2008/2009 TAIWAN M&A POLICY AND ACTIVITY
(The Mergers & Acquisitions Review, written by Steven J. Hanley, Michael R. Fahey, and Chih-Shan Lee of Winkler Partners. Reproduced on this website with permission from the authors.)

• Overview of 2008/2009 M&A Activity
• General Introduction to the Legislative M&A Framework
• Developments in Corporate and Takeover Law and Their Impact
• Foreign Involvement in M&A Transactions
• Significant Transactions, Key Trends, and Hot Industries
• Financing of M&A: Main Sources and Developments
• Tax Law
• Competition Law
• Future Outlook

Overview of 2008/2009 M&A Activity

Taiwan saw 216 domestic M&A transactions valued at over $4.6 billion close in 2008. While the total number of transactions increased only slightly over the 197 recorded in 2007, their total value increased by nearly 30 per cent from 2007’s $3.2 billion. Official figures are not yet available for 2009, which is expected to see a decrease in the number of transactions due to the ongoing global financial crisis, which has hit Taiwan’s export oriented economy hard.

Although Taiwan’s GDP has fallen sharply in 2009 because of the crisis, the financial turmoil led directly to a string of acquisitions of the Taiwan operations of major international insurers by domestic financial groups who saw bargains. At the same time, Taiwan’s highly internationalized IT manufacturers continued to make strategic outbound investments as they seek to move up the value chain by developing their own brands. The most important development in 2009, though, has been media and property acquisitions in Taiwan by Taiwanese business groups that now operate primarily in China.

Forty-one domestic (including inward-bound) transactions were valued at over $62 million in 2007, while 124 were transactions of $15.6 million or less. This accurately reflects the predominance of specialized family-owned concerns in Taiwan’s economy. M&A activity was most common in the IT, electronics, construction, and communications sectors.

General Introduction to the Legislative M&A Framework

In Taiwan, the laws and regulations relevant to M&A activities are found in a number of statutes including:

• the Business Mergers and Acquisitions Act (‘BMAA’);
• the Company Act;
• the Securities and Exchange Act;
• the Statute for Upgrading Industries;
• the Fair Trade Act;
• the Labor Standards Act;
• the Statute For Investment By Foreign Nationals;
• the Financial Institutions Merger Act; and
• the Financial Holding Company Act.

In general, the BMAA supersedes other laws and regulations concerning M&A. Article 2 of the BMAA provides that any merger or acquisition shall be conducted pursuant to the provisions of that Act and that matters not provided for therein are governed by other relevant acts and regulations. One exception involves financial institutions, in which the Financial Institutions Merger Act and Financial Holding Company Act supersede the BMAA where there are conflicting provisions.

The BMAA was announced by the Taiwan government on 6 February 2002, and substantial amendments were subsequently promulgated on 5 May 2004. The intent of this legislation was to create an independent act to simplify the application of the various laws in connection with M&A activities, to streamline procedures and to avoid unnecessary and time-consuming amendments to the various other laws related to M&A. The main purposes of the Act are to simplify and facilitate M&A procedures, balance the interests of employees and employers in M&A transactions, and to provide tax benefits. In general, the BMAA regulates mergers, acquisitions, and corporate divisions.

The term ‘acquisition’ as defined in the BMAA means any company acquiring shares, business or assets of another company in exchange for shares, cash or other assets. However, the definition of ‘acquisition’ has been explained and limited by the Ministry of Economic Affairs to include only:

• the assumption or transfer of the whole legal entity;
• transfer of the whole of or substantial operations or assets;
• acquisition of the entire operations or assets of another company such that it will have a material impact on the acquiring company; and
• share exchanges.

Only acquisitions that fall under these categories qualify for benefits under the BMAA such as tax benefits and simplified procedures.

Two of the most widely reported economic stimulus activities within the last two years were the introduction of cash vouchers for consumers, and the liberalization of business and tourist ties with China (see Section III). Nearly all of Taiwan’s 23 million people were eligible to receive a NT$3,600 government-issued shopping voucher in January 2009, intended to give a $2.4 billion boost to the island’s sagging economy. The government is evaluating the issuance of a new round of shopping vouchers.

