Corporate M&A 2023

Last Updated April 20, 2023

Taiwan

Law and Practice

Authors



Lee and Li Attorneys at Law is the oldest and largest law firm in Taiwan and is highly sought after by clients worldwide for its comprehensive and premium legal services. Its M&A practice group has more than 100 staff members and assists clients in structuring and implementing all types of mergers and acquisitions, including mergers, demergers (spin-offs), share exchanges, asset acquisitions, share acquisitions, and group restructurings. The M&A transactions handled by Lee and Li frequently involve high-value and complicated legal issues and structures. Combining its experiences in corporate investments, labour, tax, and securities issues, its M&A practice group is well known for providing comprehensive and in-depth legal advice on all legal issues concerning M&A. Lee and Li is also known for its public policy initiatives regarding M&A. Lee and Li’s imprints can be found in legislation and regulations that form the legal infrastructure of Taiwan’s economy.

M&A transactions in Taiwan were hardly affected by COVID-19 in 2022. Nonetheless, there have been slightly fewer cross-border transactions, more domestic transactions and, in particular, the volume of investments from Japan has decreased. The authors are of the opinion that this may be due to the pandemic circumstances overseas and the Japanese investors’ practices in performing on-site due diligence and in-person negotiation in dealing with M&A transactions.

One of the top trends in the Taiwan market is the consolidation of financial institutions. High profile transactions include the merger of Jih Sun Financial Holding Co into Fubon Financial Holding Co, the sale of Citibank Taiwan’s consumer banking business to DBS Taiwan, and Chubb group’s acquisition of Cigna Taiwan Life Assurance Company Limited.

Also, green energy continues to thrive. Copenhagen Infrastructure Partners (CIP) completed the transfer of a portion of the shares in one of its windfarms to GPSC of Thailand. 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 initiated relevant discussions with private power plants for procuring green energy due to the ESG advocacy and promotion of ESG awareness in the society. 

Besides the financial industry and green energy sector, the consolidation of retail chains has also been seen.

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 financial, green energy and retail chain sectors have experienced significant M&A activity as mentioned above. No particular industry has been particularly affected by the COVID-19 pandemic.

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 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 (“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 regulators 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 Investment Commission (IC), 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 (the 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 IC 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 IC. 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 his or her 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 IC. 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.

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 said 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 came into force, shareholder approval was waived where a whale-minnow M&A meets the following criteria: (i) 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 (ii) 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 promoting 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 concern. 

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% 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. 

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% after the proposed amendment to the Securities and Exchange Act is passed) 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 has been 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 above.

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 twelve 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 (i) the IC’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 his or her 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 his/her 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 mergers and acquisitions, a director who has a personal interest in such transaction shall declare the essential contents of such personal interest and the reason why he/she believes 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 the 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 judgment 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 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 his or her 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 he/she believes 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 his or her 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.

Completion of M&A transactions in Taiwan were not substantially affected by the COVID-19 pandemic. To the authors’ knowledge, there is no material litigation regarding pending M&A transactions in early 2020.

Shareholder activism is not an important force in M&A transactions in Taiwan. If a shareholder would like to use his or her 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.

Lee and Li, Attorneys-at-Law

8F, No 555, Sec. 4
Zhongxiao E. Rd Taipei
11072
Taiwan

+886 2 2763 8000

+886 2 2766 5566

attorneys@leeandli.com www.leeandli.com/EN
Author Business Card

Trends and Developments


Authors



LCS & Partners was established in 1998 and is one of Taiwan’s largest law firms, regularly representing foreign and domestic parties in some of the most complex cross-border transactions. As a leading corporate law firm, its corporate practice is comprised of a dedicated core of attorneys with experience in the areas of M&A, restructuring, financing and investment. The firm has acted as a legal adviser on numerous landmark M&A transactions across many industries, including the financial, TMT, chemical, entertainment and hospitality industries. LCS & Partners has repeatedly contributed to major changes to Taiwan’s M&A Act and has been part of numerous landmark cases.

