governed by different authorities and legislations in Taiwan. If any of the relevant parties is a Taiwan public company, then the primary regulator is the Financial Supervisory Commission (FSC), the single financial regulator in Taiwan. If any of the relevant parties is a foreign company, the primary regulator will also include the Investment Commission. If any of the relevant parties fall under a regulated industry, such as financial institutions, media industry, or utilities industry, then approval from the respective competent authorities is also required.
For financial institutions, the FSC is the primary regulator; for the media industry, the National Communications Commission is the primary regulator. Further, pre-merger notification from the Fair Trade Commission (FTC) is required for consolidation of business entities if the market share and certain other thresholds are met.
Foreign buyers are required to obtain foreign investment approval from the Investment Commission prior to acquiring a Taiwanese company. Foreign investment is welcomed in Taiwan, except in a limited number of industries where foreign investment is restricted or prohibited for national security reasons, such as telecommunications, media and certain transportation sectors. In the past, going private transactions or hostile takeovers were not welcomed by the Investment Commission. However, recently, regulators have changed their views as long as the transactions are in compliance with the applicable laws, regulations and the policies.
As stated, investments by Chinese companies are subject to a separate set of restrictions and scrutiny. There are many businesses in Taiwan that fall into the prohibited or restricted investment category and, therefore, Chinese company cannot make investments. Even for the permitted investment category, the scrutiny can vary on a case by case basis. More specifically, the application by a Chinese investor will be rejected if such Chinese investor has Chinese military background or engages in military-related business activities.
The Investment Commission will likely reject the application if the Taiwan company being acquired has monopoly or oligopoly economic power; is sensitive from the perspective of politics, society, culture or national security; or the transaction may have an adverse impact on Taiwan’s economic development or financial stability.
The antitrust regulatory regime applicable to merger and acquisition in Taiwan is the Fair Trade Act. A pre-merger notification with FTC is required if the parties intending to consolidate meet certain market share or turnover threshold outlined below.
Main transactions covered (including but not limited to):
The Market Share Threshold:
The Turnover Threshold (excluding financial institutions). “Turnover” is defined by FTC as the total sales or operating revenue of a company, where:
The acquiring company must file prior notification of its plan of acquisition with the FTC. The FTC would usually render its decision within 30 working days after receiving the notification, but may extend its review period by up to an extra 60 working days.
According to the M&A Act, the surviving company of a merger or share exchange, or the transferee company of an asset acquisition or spin-off must deliver a written notice at least 30 days prior to the closing of the transaction to the retained employees informing them of the terms of a new employment offer. Employees will then have ten days from the receipt of such notice to accept or reject the offer by written response. Any failure to inform the new employer of their decision within the specified period will be deemed as acceptance of the offer. Furthermore, the surviving company or the transferee company shall recognise the previous service period of the employee.
The employee who was not retained or who declined the offer for the new employment will be terminated. Under such circumstance, the employer shall pay severance fee or pension based on the Labor Standards Law and the Labor Pension Law, respectively.
The national security review is conducted by the Investment Commission during the foreign investment (including Chinese investment) approval process. According to the Statute for Investment by Foreign Nationals, foreign investors are prohibited from making investments in any company or industry if the investment will have adverse impact on Taiwan’s national security, public order, morals and practices, or public health.
Chinese investors are subject to a separate set of restrictions and scrutiny, which are more stringent than those applicable to foreign investors. Even for any permitted investment category, an application by a Chinese investor will be rejected if:
To ensure the monitoring of the investments made by Chinese investors, Taiwan’s National Security Bureau will participate in the review, regardless of the size of the investments.
On 30 November 2018, Taiwan’s Constitutional Court released its interpretation No 770 (the “Interpretation”) regarding a long time controversy over the M&A Act. According to the M&A Act, when a company attempts to merge with another company using cash as consideration, the shareholders of the merged company cannot request for buy-back of their shares at the fair price or request for any other legal remedies unless they express their objection and waive their voting rights at the shareholders’ meeting.
The Interpretation pointed out that to protect the right of the shareholders, they can apply to the court for the appraisal of then fair price even if they did not express their objections at the shareholders’ meeting in accordance with the law. The Interpretation further states that the disclosure requirements regarding whether any conflict of interest involved and the protection of dissenting shareholders should be enhanced.
