Overview of Recent Trends
Due to the COVID-19 pandemic, there has been a slowdown in inbound activity for the year 2020. According to the statistical data compiled by the Investment Commission of Taiwan’s Ministry of Economic Affairs (“Investment Commission”), the foreign direct investment amount in Taiwan in 2020 was USD9,144,336,000, which was approximately 18.32% less than the amount in 2019.
In the fourth quarter of 2019, buyers from outside of Taiwan were common, especially from China, Japan, Hong Kong and Singapore, and active in industries that are predominated by heavy investments in manufacturing and computer equipment. Many of these transactions were driven by opportunities created by the US–China Trade War, where a Chinese customer may need substitutes for supplies originally offered by international suppliers who are now banned from doing business with Chinese customers. Though the newly-elected Biden administration seems willing to rebuild the fractured relationship between China and the United States, renegotiation of trade deals would take some time and the effects from US–China Trade War may still pervade in the near future.
In terms of industry sectors that attract foreign direct investments, renewable energy ranks top by virtue of Taiwan government’s policies promulgated in recent years, which aim to expand capacity of energy generated by renewable sources. Offshore wind power is one of the major types vigorously promoted by Taiwan government. Numerous international players have collaborated with domestic suppliers in offshore wind farm investments in Taiwan, most of which located in the Taiwan Strait, off the island’s west. Solar power industry, which is one of the current administration’s priorities, is another green energy source that has grown significantly in recent years. Taiwan government expects the accumulated installed capacity of solar photovoltaics (PVs) will reach 25GW by 2025.
In 2020, although the growth of renewable energy industries in Taiwan was impacted by the COVID-19 pandemic, it still received a significant amount of foreign investment. For instance, the prominent global institutional investor Caisse de dépôt et placement du Québec (CDPQ) co-invested with a Taiwan local investor Cathay PE in the 605MW Greater Changhua 1 Offshore Wind Farm (Greater Changhua 1) in 2020. CDPQ and Cathay PE will jointly own 50% of the Greater Changhua 1, with Ørsted, a multinational power company based in Denmark and the original investor of the Greater Changhua 1 Offshore Wind Farm, retaining the remaining 50% shareholding. The 50-50 partnership is the first of its kind in the Asia-Pacific offshore wind sector and will help stimulate further opportunities in the Taiwanese market for offshore wind farms.
In terms of the types of investors, there have been a few international private equity funds conducting privatisation of listed companies obtained Taiwanese government’s approvals during 2019. In late 2018, a consortium by US private equity firm KKR & Co announced to acquire a majority and controlling interest in LCY Chemical Corporation, formerly listed on Taiwan Stock Exchange. During 2019, a proposed acquisition of Microlife Corporation by an affiliate of Morgan Stanley Private Equity Asia, another taking-private acquisition, also received approval from 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. It is expected that these deals will further attract other international private equity funds’ attention to tap into Taiwan’s M&A niche for SMEs (small and medium-sized enterprises), which account for the vast majority of Taiwan’s companies in various industries.
Contrary to the inbound transactions, the outbound transactions continue to grow despite the global travel restrictions and economic uncertainty due to the COVID-19 pandemic. According to the statistical data compiled by the Investment Commission, the outbound investment amount in 2020 was USD11,805,105,000, which was approximately 72.31% higher than the amount in 2019. The reason for such outbound investment increase may be the US-China Trade War. The United States has continued to impose sanctions on China by raising tariffs and restricting investments which directly impacted Taiwanese investors in China. Numerous Taiwanese enterprises have deployed in the United States or Southeast Asia through direct investment or offshore M&A, and this trend of offshore M&A continued through 2019 and 2020.
From past experiences, it has been observed that Taiwan companies and investors demonstrate a sustained interest in overseas acquisitions, within specific industry vertical integration and increased sophistication and willingness by companies to engage in horizontal combinations and consolidations. Taiwanese companies have accelerated to expand their business overseas, to diversify their over-concentrated supply chains, and to expand businesses, global sales channels and customers through M&A.
Development of the Regulatory Landscape for M&A
Regulations on foreign investors
For decades, the general regulatory framework of foreign investment in Taiwan did not change a lot. Foreign investors 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 military industries, telecommunications, media and certain transportation sectors.
Following the initial outbreak of COVID-19 in the beginning of 2020, Investment Commission of the MOEA temporarily loosened the requirement on the notarisation of Power of Attorney (POA) documents. Under the temporarily rule, the foreign investors may provide a copy of the POA first and supplement the notarised original POA within six months after obtaining the foreign investment approval.