While the voucher programme and increase in the presence of Chinese businesspeople and tourists received substantial media coverage, the government also announced early this year that it would invest nearly $16 billion in infrastructure projects over the next four years, including the upgrading of airports around the island, highway projects, urban renewal and public transportation facilities. The government has also announced measures to lower interest rates, increase deposit insurance coverage, and offer tax incentives for key industries such as technology.

Developments in Corporate and Takeover Law and Their Impact

Although indirect Chinese investment in Taiwan quietly began several years ago through the Hong Kong subsidiaries of Chinese companies or through private equities based in third countries, a remarkable liberalisation of regulations governing Chinese investment over the past year is expected to turn the erstwhile trickle of investment into a flood.

In April of 2009, the Financial Supervisory Commission approved the Regulations Governing Securities Investment and Futures Trading in Taiwan by Mainland China Area Investors. While these regulations now allow market investments in companies listed on the Taiwan Stock Exchange and the Gretai Securities Market by Chinese Qualified Domestic Institutional Investors (‘QDII’), significant restrictions apply that will block true acquisitions by this route for the time being. Among these restrictions is a ban on Chinese QDIIs exercising substantive control over invested listed companies, a ban on the QDII or its representatives serving on the board of invested companies, and a 10 per cent cap on cumulative market acquisitions without special approval.

Chinese regulatory restrictions on investments by QDIIs in single markets are also a significant limiting factor. Nonetheless, even this incremental opening is a milestone for Taiwan’s capital markets. Further liberalisation of Chinese investment in Taiwan’s capital markets is expected once Taiwan and China’s financial authorities agree on the details of a much-anticipated memorandum of understanding on capital markets and financial services in general.

Of more immediate impact will be the remarkable liberalization of direct Chinese investment that occurred at the end of June 2009 when the Executive Yuan approved 192 types of Chinese investment in the manufacturing, service, and public construction sectors including the manufacture of passive electronic components, telecommunication services, and port development. In practice, Chinese investment in Taiwanese companies was previously entirely prohibited even if the Chinese investment came from a third country. The new regulatory framework for Chinese investment in Taiwan is essentially the same as the one that applies to other foreign investment, the principal difference being the limited number of sectors in which investment is permitted.

Another difference is that any Chinese investment by a Chinese firm owned by the Chinese military or otherwise related to military affairs is prohibited. Investments that are ‘politically, socially or culturally sensitive’ may also be rejected. A third difference is that if a Chinese investor takes an equity stake of one-third or more in a Taiwanese company with a capitalisation of NT$80 million or more, the Taiwanese company will be deemed a Chinese-invested company and is required to file financial statements with the Investment Commission under the Ministry of Economic Affairs.

Despite these restrictions, Chinese investors can now remit funds into Taiwan to establish companies, branch offices, or representative offices subject to approval by the Investment Commission or other relevant agencies. By the same mechanism, they may also acquire shares in existing companies, and if enough shares are acquired, the Chinese company can exercise management control. The upshot is that while Chinese investors cannot acquire or merge with Taiwanese companies through Taiwan’s capital markets (at least for now), they can do so by means of direct investment.

Significantly, these new regulations have been accompanied by a host of related administrative measures making it easier for Chinese investors and professionals to visit and work in Taiwan.

Chinese investment is defined as any direct Chinese investment from an entity that is more than 30 per cent invested by Chinese-sourced capital or is subject to substantive control from China. It is also important to note that any single or cumulative investment equivalent to 10 per cent or more of a listed company’s equity will be deemed a direct investment subject to approval by the investment commission. Still, many types of Chinese direct investment will be treated the same as any other foreign investment.

While it is too early to tell whether Chinese companies will make significant acquisitions in Taiwan in the short term, considerable anecdotal evidence in the business suggests that major Chinese companies tested the waters by filing applications for direct foreign investment in order to open branch or representative offices in Taiwan in the days following the liberalization of Chinese direct investment. Another sign of Chinese interest was a premature announcement that China Mobile would acquire 12 per cent of Taiwanese telecom operator FarEastone in the spring of 2009. This deal has fallen through for the time being because mobile telephone service was not among the sectors opened to Chinese investment.