In 2007, Taixin International Telecommunication Co Ltd, acquired approximately 84% of the issued shares of Taiwan Fixed Network Co Ltd. through a public tender offer. Subsequently, Taiwan Fixed Network proposed to consummate a cash merger with Taixin at the annual shareholders’ meeting, with Taixin remaining as the surviving company and Taiwan Fixed Network dissolved after the merger. As Taixin held more than two thirds of Taiwan Fixed Network’s shares, the shareholders’ meeting of Taiwan Fixed Network passed the cash merger with Taixin successfully.
One of Taiwan Fixed Network’s shareholders claimed that the chairman of Taiwan Fixed Network failed to exercise his fiduciary duty. Thus, the shareholder filed a lawsuit against the surviving company for the return of his shares. A petition for constitutional interpretation was filed after the judgment against such shareholder was affirmed by the Supreme Court.
The M&A Act
The Constitutional Court held that the M&A Act was inconsistent with the constitutional right of protection of property, since minority shareholders in a cash-out merger were not able to acquire adequate information regarding the impact of such merger. Moreover, there was no effective procedure of relief to ensure the fairness of cash consideration.
In response to the Interpretation, the competent authorities have proposed the relevant amendments to the M&A Act regarding disclosure of information between interested parties and the procedures for relief available to dissenting shareholders including the shareholders’ appraisal rights.
The Company Act was amended in great detail in 2018. Under the amended Company Act, certain measures to facilitate the M&A transactions have been built in. For example, companies are allowed to offer multiple voting rights or veto rights to preferred shareholders and the shareholders’ agreement are also recognised.
In addition, a new provision in the Company Act provides that shareholders' meetings can be called not only by the board of directors, but also by the shareholders holding a majority of the company's shares for at least three consecutive months, enabling the controlling shareholder to replace the current management of a company. It is expected that these measures can foster the development of takeovers.
Due to legal uncertainty, stakebuilding by buying shares from the market before launching a formal offer must be carefully analysed in Taiwan; see 4.3 Hurdles to Stakebuilding.
The Securities and Exchange Law requires that any person who acquires beneficial ownership of more than 10% of the issued shares of a public company must file a report to the FSC within ten days of the acquisition. The shares held by related persons shall be counted in as a whole. For banks, the reporting and disclosure threshold is 5% of the total issued shares.
The Taiwan Stock Exchange has established the Market Observation Post System for the disclosure of all material information. For an acquisition, a buyer shall disclose the information its identity, the number of the shares acquired, the method and date of acquisition, the purpose of the acquisition, source of funds, details of the acquisition during the past six months, the number of the shares expected to be further acquired within one year, any intention to hold a special shareholders’ meeting, plan to act as director or supervisor, plan to dispose of assets or to change the financial or operational condition of the company. In the event the buyer fails to file the report when its shareholding reaches 10%, the excess shares over 10% will have no voting rights.
There is no law or court decision stating that buying shares from the market before launching a formal offer is unlawful. However, the Financial Examination Bureau of the FSC tended to view such action as a possible violation of insider trading laws, in the event that the buyer has already contacted the target company and received certain non-public material information. Therefore, it is urged that the buyer should consult your lawyer when it decides to build up stakes first before launching a formal offer.
According to the mandatory tender offer rules in Taiwan, only acquisition of the shares of a public company is subject to the Securities and Exchange Law, which means that holding equity derivatives other than “shares” will not trigger the disclosure and reporting obligations. However, in the context of insider trading rule of the Securities and Exchange Law, in addition to the listed shares, any equity-linked securities are all subject to the law.
As described in 4.4 Dealings in Derivatives, with respect of acquisition of the 10% issued shares disclosure threshold and the mandatory tender offer disclosure requirement, only dealing in “shares” (excluding other equity derivatives) will be subject to the filing and reporting obligations.
As described in 4.2 Material Shareholding Disclosure Threshold, once an investor acquires more than 10% of the issued shares of a public company, the investor shall report to the FSC, disclosing the purpose of the acquisition, any purchase record during the previous six months, the number of shares expected to be further acquired within one year, any intention to hold a shareholders’ meeting, any plan to act as director or supervisor and any plan to dispose of assets or change the financial or operational condition of the company.