Anticipated material changes in the near future
Though the general regulatory framework of foreign investment in Taiwan did not change a lot in the past decades, an amendment to the “Statute for Investment by Foreign Nationals” is currently being proposed by the Executive Yuan and being reviewed by Taiwan Congress. The proposed amendment will dramatically change the regulatory landscape of foreign investment in Taiwan. One of the biggest changes is that, in the future, a pre-approval of foreign investment will only be required in certain cases. That is, most of the foreign investment whose investment amount is below a certain threshold will not need to obtain a prior approval from Investment Commission and only requires to report to the Investment Commission afterward, which is contrary to the current regulations requiring every foreign investment case to obtain prior approval. However, the amendment is still under the Congress’ review and the prospect of legislation is hard to predict.
Another expected change relates to foreign investments from Hong Kong. Under the current regulations, investors from Hong Kong have been treated as foreign investors instead of PRC investors. However, the political changes in Hong Kong in recent years has incentivised more frequent discussions on whether Hong Kong investors should be treated as PRC investors and whether restrictions on Hong Kong investors should be tightened. Nevertheless, as of today, there is no formal legislative proposal made and the Ministry of Economic Affairs has not given any explicit answer on whether they are planning to amend any relevant regulations.
Regulations on PRC investors
Taiwan generally offers an open and welcoming environment for foreign investors but investors from People's Republic of China (PRC) face a different set of regulations than others. Though there have been some economic and cultural interactions and relationships established between Taiwan and the PRC since decades ago, the confrontation between the governments of Taiwan and the PRC has reached to a new record high in the past few years due to the policies of the current Taiwan administration and the continuous unsettlement of Taiwan’s international political status. Due in large part to these tensions and for a variety of strategic reasons, Taiwan has imposed strict restrictions on investments by PRC investors.
Generally, PRC investors are required to apply for an approval before engaging in investment activities in Taiwan. PRC investors are only allowed to invest in a Taiwan company if the investment is consistent with the restrictions and limitations on Taiwan’s “positive list” for investment from PRC. In addition, the Investment Commission may put restrictions on PRC investors who have military background, hold political positions or are part of the China Communist Party; the Investment Commission may even ban PRC investors from investing in Taiwan if their background is deemed to have significant influence on the national security. The consequences in connection with any non-compliance with the above-mentioned laws would lead to Taiwan authorities taking a range of actions, including imposing fines, requesting violators to divest part or all of their Taiwan investments, suspending shareholders rights, and revoking corporate registration of the invested companies in Taiwan.
In addition, “PRC investors” has been broadly defined to include any PRC entities and PRC invested companies from other jurisdictions. “PRC invested companies from other jurisdictions” refers to those entities incorporated outside of the PRC and invested by PRC entities or individuals that (i) directly or indirectly hold more than 30% of the shares of such entities, or (ii) have the ability to control such entities. There are detailed guidelines announced by the Investment Commission on what counts as “the ability to control.”
On 30 December 2020, a stricter regulation and several new administrative rules on PRC investors have been released which further tighten the restrictions on PRC investors in every aspect, including a broader definition on the above “PRC invested companies from other jurisdictions.”
Anticipated material changes in the near future
In sum, the PRC investors’ investment into Taiwan has become more strictly regulated. Even unambiguous cases may still face higher scrutiny and longer review period from Investment Commission. Due to the current policies of the Taiwan government, it is foreseeable that in the near future the Taiwan government will keep on tightening the investment from PRC entities.
Taiwan has established a set of comprehensive antitrust and unfair competition activities regulations with the enactment of the Fair Trade Act in 1992. There have been several amendments following, and the amendment in 2015 that modified over 70% of provisions set forth in the original Fair Trade Act constitute the most significant amendment. Under the 2015 amendment, the revenue numbers of entities that are controlled by, controlling or affiliated with the entities in the merger, as well as of other entities under common control, shall now be included in the threshold amount for merger filings, which makes it easier to reach the filing threshold. In addition, the Fair Trade Act was most recently amended in June 2017.
Under the 2017 amendment, the review period was extended to 30 working days from 30 calendar days (with an extension of no longer than 60 working days). Further, in the event of a hostile takeover, the competent authorities shall provide the reasons for filing to the target company and inquire comments from the target company.
