Preparing for a Taiwan debut

However, not all types of foreign companies will be able to list via the TWSE or the Taiwan OTC. For example, foreign companies with revenues deriving mostly from Taiwan sources will be encouraged to reorganise as a domestic listing, rather than a foreign listing, and those foreign companies with shareholdings exceeding a maximum amount of Mainland China (PRC) ownership will also be precluded. Finally, there are basic financial, profitability and paid-in capital requirements for listing via the TWSE and the Taiwan OTC, which must be met by a foreign company.

Conversely, assuming that the foreign company qualifies for listing on the TWSE or the Taiwan OTC, there are some peculiarities about the Taiwan listing process which require some consideration. First, unlike the rule-based listing process in the United States or in other jurisdictions, the Taiwan listing process is a merit-based review and therefore the foreign company must be prepared for a review process that could be more detailed from a business perspective than in other jurisdictions. Secondly, in part due to the merit-based nature of the review, the typical Taiwan listing process can easily exceed six months and often could take more than a year from start to finish.

Since the TWSE engages in a lengthy merit-based review of each IPO, if many of the issues below are not dealt with in a manner satisfactory to the TWSE staff, significant delays could occur.

Conversion to an offshore holding structure

TWSE regulations require that a foreign issuer amend its organising documents to include a number of provisions based on the TWSE's Guideline For Shareholders' Protection that reflect Taiwan domestic corporate law. Some of these provisions may be incompatible or inconsistent with the corporate laws of the foreign company's state of incorporation. Indeed, the foreign issuer's legal counsel in the jurisdiction where such foreign issuer is organised must issue a detailed legal opinion in regards to whether such “minimum” shareholder protection mechanisms have been effectively adopted by such issuer.

In consideration of the foregoing, although the TWSE does not require the company to be incorporated in any particular jurisdiction, due to the amount of mandatory provisions and internal rules which the TWSE will require to be implemented by the foreign company, most foreign companies choose to restructure under a company organised in an offshore jurisdiction. This offers a balance between international recognition and flexibility in its internal corporate governance laws and regulations. To date, by far the most popular jurisdiction for establishing holding companies has been the Cayman Islands.

Thus, in drafting the listing company's memorandum and articles of incorporation, Taiwan counsel and Cayman Islands counsel must work together to ensure that all of the provisions required by the TWSE are included and that none of such provisions conflict with Cayman Islands law.

Employee stock options and incentive plans

Foreign companies frequently use stock options, restricted stock and other equity awards to motivate their employees to maximise the long-term performance of the company. Foreign companies should therefore be aware that listing on the TWSE may restrict their incentive plans in several key ways.

Informal cap on stock options

Most Taiwan-listed companies operate under a de facto cap on shares underlying incentive stock options for employees, equal to 15% of the companies' overall issued and outstanding shares. In consideration of this, the TWSE would likely question foreign issuers with options authorised under an incentive plan in excess of 15%.

Since it is not uncommon for foreign companies, particularly venture-backed technology companies, to authorise 20% or more of their outstanding shares in stock options, particularly as a company nears an IPO, the cap on stock options may be a significant restriction for many foreign companies. If the foreign company intends to issue stock options that would exceed the 15% cap, the company must take steps to ensure that the amount of stock options is below the cap prior to listing. In certain cases this may simply mean that some employees will need to exercise their options before a public market exists for the company's stock. Paying the exercise price may be financially burdensome for many employees, and as discussed below, TWSE will not permit a company to provide loans to employees to exercise their options in advance of listing.

In addition to the foregoing, the TWSE may also question issuances of a significant amount of options in the period leading up to an IPO.

Director compensation

Director compensation is categorised as either salary or bonuses in Taiwan, and each is regulated separately. Of particular note is that incentive stock options may only be paid to employees of Taiwan-listed companies, and not to their directors or consultants. In consideration of this, the TWSE may question foreign companies where directors are entitled to receive stock options, rather than cash, for their services on the board. This may be a significant difference for many foreign companies that are accustomed to providing stock options or other equity awards to directors to preserve cash and to align the interests of directors with shareholders.

In addition to salary, a foreign issuer may pay director bonuses from the profits of the company in line with Taiwan practice. The organising document of the foreign issuer should provide for a profit distribution plan and set a specific limit on the percentage of the profit that may be used for director bonuses. The profit distribution plan must be approved by the shareholders.

Employee loans

The Taiwan Company Act generally prohibits a company from making loans to any person including employees, and the TWSE has indicated that it will apply this prohibition to foreign companies as well. Foreign companies may, however, occasionally establish employee loan programs for relocation benefits, tax payments, exercise of stock options or other reasons. Such companies should terminate such programs prior to listing on the TWSE and, if there are loans outstanding under old programs, be prepared to explain the terms and rationale of the loan programs to TWSE officers. In many cases the TWSE may require such loans to be repaid before the effectiveness of the IPO.

Preferred stock and shareholders agreements

Start-up companies typically undergo one or more rounds of preferred stock financings during their development. The company's organising documents will provide for certain preferential rights to holders of preferred stock, such as priority over holders of common stock for liquidation and dividends. In addition, the preferred stock investors may have agreements among themselves and with the company that provide for a number of additional rights, such as voting agreements, access to the company's financial information and restrictions on transfer of the company's common or preferred stock.