A listed company is required to disclose information on the Market Observation Post System (MOPS). Further, a listed company is required to hold a press conference to announce the contemplated transaction before the disclosure of material information on the MOPS.
The information required to be disclosed includes the name of the counterparty (and its relationship with the company), the purpose of the deal, the impact on the company’s financial report, share exchange ratio and the basis of calculation (if applicable) and the closing conditions.
Pursuant to the Business Rules of Taiwan Stock Exchange (TWSE), the timing to disclose a deal by a listed company is the earliest of any of the following dates: the date the agreement is reached, the date the agreement is signed, the payment date, the date of closing, the date of the board resolution or the committee resolution and the date where the counterparty and consideration are confirmed.
In practice, most Taiwanese companies will not disclose the signing of a non-binding letter of intent. However, whether any terms of the non-binding LOI will trigger the disclosure requirement shall be decided on a case by case basis.
It is a common practice that due diligence for a merger or acquisition covers legal, financial, business, HR and management aspects. In terms of legal due diligence, the required information usually includes, but not limited to, group structure, company registration information, material assets, material agreements, related-party deals, regulatory compliance (eg, labour, environment, taxation, etc), litigation and investigation.
It should be noted that if due diligence is conducted on a listed company, the buyer that obtaining material non-public information is likely subject to the insider trading rules under the Securities and Exchange Act.
The standstill or the exclusivity agreement is common in an M&A deal in Taiwan and the validity of such agreements is rarely challenged by shareholders or other competitors of the buyer. However, in Carlyle’s tender offer of ASE (the largest IC packaging company in the world), the Special Committee of ASE did challenge that the exclusivity agreement between the major shareholder and Carlyle will hinder the other investors from providing an offer to ASE, which will likely harm the minority shareholders’ rights and interests and, therefore, requested that the major shareholder terminate the agreement with Carlyle.
For an acquisition project in Taiwan, the definitive agreements usually include the share purchase agreement and the shareholders’ agreement.
For the statutory merger, share exchange and spin off, each of which shall be approved by the board of directors and the shareholders’ meeting, the M&A Act sets forth that the definitive agreement shall contain specific provisions.
A definitive agreement for an acquisition typically includes the following major terms: consideration, deposit (if any), payment terms, closing conditions, representations and warranties, covenants, drag-along, tag-along, exclusivity, termination and indemnifications.
For tender offer deals, the offeror is also required to provide the tender offer prospectus to the target company and submit a set of tender offer documents to the FSC for reporting and approval purpose.
For a statutory merger, spin-off or share exchange, the M&A Law requires that the deal be approved by the board of directors as well as the shareholders’ meeting. In the event that the transaction is approved by the annual shareholders’ meeting, between the board meeting and the shareholders’ meeting, it is approximately 75 days. If the parties call for an extraordinary shareholders’ meeting to approve the deal, it is approximately 50 days between the two meetings.
If the target company is a listed company, after the shareholders’ meeting, stock exchange’s approval and the FSC’s approval will also be required. For a delisting project, it will take around 30 days for the stock exchange to approve or disapprove the deal.
For acquisition of over 20% of the shares of a public company, it must be done via a mandatory tender offer, as stated above. Please refer to the paragraph below for the length of process of a tender offer.
If the target company is a public company and the buyer intends to acquire more than 20% of the total issued shares of the target company within a period of 50 days, the buyer (the “offeror”) must to launch a public tender offer pursuant to the Securities and Exchange Act and the Regulations Governing Public Tender Offers for Securities of Public Companies. This is a mandatory tender offer requirement. The minimum tender offer period is 20 days and the maximum is 50 days, subject to a one-time extension of another 50 days.
For a statutory merger or share exchange, cash, shares or other assets can be used as consideration, according to the M&A Act. For a tender offer, cash is commonly used as consideration. However, in a recent deal, preferred stocks were used as consideration in addition to cash.
The FSC requires the following common conditions:
Whether financing can be obtained is not permitted as a condition to the success of a tender offer. In a tender offer, the offeror is required to provide a bank guarantee evidencing adequate financing on a firmly committed basis.