Overview of Recent Trends

Inbound transactions

Due to the ease of the COVID-19 pandemic, the inbound activity into Taiwan rose sharply in 2022. According to the statistical data compiled by the Investment Commission of Taiwan’s Ministry of Economic Affairs (the “Investment Commission”), the foreign direct investment amount in Taiwan in 2022 was USD13.303265 billion, which was approximately 77.94% higher than the amount in 2021, constituting the highest figure ever reached in the past ten years.

Though there was a stagnation in the growth of renewable energy industries in 2021 due to the COVID-19 pandemic and the border quarantine requirements, which created obstacles for foreign technical personnel from entering into Taiwan for offshore wind farms constructions, in 2022, with the ease of the pandemic, inbound transactions were mostly driven by foreign investments in the green energy sectors. There were several investment projects with considerable investment amounts in offshore wind farms, such as Ørsted Wind Power TW Holding A/S making numerous investments in the Greater Changhua Offshore Wind Farm NW Ltd, with one of the projects reaching an investment amount of TWD11.9995 billion. Also, Mitsui O.S.K. Lines Ltd made an investment in Formosa I Wind Power Co Ltd in the amount of TWD3.883 billion in 2022. Most of the aforementioned energy projects are located in the Taiwan Strait, off the island’s west coast.

Just before the outbreak of the COVID-19 pandemic, there were several significant foreign investments into offshore wind farms. For instance, the prominent global institutional investor Caisse de dépôt et placement du Québec (CDPQ) co-invested with a Taiwanese 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 in 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 addition, the “Finalised Plan for Zonal Development Auction”, released in 2021 by the Bureau of Energy, which aims to build a total capacity of 15GW of offshore wind farms in the next ten years, presented ongoing opportunities for foreign investors to invest in the offshore wind farms in the near future.

Due to the Taiwanese government’s policies on expanding the capacity of energy generated by renewable sources, offshore wind power and also solar power have become the most popular investment targets in recent years. In addition to investments in the operation of power plants, foreign investors also shifted their focus to the upstream sectors along the supply chain and ancillary energy-related industries, such as the energy storage business. Numerous international players have collaborated with domestic suppliers in these sectors in Taiwan.

Outbound transactions

Though the impact of COVID-19 pandemic has reduced significantly, and Taiwan also lifted its border quarantine measures in October 2022, the outbound investment amount in 2022 was USD9,962,282,161, which was approximately 20.93% less than the amount in 2021, presenting a negative growth for the first time since 2019, according to the statistical data compiled by the Investment Commission. The reasons for such outbound investment decrease may be the anticipation of global recession due to tightening monetary policies and the heightened political tensions between Taiwan and Mainland China, along with significant impacts from the Ukraine war.

Nevertheless, from past experience in Taiwan’s M&A market, we have observed that Taiwanese companies and investors demonstrate a sustained interest in overseas acquisitions, within specific industry vertical integration, and there is 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

Recent development

For decades, the general regulatory framework of foreign investment in Taiwan has not changed much. Foreign investors were 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 it 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, the Investment Commission temporarily relaxed the requirement for the notarisation of power of attorney (POA) documents. Under the temporary rule, foreign investors may provide a copy of a POA first and supplement the original notarised POA within six months after obtaining the foreign investment approval. However, as the impact of the COVID-19 pandemic has reduced globally and Taiwan also lifted its border quarantine measures in October 2022, it is possible that the officer from the Investment Commission may decide not to apply such temporary rule if he or she deems that the notarisation process in the foreign country is not affected by the pandemic even if the Investment Commission has not yet expressly abolished such temporary rule.

Anticipated material changes in the near future

Although the general regulatory framework of foreign investment in Taiwan has not changed much 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’s 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 foreign investment below a certain threshold will not require any prior approval from the Investment Commission, replaced by an after-the-fact report to the Investment Commission, which is contrary to the current regulations requiring every foreign investment case to obtain prior approval. However, the amendment is still under review by Congress, and the prospects of legislation are difficult to predict.

Another expected change relates to foreign investments from Hong Kong. Under the current regulations, investors from Hong Kong are treated as foreign investors instead of PRC investors. However, the political changes in Hong Kong in recent years have incentivised 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 April 2023, no formal legislative proposal has been made and the Ministry of Economic Affairs (MOEA) has not given any explicit answer on whether it is planning to amend any relevant regulations.

