Race to take advantage of new openness from Taiwan

Chen & Lin Attorneys-at-Law
Ying-Yi Lee
[email protected]

On April 30 2009, after decades of intense political enmity, a major milestone was achieved with the lifting of a decades-old ban on Chinese investment in Taiwan. For the first time in 60 years, mainland institutional investors are allowed to invest in the securities markets in Taiwan. It is only the first step in a wide-ranging financial cooperation programme that Taiwan launched with Mainland China. In June of 2009, Taiwan's Ministry of Economic Affairs (MOEA) further allowed mainlanders, whether individual or institutional, to make direct investments in Taiwan such as setting up a corporate. Prior to the milestone, cross-strait investments predominantly involved Taiwan-based firms moving to, or collaborating in joint ventures in, Mainland China. Now, the race to take advantage of the new openness from Taiwan has started.

It is very unlikely for anyone who is unfamiliar with the rules of a race to win the game. The same principle applies here. Despite a series of deregulations, investment by mainlanders is still subject to various restrictions. Take direct investment as an example: among other restrictions, only industries listed in the 'positive list' are permitted targets; the aggregate investment amounts and shareholding in certain industries are subject to a ceiling amount; and every investment requires separate prior governmental approval. Investments in the securities market are less restrictive; nevertheless, once the investment exceeds 10% it is treated as a direct investment and separate prior governmental approval is required. It is important for any potential mainland investor to be advised of those restrictions before the business decision is made.

A review of the landmark deal between China Mobile and Far EasTone can be helpful here. China's top telecoms carrier China Mobile and Taiwan's third-largest telecom operator Taiwan-listed Far EasTone entered into a cooperation agreement in April 2009 in which Far EasTone agreed to issue 12% of Far EasTone's common shares via a private placement to China Mobile. Because the stake to be subscribed exceeded the 10% threshold, a separate prior approval was required. Nearly two years after public announcement, this deal is still pending because Far EasTone engages in first class telecommunication industries that have yet to be included in the positive list.

This illustrates how critical the role of legal boundaries plays in transactions and the importance of seeking legal advice prior to decision-making. When parties negotiate a deal, unless they are fully advised of the constraints in advance, they may not discuss and work out back-up plans and exit mechanisms. But businessmen may choose to prepare in advance and make deals in expectation of deregulation. In such forward looking transactions, parties may choose not to agree on exclusivity clauses or break up fees, but on a drop date – as neither party is able to predict whether the other remains a suitable cooperation partner at the time the restrictions are lifted.

It is equally important to be advised of new opportunities and Mainland investors are recommended to seek advice to ensure that they are updated about any new opportunities – for example, investment in the securities market. On December 27 2010, the Financial Supervisory Commission broadened the scope of permitted securities targets. Previously, qualified mainland investors were permitted only to purchase issued and outstanding shares of listed companies; now, they are further permitted to subscribe to shares newly issued by a listed company or shares newly issued in an IPO transaction. This allows qualified mainland investors to participate in not only the secondary capital market but also the primary capital market. To take advantage of such opportunities, investors may be interested in entering into certain subscription agreements. These generally include terms with respect to board seat allocation, the exercise of voting rights, and events subject to the supermajority resolution of the board. Nevertheless, as those terms involved 'control' of Taiwan companies, they are subject to stricter restrictions. Any investor who is considering such an agreement is better to be advised of the restrictions in advance. Otherwise, the investor runs a risk that those terms are just agreed in paper but not enforceable in the court.

Now is the chance for pioneer mainland investors to grab super-normal profits. According to an announcement by the Investment Commission MOEA – the authority in charge of direct investments – approved Taiwan investment by mainlanders surged from 23 in the second half of 2009 to 79 for the full year of 2010. To ensure great ideas can be executed, mainland investors are suggested to seek legal advice in advance. This will help utilise opportunities to the maximum extent within the legal boundaries.