2017 Mergers and Acquisitions Report: Taiwan

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2016 was again a robust year for the M&A market in Taiwan and we could call it a technology M&A year. There were quite a few public M&A transactions and some of them were notably huge deals involving either international or local leaders in the technology sector. For example, ASML acquired Hermes Microvision for $3.1 billion, while Micron acquired Inotera Memories for $4 billion. ASML and Herms Microvision are suppliers to semiconductor companies and Micron and Inotera Memories are major memory manufacturers. Meanwhile, ASE, one of the leading semiconductor companies in Taiwan, initiated a series of attempts in August 2015 to acquire SPIL, another leading semiconductor player in Taiwan, which continued into 2016. Finally, ASE and SPIL reached an agreement to jointly form a holding company to combine each other's strengths. In the process of ASE's attempts to acquire SPIL, various textbook strategies for hostile takeovers were implemented, such as injunctive relief (ASE sought injunctive relief to enjoin SPIL's convening of a shareholders meeting to approve a share exchange between SPIL and Foxconn) and white knight (such as introducing Tsinghua Unigroup after the attempt to exchange shares with Foxconn failed), among others; these are rarely seen in the local M&A market.

In addition, in 2016, a subsidiary of a Japanese company, Bai Chi Gan Tou Digital Entertainment (Bai Chi Gan Tou), failed to perform its payment obligations after the relevant conditions of its tender offer of a local listed online game company, XPEC Entertainment (XPEC), were successfully satisfied (the XPEC incident). The XPEC incident was the first fake tender offer in the history of Taiwanese M&A. The stock price of XPEC soared during the tender offer period, and many investors tendered their shares to Bai Chi Gan Tou due to the high acquisition premium. However, at the last moment, Bai Chi Gan Tou announced that it was financially unable to perform its payment obligations and suddenly the acquisition turned into a scandalous criminal investigation. Even the chairman of XPEC was indicted for embezzlement. This was the first case where a successful tender offeror failed to close a tender offer transaction. The regulator was alerted and it resulted in certain policy and regulation changes.

On the other hand, Taiwan companies continue to expand their M&A activities to offshore markets. For example, following the acquisition of Sharp, it was reported that Foxconn is now contemplating acquiring Toshiba.

Total M&A transactions in 2016 were lower than in 2015. According to Bloomberg's M&A Legal League Table Rankings, the total value of announced transactions in 2015 was $28.65 billion with a deal count of 268, while the total value of announced transactions in 2016 was $23.8 billion, with a deal count of 241. Conversely, back in 2014, the total value of announced M&A transactions was only $14.86 billion with a deal count of merely 192.

Both private and public M&A transactions are the driving forces of the M&A market in Taiwan. While public M&A transactions have been booming in 2015 and 2016, there have been quite a few private M&A transactions in the market as well. For example, there have been several acquisitions in the media industry, including the acquisition of TV channels and system operators. Also, there have been many attempts by PRC/PRC-invested companies to invest in Taiwanese companies. However, many of them were either rejected by the government or voluntarily withdrew their plan due to the sensitive cross-strait situation.

In 2016, the two largest public M&A transactions, ASML's acquisition of Hermes Microvision and Micron's acquisition of Inotera Memories, were both conducted by way of statutory share exchange pursuant to the newly effective amendments to the Taiwan Mergers and Acquisitions Act (the M&A Act). Under the M&A Act, an acquirer may issue new shares to the shareholders of the target company in exchange for their shares in the target company so that the acquirer may acquire 100% shares in the target company without obtaining the consent of each of the shareholders of the target company. The shareholders of the target company would become the shareholders of the acquirer after completion of the transaction.

Pursuant to the amended M&A Act, which became effective in January 2016, the consideration for a statutory share exchange can be cash, stock, or a combination of both. Both of the above M&A transactions adopted cash as the consideration for the share exchange, under which the shareholders of the target company received cash instead of the stocks of the acquirer as consideration. After the completion of the transaction, the acquirer obtained 100% of the shares in the target company and all of the shareholders of the target company were cashed-out.