For a statutory merger, spin-off or share exchange, the deal must be approved by a majority vote of the directors present at the board meeting attended by directors who represent more than half of the directors of the company, and by a majority vote of the shareholders at the shareholders’ meeting attended by shareholders who represent more than two thirds of the total issued shares of the company.
For a public company, if the total number of shares represented by shareholders present at the shareholders' meeting is less than two thirds of the total issued shares, but more than half of the total issued shares, the approval for the deal may be adopted by the shareholders who represent more than two thirds of the total issued shares present at the shareholders’ meeting of the respective company.
As for a delisting project, the resolution must be adopted by shareholders who represent more than two thirds of the votes of the total issued shares of the listed company.
For a tender offer, the offeror is not required to obtain the target’s board approval to launch the offer, although the target’s board meeting can recommend the shareholders to accept the offer or not. As such, to do a hostile takeover deal against a public company in Taiwan, tender offer is a common mechanism employed by the buyer. The minimum number of shares offered to buy must be no less than 5% of the total issued shares of the target company.
The offeror can specify a percentage of the shares to be acquired as a condition to a successful tender offer. If the threshold is not reached, the offeror will not be required to proceed; provide, if the threshold is reached, the offeror must proceed and cannot terminate the offer, unless otherwise approved by the FSC.
As it is relatively cheap to arrange for financing in Taiwan, it is common for international private equity funds to seek for financing from domestic banks in connection with an M&A deal involving Taiwanese party.
In a tender offer, the prospectus must disclose detailed financing plan including the source of funds, lender and borrower and collateral. If the assets or shares of the target company are used as collateral in the offeror's repayment plan, the prospectus must disclose the relevant terms and state the assessment of the impact on the financial stability and operation of the target company going forward.
As described in 5.4 Standstills or Exclusivity, it is common for the acquirer to enter into an exclusivity agreement (or “no-shop” agreement) with the target company. In addition, to alleviate the risk of the target company’s breach of pre-closing covenants, termination fee is commonly used as a security measure.
Please note, however, that the termination fee arrangement has not been tested by the court regarding whether it is valid and enforceable under Taiwanese laws.
In the past, shareholders’ agreements and voting agreements were not enforceable under Taiwanese laws. According to the amendments to the Company Act, investors may now request for additional governance rights based on shareholders’ agreement or voting agreement if the target is a non-public company.
Further, under the amendments to the Company Act in 2018, any investor that holds a majority of the target company's shares for at least three consecutive months may convene a shareholders’ meeting to replace the current board members.
A shareholder can vote by proxy instead of attending the shareholders’ meeting in person. In the event that the transaction requires the resolution of shareholders’ meeting, it is very common for the investor to solicit proxies to obtain necessary shareholder approvals.
In a tender offer, no matter how many percentage of the shares are acquired, there is no squeeze-out mechanism available in Taiwan. Therefore, the buyer will normally conduct another merger or share exchange after the tender and provide cash as consideration to squeeze out the minority shareholders and the consideration for tender offer and for merger shall be the same to protect the minority shareholders.
Once the offeror launches a tender offer, it must complete the procedures within the prescribed time period set forth in the offering documents. In general, the offeror may not suspend the tender offer process. The offeror can only stop the offer under the circumstances prescribed by law (such as the target company’s financial or business condition materially and adversely changes or the offeror becomes bankrupt), subject to the approval of the FSC.
In addition, to protect the minority shareholders of the target company, the offeror cannot conduct any of the following acts:
Before the commencement date of a public tender offer, the offeror shall disclose any information related to the public tender offer to the website designated by the FSC (ie, the MOPS). Materials that should be disclosed include the tender offer filing form, the tender offer prospectus, legal opinion and evidence that the offeror has the ability to pay the tender offer consideration. A public tender offer may not commence until after a report, which shall include proof that the documents have been uploaded to the MOPS, has been filed with the FSC.
If the public tender offer requires the approval of, or reports to be filed with, other competent authorities (ie, the Investment Commission or the FTC), the offeror shall file applications with such authorities simultaneously with filing the report to the FSC. In addition, the offeror shall serve a copy of the tender offer filing form, the tender offer prospectus, and other related documents to the target company on the same day that the offeror files the report with the FSC. When the target company receives a public tender offer from an offeror, the board of directors of the target company shall promptly form a special committee to review the fairness and reasonableness of the tender offer conditions, and the special committee shall publicly announce the result within 15 days from receipt of the public tender offer.