In addition to the rapid liberalisation of Chinese investment, Taiwan’s legislature also amended the Financial Holding Company Act at the end of 2008. The most significant of the changes to this law is a requirement that any individual or group of related individuals who acquires more than 5 per cent of a financial holding company or its subsidiaries must report the acquisition or lose the right to vote with the acquired shares. This new requirement is intended to increase transparency and thereby dampen enthusiasm for some of the complex leveraged buyouts (often with significant offshore components) that Taiwan’s financial conglomerates have used to acquire competitors in recent years.

The amendments to the Act also make it easier for subsidiaries of financial holding companies to share information about their customers across the entire group. This should increase the appetite of larger holding companies to acquire smaller financial services companies since they will be able to better cross-sell other financial products to the customers of their acquired targets.

Foreign Involvement in M&A Transactions

Despite a dramatic contraction in Taiwan’s GDP, a number of significant inward and outbound transactions occurred at the end of 2008 and the beginning of 2009. These included US DRAM maker Micron’s $400 million purchase of now-bankrupt Qimonda AG’s 35.6 per cent equity stake in Inotera Memories, Inc (a joint-venture between Qimonda and Nanya Technology Corporation), and an NT$8 billion private placement deal by Japan’s Ltd’s Dai ichi Mutual Life with the Shin Kong Group that raised the Japanese insurer’s stake in Shin Kong’s insurance arm Shin Kong Life Insurance to 14.9 per cent and improved Shin Kong Life’s ratio of risk-based capital (‘RBC’) to 250 per cent. Both of these inward investments by major foreign investors were seen as strategic investments in sound Taiwanese companies whose foreign parent was a victim of the financial crisis or where the Taiwanese parent was experiencing cash flow problems.

Reversing trends over the past few years, Taiwan’s financial holding companies began buying back local insurers that had been previously acquired by foreign financial firms. This trend began when Fubon Financial Holding Co made a $600 million stock swap in late 2008 to acquire ING Life Insurance Co Ltd from ING Groep NV. The acquisition made Fubon Taiwan’s fourth-largest life insurer.

Then in January 2009, China Life, part of the Taiwan-based Chinatrust Financial Holding Co, bought most of Prudential Plc’s Taiwan unit for US $64 million. In the spring of 2009, Aegon sold Aegon Life Insurance (Taiwan) Inc to Zhong Wei, a Taiwanese joint venture between Meifu Property Development Group and Taiwan Glass Industry Corp. Finally, as this volume went to press, bids for AIG’s Nanshan Life Insurance were submitted by some 10 Taiwanese and overseas private equity groups for Nan Shan Life. The bids ranged from $1.7 billion to $2 billion. If the transaction closes as expected it will easily be the largest of the past year.

Outbound acquisitions of strategic foreign targets by Taiwan’s technology companies continued in 2008 to 2009, led by Taiwanese original design manufacturers (‘ODMs’) that are striving to create their own worldwide brands. The most prominent of these deals was HTC’s acquisition of One Touch, a San Francisco-based design firm. HTC, which is one of the world’s biggest manufacturers of smart phones, hopes that One Touch will help it design phones that HTC can sell under its own label.

Significant Transactions, Key Trends, and Hot Industries

The financial crisis had a major effect on M&A activity in Taiwan in 2008-2009. In particular, as alluded to above, the need for cash by major international financial service and insurance concerns led to opportunities for some of Taiwan’s major financial industry players to acquire the local operations of troubled firms such as AIG.

Of greater long term significance though was the acquisition of the China Times Group by Tsai Eng-meng, chairman of the Want Want Group, for $637.5 million. While the Want Want Group’s origins are in Taiwan, most of its operations are in China where it has become a dominant player in the food and beverage industry. Although the acquisition was made by Tsai and his family, rather than the Want Want Group, the acquisition of a major media group by interests with such close connections to China is unprecedented. A measure of the sensitivity of this acquisition came in May 2009 when the National Communication Commission imposed a number of significant restrictions on the management of the China Times Group’s two television stations, but then largely backed off after Tsai protested vigorously in a highly public campaign.