There have been several driving forces in the structuring of an M&A deal in Taiwan. Given that the newly amended M&A Act allows for more flexibility regarding the consideration that an acquirer may offer to the shareholders of the target company, such as the cash-out type of share exchange as mentioned above, it should now be easier for an acquirer to achieve a 100% equity interest acquisition in a target company. Meanwhile, given the sensitiveness of PRC investment in Taiwan, acquirers and targets will also be spending more time structuring their transactions to meet the local restrictions/requirements regarding PRC investment in Taiwan, as well as their M&A goals.

Furthermore, pursuant to the XPEC incident, the authorities have strengthened the financial burden on a tender offeror and, from now on, a tender offeror of a public company may need to substantiate their financial plan much earlier than previously.

The main statutes governing M&A activities in Taiwan are the M&A Act, the Company Act, the Securities and Exchange Act and the Fair Trade Act. In addition, under the Securities and Exchange Act a set of tender offer rules are prescribed to govern the tender offer of public companies. Other statutes may also be relevant, such as the Labor Standards Act and the Tax related laws and regulations. The M&A Act was amended significantly recently and the amendments became effective on January 8 2016.

The main regulatory body in charge of public M&A transactions is the Securities Futures Bureau (SFB) of the Financial Supervisory Commission (FSC), the government agency in charge of public companies. The other relevant regulatory bodies include the Fair Trade Commission (FTC), the authority in charge of anti-trust clearance, and the Investment Commission (IC), the authority in charge of reviewing foreign investments. If the target holds any special licence, the authority in charge of the special licence may need to review the transaction.

The M&A Act was significantly amended in the middle of 2015 and the amendments became effective on January 8 2016. The amended M&A Act offers more flexibility in the type of considerations that an acquirer is allowed to offer in statutory M&A transactions, such as share exchange. It also reinstates the possibility of structuring a triangular merger under the Taiwan legal system. In 2016, we saw the two largest public M&A transactions adopt the new cash-out share exchange to achieve the acquisition of a 100% equity interest in a public company. With regards to a triangular merger, thus far, we have not seen any actual case of this sort.

Meanwhile, the tender offer rules were amended subsequent to the XPEC incident. According to the amended Regulations Governing Tender Offers for Securities of Public Companies, a tender offeror is required to provide documents to support its ability to settle the consideration mentioned in the tender offer. Such documents may be: a letter issued by a financial consultant qualified as a securities underwriter, or by a certified public account responsible for auditing and attesting the financial reports of public companies; or a letter of performance guarantee to be issued by a financial institution.

This means that a tender offeror may be required to have its acquisition fund in place at a much earlier stage of the tender offer. Moreover, the revised tender offer rules imposed more responsibility on the directors of a target company. The revised rules require the directors to review the identity and financial ability of the tender offer and the reasonableness of its source of funds in order to safeguard the interests of the shareholders of the target company. The disclosure rules for conducting a tender offer were likewise also strengthened.

Furthermore, the Labor Standards Act was amended at the end of 2016 with regard to the change of holiday schedule, overtime payment, work days and working hours, etc., and the authorities have been strengthening its enforcement. As a result, when conducting due diligence on the target company, the acquirer may need to pay more attention to such areas and carefully evaluate the relevant regulatory risks and contingent liabilities.

There are a few areas worth observing in this regard. First of all, with regards to media industries, the government and private sector are discussing whether to loosen restrictions on government and political parties' investment in companies operating TV channels or TV systems. Currently, the government and political parties are prohibited from investing in any TV channels or systems. As a result, many listed companies are prohibited from making investment in such companies, given that government operated funds oftentimes would invest in listed companies by acquiring shares from the local markets.

Meanwhile, PRC companies or PRC invested companies have been eager to invest in companies in Taiwan, such as semiconductor companies or online game companies. The Tsai administration's position in this regard will determine whether and how such M&A transactions could be structured and proceed.