For a statutory merger or share exchange, in principle the company shall, during the non-trading hours immediately after a resolution has been passed by the board of directors but in any event prior to the next trading day, convene a press conference at the TWSE or TPEx, and announce the information on the MOPS after the press conference.
A public tender offeror shall prepare a tender offer prospectus, which shall state basic background information of the tender offer, including but not limited to the name of the offeror, the name of the target company, the type(s) and number of securities to be purchased, the tender offer period, and the tender offer consideration. Moreover, the tender offer prospectus shall disclose the following information: the tender offer conditions, type(s) and source(s) of the tender offer consideration, the risk associated with tendering, procedures to be followed after expiration of the period of tender offer, the offeror's shareholdings in the target company, any circumstances other purchases or sales by the offeror of shares in the target company, the offeror's business plan for the target company, the resolutions of the target company, and a fairness opinion.
For a statutory merger or share swap, a special committee shall be formed to review and verify the fairness and reasonableness of the transaction before the board of directors makes a resolution, and the result of such review and verification, opinions of independent experts, and any other required information regarding any merger/consolidation agreement, share exchange agreement, or division plan shall all be sent to the shareholders.
In the event a public company consummates a merger or acquisition where the consideration is shares, a public prospectus shall be separately prepared. The prospectus shall disclose items including the merger or acquisition agreement, fairness opinion of an independent professional on the share exchange ratio, and financial reports of the companies involved.
In the case of a public tender offer, the offeror shall provide proof that it has the ability to pay the tender offer consideration. If the offeror is a company that will pay the consideration with its own funds, it shall demonstrate the reasonableness of the source of funds for this tender offer and disclose its financial reports for the two most recent fiscal years prior to the public announcement of the tender offer. In the event the offeror is a public company that will pay the consideration with shares or bonds, the prospectus shall include the public company's financial reports for the two most recent fiscal years as well as its most recent audited and certified financial report.
For a statutory merger or share swap where a public company pays the consideration by issuing new shares, a public company shall disclose, in its prospectus, the financial reports of the companies involved in the merger for the two most recent fiscal years.
If a public tender offeror or any of its related parties have bought or sold securities of the target company from or to any of the insiders of the target company during the two–year period prior to the public tender offer, the prospectus shall indicate the date(s), counterparty(ies), price(s), and the number of shares in any such share transaction. Moreover, if the offeror or any of its related parties has entered into any agreement or undertaking regarding the tender offer at issue with any of the insiders of the target company during the two–year period prior to the tender offer, the prospectus shall disclose all such agreements or undertaking.
Where a public company consummates a transaction in a certain form as prescribed by the M&A Act (eg, a statutory merger or share swap), such company shall submit the transaction documents to its board of directors and special committee for review. The transaction documents shall also be submitted to a general meeting of the shareholders if a resolution by the shareholders is required.
Under the Company Act, directors are subject to two primary fiduciary duties: a duty of care as a good manager and a duty of loyalty. Directors shall be liable for any damage to the company if they fail to perform their duties.
Under the M&A Act, any director who has a conflict of interest should disclose the essential contents of such conflict to the board of directors and at a general meeting of the shareholders, and lay out all of the reason in favour of or against the transaction in which the conflict arises, to ensure informed decision-making by the shareholders. In addition, the director, subject to the conflict of interest, should not vote in the resolution of such transaction.
When a public target company receives a public tender offer bid from an acquirer, the board of directors of the public target company should promptly form a special committee to review and verify the background and financial conditions of the acquirer, the fairness of the terms and conditions of the public tender offer, the reasonableness of the source of funds, and then make a recommendation with respect to the public tender offer. The special committee shall fully disclose the verification measures and related procedures it has adopted.
The target company should publicly announce the conclusions of both the special committee and the meeting of the board of directors within 15 days after the receipt of the public tender offer.
For a statutory merger or share exchange, a public company shall form a special committee to review the fairness and reasonableness of the transaction. The special committee shall disclose the results of its review and verification to the board of directors and at a general meeting of the shareholders (if resolution by the shareholders is required). The public company should publicly announce the conclusion of both the special committee and the meeting of the board of directors immediately.
