Taiwan Focus: Sourcing funds through IPOs

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Higher turnover ratios

In addition to higher PE Ratios, the statistics also show that the turnover ratios (trading value/market capitalisation) on both the TWSE and the GreTai Market are higher than those of the HKEX or SGX, which proves the active transactions and higher liquidity in Taiwan's capital markets (see figure 2).

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Costs and sponsorship

Compared to the costs associated to list shares on the HKEX, SGX or on PRC relevant exchanges, the costs associated with Taiwan IPOs, like underwriting, legal and accountant fees, are the most reasonable. In addition, sponsors provide services with responsiveness and good quality, aiming to shorten the process of preparing and successfully listing to the greatest extent possible.

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Proximity to mainland China market

Taiwan, having similar culture and language with mainland China and a geographic advantage, is a great place to maintain close relations with the mainland China market. Taiwan is also the most convenient place for companies operating in other jurisdictions to enter into the China market. It is expected that in the post-Economic Cooperation Framework Agreement (ECFA) era, cross-strait cooperation will become closer. Taiwanese entrepreneurs who have successful businesses in mainland China or elsewhere may also find Taiwan's capital markets more attractive as Taiwan is their homeland and Taiwan investors tend to recognise and accept foreign companies established by Taiwanese businessmen.

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High-tech companies

In Taiwan, there are complete supply chains of high-tech industries, like semi-conductors, optoelectronics, information services, computer and peripheral equipment, communication and internet, which render Taiwan a unique environment for high-tech companies and the percentile of high-tech companies listed on either the TWSE or the GreTai Market is the highest among all industries. Given that Taiwan is such a platform for high-tech companies to source funds, IPOs and subsequent Secondary Public Offerings (SPOs) would be easier for foreign high-tech companies. Compared to other bourses, where the value of high-tech companies may be under-evaluated, the true value of such companies may be fairly reflected in Taiwan.

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Innovative industries

Taking the GreTai Market for example, in recent years, it continuously puts efforts on assisting innovative enterprises, such as biotechnology, pharmaceutical, online games, cultural and creative companies, in listing their companies' shares on the GreTai Market. With such vision and efforts, and as the new clusters are well established in Taiwan, it brings many benefits to foreign companies within such clusters and lets them enjoy growth and performance.

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Preparing for IPOs in Taiwan

According to the current unwritten law, an enterprise incorporated under the laws of China (excluding Hong Kong and Macau) is not eligible to be listed in Taiwan. However, the set game rule since 2008 is that mainland enterprises may establish an offshore holding company as the vehicle to apply for a Taiwan IPO (listing entity). Due to this, it is general practice that a restructuring is conducted before applying for a Taiwan IPO.

Until now, almost all of the listing entities are Cayman Islands companies, although neither the TWSE nor the GreTai Market requires so. The historical reason is that the shares of the listed company are required to be on par value of Ntd10 ($0.34) and Cayman Islands law is able to accommodate such need. This restriction was lifted in January 2012. Therefore, it is now more relaxed to choose the listing entity incorporated in any other jurisdiction, par value of the share and its currency. Hence, the need to restructure the group merely for Taiwan IPOs and the cost associated may be reduced. The current structure can even be maintained without restructuring if it fits Taiwan IPOs.

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Mainland Chinese and enterprises

The most common question that has been repeatedly asked is whether mainland Chinese, legal entities and organisations of mainland China (mainland Chinese and enterprises) can control the listing entity and what is the view of the Taiwanese authorities if the enterprise is controlled by mainland Chinese and enterprises?

The answers to the above questions are evolving. At the very beginning, even though mainland-based companies can apply for Taiwan IPOs through restructuring, the Taiwan authorities generally took a more favourable position towards a listing entity that is not controlled by mainland Chinese and enterprises. Provided that if a company controlled by mainland Chinese and enterprises would like to list its shares in Taiwan, it may do so through special-case permission granted by the Taiwan Financial Supervisory Commission (FSC). Having any of the following events, among others, shall be deemed as having controlling power over the listing entity: (1) directly or indirectly holding more than 30% of the shares of the listing entity; (2) controlling the majority of the votes pursuant to contracts among investors; (3) controlling the majority of the votes of the directors; (4) having the right to appoint or discharge the majority of directors; or (5) having other controls over the financial, operational, or human resources policies of the company pursuant to law or regulations or contracts.

