Taiwan Focus: Gateway to investments in greater China
January 17, 2013 | BY
clpstaff &clp articles &Private equity and venture capital investors are seeing Taiwan as the key to entering the PRC, but PE firms have encountered difficulties with tender offers, calling for a more transparent review process and regulatory scheme
In the past ten years, Taiwan enterprises or enterprises run by Taiwanese have been seen as great jump boards to the China market and have attracted abundant investments by foreign private equity and venture capital. While some PE firms searched for companies with strong cash flow, some saw opportunity in the industries that may have better growth potential in China, such as the consumer or financial industries. Venture capitals are attracted by the high concentration of start-ups with high-calibre talent in the high-tech industry in Taiwan. As a result, in the cable-TV sector, all of the three largest Multiple Service Operators (MSOs) in Taiwan were once controlled by foreign PE firms. This was until the Carlyle Group sold its interests in one of the MSOs to a local enterprise in 2011. In the financial sector, PE firms acquired majority or minority stakes in Taiwan banks, including TPG, Long-reach Group, Carlyle Group, GE Capital and SAC Private Capital Group.
Tsar & Tsai Law Firm is honoured to be able to participate in this booming area of private equity and venture capital investment in Taiwan. The firm represented clients to acquire controlling interest over local targets, including the largest MSO in the cable-TV sector in Taiwan, En-Tie Bank and to invest as a strategic partner with minority stakes, like Taishin Financial Holding Company. The Firm also advises clients in disposition of stakes by ways of stock market exit or private placement, where the clients wish to realise their gain.
Recently, foreign PE firms encountered some regulatory hurdles in their investment through tender offers in Taiwan listed companies. Notably, in KKR's proposed acquisition of Yageo, a Taiwan listed electronic component manufacturer, the Taiwanese government blocked a plan jointly proposed by KKR and the Chairman of Yageo, to acquire 100% of Yageo and then to take Yageo private. One of the reasons for the block, as published by the competent authority, is that the acquirers did not give sufficient explanation as to the protection of existing investors and shareholders and the lack independent assessment or opinion on the offer price before the target's board made the recommendation to the shareholders. In addition, the regulator also expressed concerns about the leveraged investment plan proposed by the acquirers. Many commentators tend to believe that the regulators are reluctant to approve any critical delisting cases, even though such proposed cases meet legal requirements. The case caused concern to the investors and there is a call for a more transparent review process and regulatory scheme.
The Yageo case has caused the Taiwan regulator to pass a new amendment to the Tender Offer Rules in order to tighten the regulation on the tender offer price and information disclosure.
|Tender offer filing
Under the Securities and Exchange Law (SEL) and the Tender Offer Rules promulgated by the Financial and Supervisory Commission (FSC), subject to limited exceptions, a person or entity intending to launch a tender offer to purchase the shares of a public company is required to file a report to the Securities and Futures Commission (SFC), with a copy to target company and make a public announcement of the offer. The SEL and the Tender Offer Rules also provide a mandatory tender offer requirement that, except for limited exemptions provided by the SEL, a person or entity, acting alone or with others, intending to acquire 20% or more of the shares in a Taiwan public company within 50 days must do so by way of a tender offer. Violators of this mandatory requirement will be subject to criminal liability. In order to avoid information leaks prior to the launch of the tender offer, normally such filing and announcement will be made on the same day.
One of the major documents required for filing is the tender offer circular, which contains, among others, the terms and conditions of the offer, the information regarding the Offeror (business operation and financial condition), the target's share trading record by the Offeror (including its affiliates and related persons) in the past two years, related risk factors of the tender, expert fairness opinion on the offer price and the Offeror's future plans for Target. The share purchase agreement or share trading record between the Offeror and the Target over the past two years shall be disclosed in the tender offer circular.
If the FSC finds any violation of law or regulations in the filing and announcement, they have the authority to order the Offeror to amend the tender offer filing and to make a new filing and announcement. This protects the public interest.
Price and terms
The SEL requires the Offeror to tender the offer at the same terms and conditions and if the Offeror violates this requirement, it would be liable to the sellers for the difference between the highest price and the relevant offer price. Since the tender offer is an off-stock-exchange transaction, the buyer has the freedom to set the purchase price without relating it to the current market price of the Target. In addition, under the tender offer regulations, it is permissible for the purchaser to make its offer conditional upon the success of acquiring a certain minimum number of shares.
The SEL prohibits the Offeror, including its affiliates and related persons, to buy any shares of the target company during the period between the date of filing and the date when the tender offer ends. If the Offeror violates this prohibition, it would be liable to all of the sellers for the shortfall between the offer price and the purchase price paid in other trades.
Offer period
The tender offer period cannot be less than 10 days or more than 50 days, which may be extended for a period of up to 30 days upon approval by the FSC if there is a competing offer or other legitimate reason. Once the tender offer is launched, the Offeror is not allowed to shorten the offer period even if the conditions are satisfied earlier.
Under the SEL, once the Offeror has initiated a tender offer, it may not suspend the tender offer except in certain limited situations specially provided in the Tender Offer Rules or otherwise approved by the FSC.
In the event where the Offeror fails to acquire the proposed number of shares within the offer period, or the FSC suspends the offer, the Offeror may not, within one year, carry out a public tender offer on the same target company, unless it has legitimate reasons and has obtained approval from the FSC.