The courts of Taiwan have attempted to apply the Business Judgement Rule to determine whether directors have breached their duty of care. The courts have opined that directors are not subject to civil liabilities for damages to the company if the directors:
In a public tender offer, the offeror should obtain independent expert opinions on the reasonableness of the public tender offer price or the share exchange ratio. Although the Tender Offer Regulations do not expressly provide that a target company should retain independent experts to provide opinions on the fairness of the conditions of a tender offer, in practice, the special committee of the target company will retain independent experts to assist with the evaluation of the tender offer.
For a statutory merger or share exchange, the special committee is required to retain independent experts to provide opinions on the justification of the share exchange ratio or distribution of cash or other assets to ensure the fairness and reasonableness of such transaction.
Under the M&A Act, any director who has a conflict of interest should disclose such conflict to the board of directors and to the shareholders’ meeting (if applicable), to ensure informed decision-making by the shareholders. In addition, any director who has a conflict of interest should not participate in the voting of relevant agenda for conducting the transaction from which the conflict arises.
However, to promote M&A activities in Taiwan, the M&A Act provides an exception to the above rule. That is, in the event that an investor itself is already a shareholder of the target company when the transaction is conducted, it may exercise its voting right as a shareholder at the shareholders’ meeting of the target company although the investor has a conflict in the relevant transaction.
Hostile tender offer was not common in Taiwan, partially because the Taiwanese government’s conservative attitude towards hostile tender offers in the past. However, since under certain circumstances hostile tender offers can promote corporate governance, the Taiwanese government has gradually adopted a neutral attitude towards it during recent years. Recent cases include the acquisition of WT Microelectronics Co Ltd (WT) by the semiconductor distributor WPG Holdings Limited (WPG) and the acquisition of Siliconware Precision Industries Co Ltd (SPIL) by IC packaging and testing company Advanced Semiconductor Engineering Inc (ASE).
Pursuant to Taiwan’s Securities and Exchange Act and relevant regulations governing tender offer, any person who individually or jointly with another person(s) intends to acquire shares accounting for 20% or more of the total issued shares of a public company within 50 days must launch a tender offer to all the shareholders of the public company. This is so-called “mandatory tender offer”. For example, when WPG intended to acquire approximately 30% of the issued and outstanding shares of WT, the only mechanism available is tender offer, which allows all shareholders of WT to sell their shares on a pro rata basis.
The directors will implement the defensive measures listed in 9.3 Common Defensive Measures. In implementing such measures, the directors shall comply with “Business Judgement Rule” to avoid any breach of their fiduciary duty.
When the target company is unable to defend the hostile acquirer, it usually seeks for another friendly investor to act as its white knight to make it difficult for the hostile acquirer. For example, in the case of the acquisition of SPIL by ASE, Hon Hai Precision Industry Co, Ltd (“Hon Hai”) once intended to act as a white knight and exchanged shares with SPIL so as to become the largest shareholder of SPIL.
When the target company intended to defend the hostile takeover, it is also common to increase outstanding shares via private placement to other friendly third parties to dilute the shareholding of hostile acquirer. For example, in the case of acquisition of SPIL made by ASE, SPIL announced that it would issue shares via private placement to the Chinese semiconductor company Tsinghua Unigroup to defend ASE. This approach was unsuccessful as the Chinese company is forbidden from making investment into Taiwan’s certain high tech industries.
As stated above, Hon Hai once announced to act as a white knight and exchanged shares with SPIL so as to defend the hostile tender offer made by ASE. To conduct a share exchange, the board of directors shall approve a resolution by a majority vote of the directors present at the meeting. The share exchange shall also be approved by the shareholders’ meeting of both companies. Therefore, it takes some time to complete all the procedures, which may not be feasible in an urgent situation.
Litigation and Antitrust Declaration
It is common for the target company to defend the acquirer through litigation. For example, in ASE’s hostile takeover against SPIL, SPIL filed a complaint to the court, alleging invalidity of the tender offer and therefore ASE should not be allowed to exercise the shareholder’s right. In addition, in the ASE and WPG cases, both target companies alleged that the acquirers did not receive the antitrust approvals, therefore violating the Fair Trade Law.