Regulations on PRC Investors

Recent development

Taiwan generally offers an open and welcoming environment for foreign investors but investors from the PRC face a different set of regulations. Although some economic and cultural interactions and relationships have been established between Taiwan and the PRC in the last few decades, the confrontation between the governments of Taiwan and the PRC has reached a new record high in the past few years due to the international situation. Due in large part to these tensions, and for a variety of strategic reasons, Taiwan has imposed strict restrictions on PRC investors.

Generally, PRC investors are required to apply for approval before engaging in investment activities in Taiwan. PRC investors are only allowed to invest in a Taiwanese company if the investment is consistent with the restrictions and limitations on Taiwan’s “positive list” for investment from the PRC. In addition, the Investment Commission may put restrictions on PRC investors who have a military background, hold political positions or are part of the Chinese Communist Party. The Investment Commission may even ban PRC investors from investing in Taiwan if their background is deemed to have significant influence on national security. The consequences in connection with any non-compliance with the above-mentioned laws would lead to Taiwanese authorities taking a range of actions, including imposing fines, requesting violators to divest part or all of their Taiwanese investments, suspending shareholders’ rights, and revoking corporate registration of the invested companies in Taiwan. 

In addition, the term “PRC investors” has been broadly defined to include any PRC entities and “PRC-invested companies from other jurisdictions”. The latter refers to those entities incorporated outside of the PRC and invested in 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. Detailed guidelines from the Investment Commission explain what counts as “the ability to control” and to “directly or indirectly hold more than 30% of the shares”. 

On 30 December 2020, a stricter regulation and several new administrative rules on PRC investors were released which further tighten the restrictions on PRC investors in every respect, including explicit regulation on the variable interest entity (VIE) structure and a broader definition of the above “PRC-invested companies from other jurisdictions”.

On top of the above, the amendments to the National Securities Act and amendments to the Act Governing Relations between the People of the Taiwan Area and the Mainland Area are approved by Taiwan’s Congress, which further tighten the regulations on commercial activities between Taiwan and the PRC. The amendments aim to prevent the so-called “Critical Technologies” from being usurped by any PRC entities, and criminal punishments are imposed on any violation of the relevant regulations. The motivation of such new legislation behind the scenes is generally believed to protect the integrated circuit industry in Taiwan, which is an industry in which Taiwan holds a predominant place in the world. The National Science and Technology Council announced a draft of the Regulations on Determining the National Critical Technologies on 30 December 2022, which regulates the process of determining what kind of technologies will be involved in “Critical Technologies”.

Anticipated material changes in the near future

Considering the heightened political tensions between Taiwan and Mainland China, PRC investment into Taiwan may become more strictly regulated going forward. Even unambiguous cases may face higher scrutiny and a longer review period from the Investment Commission. Due to the current policies of the Taiwanese government, it is foreseeable that in the near future it may keep on tightening up on investment from PRC entities.

Merger control

Recent development

Taiwan 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 since, with the amendment in 2015 that modified over 70% of the provisions set forth in the original Fair Trade Act, constituting 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 other entities under common control, will now be included in the threshold amount for merger filings, which makes it easier to reach the filing threshold. 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). Furthermore, in the event of a hostile takeover, the competent authorities will provide the reasons for filing to the target company and ask for comments from the target company.

From the enactment of the Fair Trade Act in 1992 to January 2023, 7,240 applications were 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 Fair Trade Commission (TFTC), representing a 0.17% rejection rate. From 2019 to 2022, 260 merger notifications were filed with the TFTC, 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 to prohibit an M&A deal

The only decision prohibited by the TFTC since 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 audio-visual 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 audio-visual and singing services. As such, TFTC determined that the actual 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, among others, price maintenance for five years, none of these commitments was sufficient to allay TFTC’s concerns about the potential anti-competitive 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 so 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 into such enterprise, to determine the violation of the merger control regulations. Whether such amendments will come into force is worth monitoring.

On 20 December 2022, TFTC released its “White Paper for the Competition Policy on the Digital Economy”. The white paper includes TFTC’s latest guideline toward “killer acquisition”, “the role that personal data plays in merger control” and other competition law topics. The white paper will become the guideline for how TFTC handles the relevant cases in the rapidly changing digital world, and will also likely serve as the basis for future amendments to the Fair Trade Act.