Another example of Taiwanese China-based firms making significant acquisitions in Taiwan was underway as this volume went to press. Ting Hsin Group, another food conglomerate with most of its operations in China, acquired 22 per cent of Taipei101, the world’s tallest complete building to become the building’s largest private shareholder. Ting Hsin has announced its intention to acquire a controlling stake in the building, although the Taiwanese government has announced that it has no intention of selling the substantial equity position it holds through various investment arms and state-controlled firms.

Taiwanese-backed conglomerates have invested an estimated $150 billion in China over the past two decades and in some cases have reconstructed themselves as primarily China-based businesses. Their acquisitions in Taiwan are significant in themselves but may also be preparing the way for Chinese firms with no connection to Taiwan to make acquisitions here in the not so distant future.

Financing of M&A: Main Sources and Developments

In general, the two main channels for raising capital for businesses in Taiwan are the same as in other countries, namely through equity or debt financing. Due to the significant number of local small and medium-sized enterprises in Taiwan, borrowing from financial institutions is still a key method of acquiring funds. Public companies also issue corporate debt to raise funds, with both standard and convertible corporate bonds being very common in Taiwan.

In the past, listed companies have been very successful in raising new funds with new share issues offered to the public. As a direct result of the ongoing financial crisis though, this method of raising funds along with convertible bonds has been less effective. Instead, listed companies have turned to issuing standard corporate bonds. Between 2005 and 2007, listed companies raised an annual average of more than $3 billion in new share issues. This amount fell to $771 million in 2008, and is expected to have fallen even more in 2009. Convertible bonds suffered similar declines. In 2006- 2007, $2.8 billion in convertible bonds were issued each year. In 2008, this declined to about $1.1 billion.

In 2009, more than $3 billion in convertible corporate debt matured. The Financial Supervisory Commission responded with a number of measures designed to soften the impact including allowing issuers to change issuing terms on approval of the issuer’s shareholders. In addition, issuers are required to consult with bond holders before changing terms. The Commission also began allowing issuers to issue new bonds for the express purpose of retiring existing debt.

Private equity was much less active in 2008-2009 than in previous years. However, AIG’s sale of its Taiwan operation Nanshan Life Insurance attracted bids from a number of major international private equity funds. The Financial Supervisory Commission, however, seems minded to place restrictions on the exit strategies for potential buyers. Private placements of shares meanwhile have become an increasingly important way of raising funds over the past year. In July 2009, for example, Compal Electronic subscribed to a 70 per cent share of a private placement by TFT-LCD panel maker Chunghwa Picture Tubes. Compal’s strategic investment was worth about $213 million and was intended to secure sufficient supplies of TFT-LCD panels for Compal, one of the world’s largest manufacturers of notebook computers.

Tax Law

Taiwan does not tax capital gains, but does assess on the seller a 0.3 per cent tax on the value of a securities transaction. It should also be noted that income tax could be triggered where an acquisition is made through purchase of assets or shareholding interests from a target company that does not issue securities.

Taiwan’s Ministry of Finance issued a letter of interpretation in October 2008, which changed the tax policy regarding share swap transactions, in particular, for transactions between an existing company and a dissolving company where shareholders will eventually acquire swapped shares of the existing company. If the value (based on the current price or the actual transaction price) of the existing company’s shares obtained by the dissolving company exceed the total invested value paid by the dissolving company’s shareholders to the dissolving company, then the excess value will be distributed as a dividend to the dissolving company’s shareholders.

Furthermore, dividends of this type shall be subject to income tax where the shareholder is an individual or foreign corporate shareholder. Where a shareholder of the dissolving company is a domestic corporate shareholder, the dividend will not be subject to income tax in accordance with the provisions in Taiwan’s Income Tax Act. However, individual or foreign corporate shareholders subject to income tax as a result of such dividend payments may be eligible for a reduction or return of the tax under relevant regulations.

For the calculation of income tax incurred by individual and foreign corporate holders, the Ministry of Finance issued another letter of interpretation in December 2008, in which the ‘total invested value’ paid by the dissolving company’s shareholders is defined as the ‘exact costs to obtain the dissolving company’s shares’.