Pursuant to the M&A Act, in a merger and acquisition by a company, directors shall fulfil their fiduciary duty for the best interest of the company. Directors shall be liable for any damage to the company if they fail to perform their duties.
Pursuant to the Tender Offer Regulations, a target company shall establish a special committee (consisting of three independent directors) within 15 days after receiving the tender offer notice. The special committee members and the directors of a target company are required to review and verify the background and financial conditions of the acquirer, fairness of the conditions and reasonableness of the source of fund, and then make recommendation to the shareholders of the company. The special committee shall fully disclose the verification measures and related procedures it has adopted.
In the event that directors receive an offer to acquire the company, directors cannot “Just Say No” under Taiwan laws. To fulfil their fiduciary duty, they are required to review the offer and make proper disclosure to be in compliance with the “Business Judgment Rule”, which is a defence against director’s breaching of their fiduciary duty and they cannot “Just Say No”.
It is not very common in Taiwan for shareholders or other stakeholders to bring actions against the director(s) of a company in connection with an M&A transaction as the legal system is not favourable to such actions due to the reasons stated below.
First, if a shareholder objects to the fairness of the consideration in a transaction, they shall file with the court by themselves for a ruling on the fair price. Second, most of the courts in Taiwan use the market price as the fair price. Third, any compensation decided by the court in a shareholder’s action against the director(s) for breaches of fiduciary duty will be awarded to the company instead of the shareholder who brings such an action. As a result, shareholders lack incentive to do so.
In 2015, the M&A Act was amended, under which the obligation to file with the court for a ruling on the fair price is shifted from minority shareholders to the company. However, shareholders’ actions are still not very common due to the other reasons stated above.
To promote corporate governance and shareholder activism, the Taiwanese government formed a quasi-government organisation called Securities and Futures Investors Protection Center (SFIPC) to bring actions against the directors of public companies on shareholders’ behalf. See 11.1 Shareholder Activism.
Most of the shareholders’ actions occur before the M&A transactions are completed. The most common litigation in Taiwan in connection with M&A transactions is based on the shareholders’ appraisal rights provided by the M&A Act.
According to the M&A Act, shareholders, who have expressed objection in writing or verbally before or during the shareholders’ meeting and waived their voting rights, may request the company buy back their shares at the fair price. If the company and the shareholders cannot agree to a fair price within 60 days after the resolution of the shareholders’ meeting, the company shall apply to the court for a ruling on the fair price against the dissenting shareholders within 30 days. Such actions cannot stop a transaction unless the dissenting shareholders holding more than one third of the issued shares of the target company.
The environment surrounding shareholder activism in Taiwan has been enhanced over the last three years with the promotion of the SFIPC and its actions to bring litigation against directors of public companies on behalf of the minority shareholders. According to the SFIPC’s statistics, a very high percentage of the litigation brought by it is in connection with the illegal acts of directors conducted during the M&A transactions (violation of the insider trading law in particular).
In addition, to enhance shareholders’ participation, Taiwan Depository & Clearing Corporation (TDCC) has established the e-voting system since 2009. However, as this is not mandatory, vert few listed companies adopts such system. In 2018, the FSC required that all listed companies shall adopt the e-voting system as one of the voting measures at the shareholders' meetings to strengthen corporate governance.
During 2018, the amendments to the Company Act have further enhanced the shareholders’ rights. For example: any investor holding a majority of a target company's shares for at least three consecutive months may convene a shareholders’ meeting to replace the current board members; shareholders have the right to access the company’s shareholder register and nominate candidates as directors and supervisors; the matters that require resolutions by the shareholders have been expanded; shareholders’ right to submit a proposal at shareholders’ meetings; and the right to audit the company have also been reinforced.
Activists in Taiwan usually tend to exert their influences in attempts to achieve the following:
There are a few precedents where shareholders convened shareholders’ meetings to elect directors of their choice in order to secure a majority of the board, and then obtain management control over the company. For example, in 2019, 151 shareholders of Champion Microelectronic Corporation successfully held a shareholders’ meeting to acquire a majority of directors’ seats to control the management of the company.
Active interference with completion of an M&A transaction is uncommon in Taiwan. Although there are more cases gradually in which the issue of fair price was raised and argued during the M&A transactions, these cases usually end favourably for the company.