Foreign companies planning on listing on the TWSE should ensure that all preferred stock will be converted to common stock at the time the company submits its application for listing, and that any agreements among shareholders should be terminated as well. Taiwan domestic law generally favors equality and free trading among shareholders, and the existence of preferred stock and shareholders agreements will raise significant questions from investors and regulators.

Restrictions on investments involving mainland China

A foreign company with investments or operations in mainland China (the PRC) may list on the TWSE as long as the listing company is a holding company rather than the PRC entity itself. However, Taiwan laws governing Taiwan-PRC cross-strait relations have other restrictions on investment by PRC citizens in a TWSE-listed company. In particular, a foreign company cannot list on the TWSE if 30% or more of its shares are held by PRC shareholders, or if a PRC shareholder has significant management influence over the company. Foreign companies with significant PRC shareholders or influence, or companies that do not know the nationality of their shareholders or management, should consider this issue early when planning for a TWSE listing.

In addition, Taiwan laws also prohibit Taiwanese citizens from investing in mainland China in certain restricted industries, including certain high-end semiconductors, integrated circuit (IC) design and thin film transistor liquid crystal display (TFT-LCD) technologies. Foreign companies that have investments or operations in these restricted industries, or have plans to operate or invest in the same, should be mindful that their Taiwanese shareholders may be in violation of these laws.

Independent directors and audit committees

The Taiwan Company Act provides that all corporations must have a board of directors as well as “supervisors” who, in theory, represent the interests of shareholders which are independent from the board. The requirement of “supervisors” may be waived for a foreign company, provided that the foreign company establishes an audit committee composed entirely of independent directors. This means that foreign companies preparing to list via the TWSE must plan for the recruitment of additional independent board members to comply with these regulations ahead of the time. In many cases, such preparations must start early as the foreign company's existing organisational documents may need to be amended by its shareholders in order to provide for the proper election of directors who are “independent” in accordance with applicable rules and regulations.

Director's liabilities under Taiwan law

In recent years, Taiwan has increasingly focused on improving corporate governance, and directors of a TWSE-listed company will be subject to civil and criminal penalties for violations of Taiwan's corporate governance laws. Taiwan law imposes criminal liability on directors for a number of offences relating to fraud, misrepresentations, and violations of a director's fiduciary duties and duty of loyalty to the company. In some cases, such as misrepresentations or omissions in the company's prospectus or financial reports, a director may have a defence if he can demonstrate he exercised reasonable care and had just cause to believe that the reports and documents were accurate. However, the chairman and CEO will each be held strictly liable for any misrepresentations or omissions in publicly filed financial reports, and each will bear liability for the full amount of any damages regardless of his individual degree of responsibility.

Final thoughts

Foreign companies considering a TWSE listing should be aware that they may be required to adopt Taiwan corporate practices in a number of ways. These practices may differ markedly from corporate practice in other jurisdictions, and may have different impacts on the interests of investors, directors, management or employees.

In general, the more flexibility and simplicity a foreign company can accept in its capital structure and compensation plans, the more it will be able to smoothly adapt to TWSE compliance requirements. Many potential issues can be addressed or avoided by communicating with TWSE officers early and clearly. Foreign companies considering or preparing a TWSE listing should work closely with their Taiwan underwriter and counsel to determine how to efficiently handle these issues.

Victor I-Hsiu Chang and Kai-Hua Yu, LCS & Partners, Taipei

Victor Chang
Partner
LCS & Partners

Tel: 8862-2729-8000 ext. 7722
Email: [email protected]

Victor Chang has extensive multi-jurisdiction transactional experience in M&A, private equity fund formations and cross border transactions of all types, frequently involving parties from the United States, Europe, Canada, Australia, Taiwan and China. Mr. Chang has been recognised as a Leading Lawyer in the areas of private equity and venture capital by Asialaw. Prior to joining LCS in 2003, Mr. Chang was deputy general counsel of Trader Classified Media, a leading classified media company traded on the Paris Bourse and he also practised for seven years in Boston, Massachusetts.

Recently, Mr. Chang has acted as deal counsel in some of the largest and most innovative M&A transactions in Taiwan and China, including the sale of Jean's Chinese assets to BOE, the acquisition by Primus Financial of Nan Shan Life Insurance, the acquisition by ANZ of ABN Amro Taiwan, the Standard Chartered – Hsinchu International Bank tender offer and the SouFun sale to Telstra.

Kai-Hua Yu
Associate
LCS & Partners

Tel: 8862-2729-8000 ext. 7607
Email: [email protected]

Kai-Hua Yu practices corporate law in Taipei, with a focus on cross-border M&A and capital markets. He has recently acted as issuer's counsel on many of the first “Return to Taiwan” IPO projects, including representing Integrated Memory Logic as the first foreign company to complete a primary listing on the Taiwan Stock Exchange. He also frequently advises on a variety of cross-border M&A and investment transactions involving parties from the U.S., Europe and Asia. Prior to joining LCS, Mr. Yu practised corporate law at Latham & Watkins in Los Angeles, where his practice included private and public M&A transactions, IPOs and general corporate representation.