The Finance Committee of Taiwan’s Legislative Yuan completed its review of the draft amendment of the Financial Institutions Merger Act in March 2009. The draft makes the following material amendments:

• the Financial Institutions Merger Act shall now apply to financial holding companies;
• expanded tax reductions and exemptions (including business and securities transaction taxes) incurred from mergers or acquisitions;
• an income tax exemption for income incurred as a result of share swap transactions; and
• losses incurred from the sale of bad debts due to a merger or acquisition may be amortized over a period of 15 years.

Although the draft amendment is pending review by the Legislative Yuan, it is expected that the general direction and spirit of the draft amendments will remain and be implemented as such by the competent authority.

Competition Law

The main objective of Taiwan’s fair trade regime is to maintain a competitive yet orderly market. Therefore, when considering whether to accept or reject any applications for business combinations (mergers), the guiding principle of Taiwan’s Fair Trade Commission (‘FTC’) is whether ‘the overall economic benefit of the merger outweighs the disadvantages resulting from restraint of competition’. As such, the FTC has full discretion to set special conditions to the approval of a combination.

The Fair Trade Act identifies five types of mergers that are subject to review by the FTC:

• where an enterprise and another enterprise are merged into one;
• where an enterprise holds or acquires the shares or capital contributions of another enterprise to an extent of more than one-third of the total voting shares or total capital of such other enterprise;
• where an enterprise is assigned by 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.

The 2009 merger between the Japanese electronics group Panasonic and Sanyo is an illustrative example that shows not only what triggers review, but also how mergers of completely foreign entities can be subject to review by Taiwan’s FTC if they have significant market share in Taiwan. By July 2009, Panasonic had acquired 51 per cent of Sanyo through public tender offers. Since Panasonic had thereby acquired more than one-third of Sanyo’s voting shares and direct control over Sanyo, the FTC reviewed the merger.

However, the FTC found that Panasonic’s market share in Taiwan for consumer electronic products such as rechargeable batteries, air conditioners, and washing machines was not significantly increased by the Sanyo acquisition. It therefore did not object to the merger because it did not find that the restraint to competition caused by the merger outweighed the overall economic benefits.

The Panasonic-Sanyo merger also shows that Taiwan’s FTC is less focused on antitrust consideration than its peers in other jurisdictions since this merger was delayed by lengthy antitrust reviews elsewhere. That Taiwan’s antitrust regime is relatively further borne out by the relatively low numbers of mergers it prohibits – just two mergers out of 65 reviewed were prohibited in 2008. Two more mergers have been prohibited in 2009 out of 22 reviewed. Indeed, the bulk of the FTC’s work is related to more consumer-protection oriented aspects of competition law such as prevention of price fixing, false advertisement and abuse of multi-level marketing schemes.

Future Outlook

It is difficult to overstate the speed at which Taiwan technology manufacturers have internationalized over the past 10 years. While their initial acquisitions of strategic foreign targets were sometimes disasters caused by lack of experience and a failure to appreciate the need for adequate due diligence (see Benq’s acquisition of Siemens Mobile), Taiwan’s highly ambitious and aggressive ODMs will continue to acquire foreign targets as they seek to create their own brands. Closer to home, Taiwanese tech-giants like the Hon Hai Group will continue to fund and acquire local companies and integrate them into their supply chains. These transactions will in general not require foreign counsel.

International private equity continues to play an important role in Taiwan’s financial sector and private equity funds are expected to launch acquisitions in Taiwan’s crowded banking sector in 2010 as the financial crisis eases.

The real question for Taiwan’s M&A market is when the Chinese will arrive and what they will acquire. Taiwan’s new administration elected in 2008 has moved far more quickly to open up Taiwan to Chinese investment than was thought possible. The legal framework is now largely in place and Taiwan’s stock and property markets are anticipating a wave of Chinese investment even as Taiwan’s economic fundamentals remain weak. These trends will accelerate if Taiwan and China agree as expected to a free trade agreement and a memorandum of understanding on financial services by early 2010.