Even though it is possible to have the shares listed in Taiwan though special-case permission, due to the lack of written rules and criteria for such permission, there is no case in which mainland Chinese and enterprises can officially apply for the special-case permission. Conversely, there are certain ways to avoid being deemed as a company controlled by mainland Chinese and enterprise, like reducing the shareholding percentage, chairperson, or changing the chairperson's nationality to non-PRC.

In August 2012, the FSC amended the Regulations Governing the Offering and Issuance of Securities by Foreign Issuers, which provides clear rules for applying the special case permission. The basic rule is that two conditions must be met in order to obtain permission: (1) shareholding in the listing entity held by Taiwanese enterprises is higher than shareholding held by mainland Chinese and enterprise; and (2) Taiwanese enterprises have effective control over such Company. In addition, the detailed application form, required documents, undertakings to be signed by the applicant and its Taiwanese shareholders, as well as the underwriter opinion form, are now in place.

Further, according to news reports in October 2012, the FSC is studying the possibility to lift the bans on such special-case permission for companies controlled by mainland Chinese and enterprise or even to establish so-called “T-Shares”, allowing a company incorporated under the Peoples' Republic of China to list its shares in Taiwan. However, no formal law or regulations have been issued. In the future it is possible the restrictions and bans on cross-strait economic activities will be gradually lifted. At the current stage, however, companies should carefully inspect the actual shareholding structure and make proper arrangements before formal filing either via general application or by special-case permission.

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Retaining lead underwriters

According to current rules, the foreign issuer shall retain a lead underwriter. The lead underwriter has to issue evaluation reports on matters such as whether the foreign issuer has met the requirements of relevant listing rules. In addition, the foreign issuer shall obtain two recommendation letters for listing from two or more underwriters, one being the lead underwriter.

Further, it is also very important to retain proper legal counsel and accountants. It is advised that the foreign company retain and have those sponsors to participate in the listing project at an early stage, as it is vital to have those experts to inspect the financial, legal and other conditions of the company pursuant to the listing rules and have the company rectify any no-compliance as soon as practicable.

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Criteria and application procedure

Except for those special criteria set for mainland China-related issues, other criteria for Taiwan IPOs are similar with those in other countries, like duration, cap size, profitability and shareholding dispersion requirements. It is suggested that interested parties seek underwriter's and legal counsel's advice beforehand.

The application procedure is quite streamlined. Figure 3 is the flowchart for the application of listing on the TWSE or the GreTai Market. It is a prerequisite that before a formal filing, the applicant shall have either been retained by the underwriter or traded its shares on the Emerging Stock Board for no less than six months. After the formal filing, it will usually take four to six months for all approvals and effective registrations.

After the financial crisis in 2008, Asia has become one of the key markets for investments. Especially, the economic cooperation between Taiwan and mainland China after the ECFA becomes closer and Taiwan has a unique platform and strategic position for the mainland China market. We therefore strongly believe foreign companies can benefit from Taiwan's capital markets and prosper.

Jennifer Wang

Partner

Chen & Lin

Jennifer Wang is a partner of Chen & Lin Attorneys-at-Law. Her expertise covers capital markets, M&A, antitrust and competition, banking and finance, corporate compliance and governance, and other general corporate and commercial transactions. Jennifer has extensive experience in assisting clients during corporate restructuring, overseas and domestic IPOs (including foreign companies' primary listing on the Taiwan Stock Exchange and the GreTai Market) and fund raising. She is also experienced in multinational and domestic M&A transactions with a wide range of merger, share swap, tender offer, stock purchase to asset and business acquisitions. In addition, she helps foreign clients making investments, establishing R&D centres in Taiwan, obtaining government cash grants, setting-up joint ventures and advising on anti-trust compliance. She is an expert at designing, drafting and negotiating various kinds of commercial agreements.

Jennifer serves clients from a wide range of industries. Some industries of the clients Jennifer has served or is serving include: semiconductor equipment, semiconductor, IC design, other hi-tech, online games, manufacturing, bank, cable TV, entertainment and food and beverage. She serves many leading multinational or domestic companies. Jennifer is named as one of the leading lawyers in the IFLR1000 (2013 edition).