The government is also contemplating significant amendments to the Taiwan Company Act. Given that the Act may be amended to a great extent, future M&A activities may be impacted. However, there are voices from the private sector against such amendments and it may take some time for the government and the private sector to reach consensus on whether and how the Company Act should be amended.

Information disclosure and insider trading are important and sensitive areas for public companies. However, local management sometimes underestimates their importance and fails to make the proper disclosures. Large public M&A transactions, in many instances, crossed the red line as regards insider trading and quite a few criminal investigations have been launched. Also in many instances, people have tried to manipulate the stock prices of listed companies in order to reap improper gains. For example, with regard to the XPEC incident, the chairman of XPEC was alleged to have assisted others to drive up the stock price of XPEC via several avenues, including a proposed tender offer, so that they could gain the profits of selling XPEC's shares on the market during the tender offer period.

Information disclosure is an area public companies need to pay more attention to when they plan M&A transactions. This would involve the proper information to be disclosed, as well as proper timing in disclosing certain information to the market. Most important of all, before proper information disclosure, the insiders in a public company should not trade in any shares of the public company. Professional advice should be sought regarding this issue.

Another area that parties to an M&A transaction should pay more attention to is compliance with labour law requirements. As described above, the Labor Standards Act was amended at the end of 2016 and the labour authorities have been strengthening the enforcement measures to further protect the rights and benefits of employees. Whether a target company is non-compliant with labour laws and whether there is any relevant contingent liability should be carefully assessed and ascertained.

In Taiwan, M&A transactions are often subject to regulatory approvals, such as foreign investment approvals or PRC investment approvals. For the industries that are subject to special licence/permit requirements, such as banks, securities firms, insurance companies, etc., the approval from the competent authority of such industries, such as the the FSC, would need to be obtained in advance. Meanwhile, any M&A transactions triggering the pre-closing antitrust filing threshold would need to obtain antitrust clearance before closing. Given all these, whether and how a regulatory approval can be smoothly obtained would be critical for the completion of an M&A transaction in Taiwan. As such, it would be advisable for the investors intending to conduct an M&A transaction in Taiwan to seek professional assistance, in advance, in order to better understand the required regulatory approvals and the application process involved.

Given that under the Taiwan Company Act, material decisions require the approval from holders of two-thirds of the voting shares of a company, in order to gain absolute control of a public company, an acquirer should aim to acquire or control at least 67% of the shares in a public company. In practice, given that not all of the shareholders attend shareholder meetings, to control the management or operation of a listed company, sometimes it is 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 a particular listed company.

In local practice, the conditions of a tender offer usually include: the minimum and maximum number of shares that the shareholders of the target company shall agree to tender during the tender offer period; the tender offeror obtaining the required government approval, if any (such as antitrust clearance and foreign investment approval, for example); and no material adverse event occurring (subject to the approval of the FSC).

In a tender offer transaction or other types of M&A transactions between public companies, we have rarely seen break-up fee arrangements.

Large private M&A transactions often adopt a completion accounts mechanism under which the purchase price is adjusted in accordance with the post-closing audit of the financial status of the target company as of the closing date. For transactions with a smaller value, it is more usual for the parties to adopt the locked box mechanism. The earn-out mechanism and escrow arrangements are commonly seen in private M&A transactions.

The customary closing conditions attached to a private takeover offer usually include, among others: that the seller's representations and warranties remain true and correct; that the required government approval (if any) has been obtained; that the required third party consent (if any) has been obtained; that no material adverse event has occurred; that no action or government order is seeking to deter or enjoin the proposed M&A transaction; and that other commercial arrangements required by the parties have been completed or achieved (this would usually be structured based on the results of due diligence).

In the event that any party in a private M&A transaction belongs to a foreign corporate group, such a party would normally require that the transaction documents be governed by the law of the foreign country where the headquarters of the foreign corporate group is located, and any dispute arising from the transaction documents be resolved via the court of a foreign jurisdiction or an arbitration proceeding conducted outside of Taiwan. The local parties would normally accept such arrangements.

