Structure and process, legal regulation and consents
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
The most common structures for private M&A transactions in Taiwan are share purchase, asset purchase and merger (or share exchange).
Share purchases tend to be the most commonly seen structure for private M&A transactions in Taiwan, as they are often more tax efficient for the selling shareholders, and can be closed relatively quickly while maintaining the target company’s corporate structure.
Asset purchases are used where the buyer desires to purchase only a specific asset or business, and seeks to exclude other assets or liabilities from the acquisition. The specific assets or businesses to be acquired will be specified in the transaction documents, but the actual transfer of those assets or businesses may be subject to further consents and procedures, particularly where contracts or employees are to be transferred.
Mergers and share exchanges can be used to acquire full ownership of a Taiwan company in a situation where a minority of shareholders is unwilling or unavailable to sell their shares by means of a share purchase. In a merger, the target company is merged into the buyer, with the buyer as the surviving company (equivalent to a forward merger in other jurisdictions); and in a share exchange, the target company becomes a wholly-owned subsidiary of the buyer (equivalent to a reverse triangular merger in other jurisdictions).
Additionally, certain hybrid or alternative approaches, such as a statutory spin-off or a general assumption of assets, may be available to depending on the specific circumstances of the target company.
Timetables for private M&A transactions can vary widely in Taiwan, particularly with respect to due diligence and pricing negotiations. