On May 31, 2016, Bai Chi Gan Tou Digital Entertainment Co., Ltd (hereinafter “BCGT”), the major shareholder of Xpec Entertainment Inc. (hereinafter “Xpec”), announced its public tender offer plan targeting 38,000,000 common shares of Xpec from June 1 to July 20. The acquisition price of the public tender offer plan was NT$128 per share, which represented a premium of 22% over the original price, with the estimated total amount being NTD $ 4.86 billion. BCGT also promised to remit the payment by August 31. However, BCGT failed to remit the money before the deadline, prompting the Financial Supervisory Commission (the “FSC”) to declare that BCGT had maliciously breached the contract and failed to perform settlement.
Regarding disputes arising from the aforementioned public tender offer, on September 8, the Securities and Futures Investors Protection Center (the “SFIPC”) announced that investors who had participated in the public tender offer may register with the SFIPC to authorize SFIPC to make claims on behalf of investors against BCGT and its representatives. The FSC also affirmed that they would keep investigating the directors (including the three independent directors) of Xpec concerning any potential liability from any malpractice and malfeasance. The aforementioned disputes have shined a spotlight on the issue of the potential liability of independent directors of a target company in a public tender offer.
According to the current Article 14-1 of Regulations Governing Tender Offers for Purchase of the Securities of a Public Company (hereinafter, the “Regulations of Tender Offer”), after receiving the copy of the Public Tender Offer Report Form, the public tender offer prospectus, and other documents from the offeror, the target company shall promptly organize a review committee. The review committee shall be composed of the independent directors of the target company. And, if the number of independent directors is not sufficient to make a quorum or there are no independent directors, the review committee shall be composed of the members selected by the board of directors of the target company. The review committee shall review the fairness and reasonableness of the public tender offer conditions, and make recommendations to the company’s shareholders concerning the tender offer.
After the case between Xpec and BCGT, the competent authorities are planning to further require the review committee of the target company to verify the identity, qualifications and finicial state of the offeror. However, requiring the review committee to investigate the offeror will impose additional liability on the directors of a target company. According to the Principle of Legal Reservation (i.e., the peopele’s rights and obligations shall be specified by law), such liabilities should be specified in law, or at least properly the authorized under law.
According to Articles 8 and 202 of the Company Act, and Article 535 of the Civil Code, directors are responsible for the company’s business and shall bear the duty of care as a good administrator for the company. However, since the transaction parties in public tender offers are the offeror and the subscribers, rather than the target company, it can hardly be said that directors’ duty of care as a good administrator for the company should impose a duty on the directors of a target company to verify the identity, qualifications and finicial state of the offeror on behalf of or for the subscribers. In addition, according to Article 43-1 of the Securities and Exchange Act, the competent authorities are authorized to stipulate regulations only in respect of the procedural matters concerning public tender offers, and there is no authorization to regulate the liability of the target company’s directors. Therefore, it is doubtful that the competent authority could, without such authorization, impose additional liability on the directors of a target company by amending the Regulations of Tender Offer.
Also, the review committee is composed of the target company’s directors, who should be able to review the fairness and reasonableness of the public tender offer conditions on the basis of their understanding of the operation and financial state of the target company. However, it is doubtful whether the target company’s directors are able to verify the identity, qualification and financial state of the offeror. Thus, comparing to the current provisions, which only oblige the committee members to review the fairness and reasonableness of the public tender offer conditions, imposing an obligation on the target company’s committee members to perform the duty to verify may not be appropriate. A more reasonable and practical solution may be to require the offeror or its consultants to disclose or confirm the identity, qualification and financial state of the offeror and thus, the shareholders and investors of the target company can decide whether to participate in the public tender offer with sufficient information.
From viewpoint of how a duty ot verify may affect public tender offers, since the target company is not a transaction party, it is questionable whether a target company should be required to perform a duty to verify and effectively inject itself into the transaction. Furthermore, it is worth considering whether a target company may invoke such a duty to verify as a pretext to interfere in or hinder the process of public tender offer, causing unnecessary obstacles or interference in mergers or acquisitions between or among companies.