Warranty and indemnity insurance seems to be a better way for the seller and buyer to allocate their respective risks in an M&A transaction. Although we have seen such a concept being discussed in local M&A transactions, the actual implementation of such mechanism is rarely seen.

Taiwan has a leading position in the semiconductor industry. Given the global trend of M&A activity by semiconductor players, it can be anticipated that there will be more M&A deals in the Taiwan market in the semiconductor industry in the coming year. Meanwhile, as the PRC has become one of the major players in the semiconductor industry, it can be anticipated that more and more PRC semiconductor companies (other than Tsinghua Unigroup) will continue to attempt to acquire Taiwanese semiconductor companies. Also, as local semiconductor companies face more and more competition in the market, to ensure their leading position in the semiconductor industry they may also need to strengthen their operations by conducting more M&A transactions, either locally or overseas. Counsels will need to pay more attention in planning such cross-border M&A activities in terms of coordinating the legal requirements in different jurisdictions and, more importantly, whether and how the various required government approvals can be obtained.

About the author
		Lihuei Mao Partner, Lee and Li Taipei, Taiwan T: 886 2 2183 2274 F: 886 2 2713 3966 E: lihueimao@leeandli.com W: www.leeandli.com Lihuei (Grace) Mao is a member of the Taiwan Bar Association as well as the New York State Bar Association. Mao's practice includes corporate and investment law, M&A, securities law, anti-trust law and labour law. Mao has advised many private equity funds and international groups in different industries on various complex acquisitions. She has also advised various foreign companies in conducting IPOs in Taiwan. Recently, Mao has been involved in advising many PRC companies in evaluating and structuring their investments in Taiwan and has been invited to give speeches on PRC investment issues in China and in Taiwan.

About the author
		Patricia Lin Senior counsel, Lee and Li Taipei, Taiwan T: 886 2 2183 2235 F: 886 2 2514 9841 E: patricialin@leeandli.com W: www.leeandli.com Patricia Lin is a senior counsel at Lee and Li. Her practice focuses on banking, securities, capital markets, financings (particularly structured and aircraft financing) and mergers and acquisitions. Lin has assisted many international capital market offerings (DRs, ECBs and Formosa bonds). Lin is an M&A expert in both general and highly regulated financial and telecom industries. She advised on the first ever PRC investment in the LED industry.

About the author
		Ken-Ying Tseng Partner, Lee and Li Taipei, Taiwan T: 886 2 2183 2179 F: 886 2 2713 3966 E: kenying@leeandli.com W: www.leeandli.com Ken-Ying Tseng currently heads Lee and Li's M&A practice group (non-financial sector). She received an LLM from Harvard Law School. Having advised on various forms of mergers and acquisitions, she is experienced in resolving both legal and commercial issues. She has assisted many multinational corporations, such as BASF, Henkel, Yahoo!, AT&T, Arrow, Bureau Veritas, Aleees, DIC, Sony, Micrel, NTT DoCoMo, Energy Absolute, Feima, Qualcomm, Olin and others in their M&A activities. Tseng has been recognised as a leading lawyer in the M&A field by IFLR1000 from 2014 to 2016 and by Asialaw in 2013, 2014, 2016 and 2017.

About the author
		Robin Chang Partner, Lee and Li Taipei, Taiwan T: 886 2 2183 2208 F: 886 2 2514 9841 E: robinchang@leeandli.com W: www.leeandli.com Robin Chang is a partner at Lee and Li and the head of the firm's banking practice group. His practice focuses on banking, capital markets, international finance, and mergers and acquisitions. He is a member of the Taipei Bar Association. Chang advises major international commercial banks and investment banks on their operations in Taiwan. He also advised six local banks on their customers' investments in structured notes issued by Lehman Brothers entities. He has also been involved in many M&A transactions of financial institutions, including AIG's sale of 97.57% of the shares in Nan Shan Life Insurance Company.