From the enactment of Fair Trade Act in 1992 to January 2021, 7,106 applications have been submitted for merger approval (for filings made before the amendments to the Fair Trade Act in February 2002) or merger notification (for filings made since February 2002, subsequent to the amendments to the Fair Trade Act). Of those filings, only 12 of the proposed transactions have been refused or prohibited by the TFTC, representing an 0.17% rejection rate. In 2019 and 2020, 129 merger notifications were filed with the TFTC, and only one of which was prohibited. No statistics are, however, provided with respect to those mergers that are approved or cleared subject to specific conditions. Such conditions are not uncommon, particularly in cases requiring more complex analysis and a detailed balance between overall economic benefits and restraints on competitiveness. Some conditions may be very cumbersome for the parties, and, in effect, prohibit the completion of the deal.
Recent decision by TFTC prohibiting a M&A deal
The only decision prohibited by the TFTC in 2019 was the acquisition contemplated by Cashbox Partyworld Co, Ltd of 100% of the shares in Holiday Entertainment Co, Ltd. Cashbox Partyworld and Holiday Entertainment were the top two market-share leaders offering audiovisual and singing services by providing customers with the equipment and venue for karaoke in Taiwan. The main issue was how to define the relevant market. The parties asserted a broader definition of the relevant “market” that included the markets of live platform, online karaoke, apps used for singing and portable mini karaoke booths.
However, TFTC concluded that the relevant market should only cover the provision of audiovisual and singing services. As such, TFTC determined that the true market shares of the parties after the proposed acquisition would reach 45.35% in the aggregate. Even if the parties agreed to commit to various post-merger commitments, including price maintenance for five years among others, none of these commitments was sufficient to allay TFTC’s concern of the potential anticompetitive conduct of the parties.
Anticipated material changes in the near future
Since the enactment of the Fair Trade Act, Taiwan has actively and conscientiously developed a full body of competition law to ensure that the basic principles of fair trade are followed. On 22 October 2018, TFTC proposed a draft amendment that, if an enterprise fails to comply with TFTC's order to rectify acts violating the merger control regulations, TFTC may have the discretion to order an administrative fine from a minimum of TWD200,000 up to a maximum of TWD50 million. Additionally, in the same draft amendment, TFTC proposed to suspend the current five-year statute of limitations once it commences its investigation against such enterprise to determine the violation of the merger control regulations. Whether such amendments will come into force is worth monitoring.
There are several amendments to the Taiwan’s Company Act (the “Company Act”) in recent years, which in general try to keep pace with the modern trends of corporate governance and investment practice. In July 2015, the Company Act was amended to include a special chapter on close companies and in general gave more freedom for arrangements of shareholder rights and duties through variations of preferred shares, voting agreements and voting trusts. In 2018, the Company Act underwent a huge renovation. As part of the amendments, certain measures to facilitate 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’ voting trust are also recognised. Moreover, companies with one single corporate shareholder are allowed to name just one director. Further, shares with no par values are also allowed and companies may distribute dividends each quarter or every six months, offering flexibility that was not previously afforded.
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 major shareholders to replace the current management of a company. Furthermore, foreign companies are no longer required to apply for recognition (but will still need to register for a branch office or a subsidiary in Taiwan) in order to carry on businesses within Taiwan. It is expected that these measures can foster the development of M&A transactions in Taiwan.
The constitutional decision on minority shareholder protections
Recently, there was one decision related to M&A transactions came from Taiwan’s Constitutional Court, which is the first M&A-related constitutional court decision and worth monitoring its impact on the lower court’s decision to relevant M&A litigations in the future. On 30 November 2018, Taiwan’s Constitutional Court released its interpretation No 770 regarding a controversy over the Business Mergers and Acquisitions Act (the “M&A Act”).
Based on the M&A Act, the major shareholders and their nominated directors in the target company may still participate and vote at the shareholders meeting or board meeting to vote for a merger deal, despite any self-interests that the major shareholders might have. In addition, when a company attempts to merge with another company using cash as consideration, the shareholders of the target 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. Some people believed that the aforementioned regulations fail to protect minority shareholders’ interests especially in a cash-out merger deal, since the minority shareholders may not have chance to negotiate for better cash consideration before being pushed into cashing out by majority shareholders. Nevertheless, the Constitutional Court held that the self-interested shareholders and directors do not need to abstain from voting with respect to the M&A deal at the relevant shareholders meeting or board.
The Interpretation pointed out that, to protect the right of the shareholders, shareholders can apply to the court for appraisal of the fair price even if they did not express their objections at the shareholders’ meeting in accordance with the law, so the dissenting shareholders may argue for a fair price through their exercise of appraisal rights. However, the disclosure requirements regarding whether any conflict of interest was involved, and the protection of dissenting shareholders in the M&A Act should be enhanced. The Ministry of Economic Affairs announced an amendment to the M&A Act on 7 October 2020, which includes certain disclosure requirements to the directors and shareholders regarding whether any conflict of interest was involved.