Corporate governance

Recent developments

In 2021, in reaction to the public health crisis posed by the COVID-19 pandemic, an amendment to Taiwan’s Company Act (the “Company Act”) was approved, which prescribes that a shareholders’ meeting of a private company may be convened via video conference and a public company may have a shareholders’ meeting via video conference, subject to the specific rules imposed by the securities authority. Before this amendment was approved, a private company could only hold a shareholders’ meeting if its Articles of Incorporation allowed a shareholders’ meeting to be held via video conference, and a public company was not permitted to hold a shareholders’ meeting via video conference under the previous Company Act.

Before the outbreak of the COVID-19 pandemic, there were several amendments to the Company Act, which in general tried 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, to provide more freedom for the arrangement 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 is also recognised. Moreover, companies with one single corporate shareholder are allowed to name just one director. Furthermore, 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 that have held the majority of a 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 will foster the development of M&A transactions in Taiwan. 

The constitutional decision on minority shareholder protections

A recent decision related to M&A transactions came from Taiwan’s Constitutional Court, making it the first M&A-related constitutional court decision and worth monitoring in terms of its impact on the lower court’s decision regarding relevant M&A litigation 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 for a merger deal at the shareholders’ meeting or board meeting, despite any self-interest 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 buy-back of their shares at the fair price or request any other legal remedies unless they express their objection and waive their voting rights at the shareholders’ meeting. Some people believe that the aforementioned regulations fail to protect minority shareholders’ interests, especially in a cash-out merger deal, since the minority shareholders may not have a 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 meeting. The Constitutional Court pointed out that, to protect their rights, 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 is involved, and the protection of dissenting shareholders in the M&A Act, should be enhanced.

The amendment to the M&A Act, which reflected the opinion of Taiwan’s Constitutional Court in interpretation No 770, was approved by Taiwan’s Congress on 24 May 2022 and became effective on 15 December 2022. Under the newly amended M&A Act, a self-interested director in an M&A transaction should provide explanation on the nature of the personal interest and the reason for his or her approval or objection to the proposed M&A resolution in the board meeting and the shareholders’ meeting. Also, the company should set out the above information in the notice of the shareholders’ meeting. In addition, the shareholders of the target company who did not waive their voting rights but voted against the proposed transaction at the shareholders’ meeting are now permitted to apply to the court for appraisal of the fair price and request buy-back of their shares at the fair price.

LCS & Partners

5F, No 8, Sec 5
Sinyi Rd
Taipei City
Taiwan

+886 2 2729 8000

+886 2 2722 6677

inquiry@lcs.com.tw www.lcs.com.tw
Author Business Card

Law and Practice

Authors



Lee and Li Attorneys at Law is the oldest and largest law firm in Taiwan and is highly sought after by clients worldwide for its comprehensive and premium legal services. Its M&A practice group has more than 100 staff members and assists clients in structuring and implementing all types of mergers and acquisitions, including mergers, demergers (spin-offs), share exchanges, asset acquisitions, share acquisitions, and group restructurings. The M&A transactions handled by Lee and Li frequently involve high-value and complicated legal issues and structures. Combining its experiences in corporate investments, labour, tax, and securities issues, its M&A practice group is well known for providing comprehensive and in-depth legal advice on all legal issues concerning M&A. Lee and Li is also known for its public policy initiatives regarding M&A. Lee and Li’s imprints can be found in legislation and regulations that form the legal infrastructure of Taiwan’s economy.

Trends and Developments

Authors



LCS & Partners was established in 1998 and is one of Taiwan’s largest law firms, regularly representing foreign and domestic parties in some of the most complex cross-border transactions. As a leading corporate law firm, its corporate practice is comprised of a dedicated core of attorneys with experience in the areas of M&A, restructuring, financing and investment. The firm has acted as a legal adviser on numerous landmark M&A transactions across many industries, including the financial, TMT, chemical, entertainment and hospitality industries. LCS & Partners has repeatedly contributed to major changes to Taiwan’s M&A Act and has been part of numerous landmark cases.

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