Target's response
After the launch of the tender offer, the Target's board of the directors and a review committee, formed of at least three independent directors or members nominated by the board, if there are not sufficient independent directors, are required to review the tender offer and make a recommendation to the shareholders within seven days after receipt of the offer documents from the Offeror. The board is required to file such recommendation with the FSC and make a public announcement through the Taiwan Stock Exchange Market Observation Post System (MOPS).
Reporting for completion
Within two days after the tender offer period ends, the Offeror must file a report to the FSC and make a public announcement regarding the implementation status of the offer. This should include whether the condition's precedent are met, the number of shares to be purchased and the closing procedure. In Taiwan, settlement of the offer will normally occur within five to seven business days after the tender offer period ends.
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Regulatory reviews
Investment approval
Foreign investments (excluding PRC investments, which are subject to a separate set of investment regulations) are generally subject to the Statute for Investments by Foreign Nationals. A Foreign Investment Approval (FIA) issued by the Investment Commission (IC) of the Ministry of Economic Affairs (MOEA) is a prerequisite for foreign investment.
Foreign investors may invest in most business sectors except for those on the Negative List. The List specifies certain prohibited industries, where no foreign investment is permitted and restricted industries, where special permits or licences from the competent authorities are required.
For PRC investments, the Regulations Governing Investments by PRC Persons (PRC Investment Regulations) shall apply. According to the PRC Investment Regulations, a PRC Person may invest in certain industries identified on the List of Permitted Industries as promulgated by the MOEA periodically. Article 3 of the Investment Regulations defines the term “PRC Person” as a PRC citizen, PRC entity or a corporate entity incorporated in a third jurisdiction (non-PRC jurisdiction) and controlled by a PRC citizen or a PRC entity.
It is advisable that you consult a legal counsel in the earliest possible stage if you plan to invest in Taiwan. The full Negative List applicable for general foreign investors and the List of Permitted Industries applicable for PRC investments can be found on the MOEA website.
Merger filing
Merger control rules can have a material impact on transactions, but usually substantial competition concerns are not raised. However, the significance of merger control rules is sometimes underestimated and it can be important to the timing of transactions. Failure to assess the merger control implication early on can delay closing of the transaction by the parties. An early and careful assessment would limit the adverse impact of such issues on the transactions.
Pursuant to the Taiwan Fair Trade Act (TFTA), two questions need to be answered to determine merger filing in Taiwan:
1) Is the transaction defined as a business combination under the TFTA? The definitions include:
- merger;
- where an enterprise holds or acquires more than one-third of voting shares or equity interests in another enterprise;
- where an enterprise acquires or leases from another enterprise the whole or the major part of the business or properties of such other enterprise;
- where an enterprise operates jointly with another enterprise on a regular basis or is entrusted by another enterprise to operate the latter's business; or
- where an enterprise directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise.
2) Are any notification thresholds met? The thresholds include:
- as a result of the business combination, any of the enterprises will have an aggregate market share of one-third or more in a relevant product market;
- one of the enterprises has one-forth the market share or more in a relevant product market; or
- sales revenue of one of the enterprises in the preceding fiscal year exceeds Ntd10 billion ($340 million) and the other enterprise exceeds Ntd1 billion (Ntd20 billion and Ntd1 billion for financial institutions).
Some specific issues are critical for private equity transactions. Identifying the relevant entities subject to merger control is an example. A private equity group usually has several levels of entities and a complicated group structure. To determine which level of entity or vehicle is required for filing with the antitrust regulator, sometimes it is necessary to analyse the particular structure and the management arrangement of the private equity.
Janice Lin
Partner
Tsar & Tsai
Ms. Janice Lin is a partner with Tsar & Tsai Law Firm. Janice specialises in joint ventures, mergers and acquisitions, as well as capital markets, loan and project financing transactions.
Janice has been involved in a wide range of transactions acting for multinational corporations in cross-border joint ventures, mergers and acquisitions, with many of these deals the first of their kind in Taiwan. Janice is frequently praised by clients for her practical approach and ability to solve problems ahead of time. Janice is listed as a leading lawyer in the field of corporate and M&A by independent publications such as Chambers Asia - Asia's Leading Lawyers 2011 and 2012.
Admitted: Taiwan and New York
Education: National Taiwan University (LL.B); Harvard Law School (LL.M.)
Languages: Mandarin Chinese and English
Tim Chou
Associate Partner
Tsar & Tsai
Mr. Tim Chou is an associate partner with Tsar & Tsai Law Firm. Tim joined the firm in 2006 and specialises in competition laws, mergers and acquisitions, labour law and dispute resolution.
Prior to joining the firm, Tim served as an official with the Taiwan Fair Trade Commission. He was responsible for monopoly, concerted actions, merger control and other vertical or horizontal restraints. Since joining the firm, Tim regularly advises multi-national and domestic clients on various competition law issues. He has successfully represented clients by defending them in antitrust investigations. He has also successfully represented clients to obtain approvals from the Fair Trade Commission.
Tim has extensive transaction experience in cross-border joint ventures, mergers and acquisitions and relevant transactions. His M&A experience spreads across a wide range of industry sectors, including the financial sector, media, telecommunications, energy, software, electronics and manufacturing.
Admitted: Taiwan
Education: National Taiwan University School of Law (LL.B. 1996); Georgetown: University Law Center (LL.M 2006)
Languages: Mandarin, English and Taiwanese Hokkien
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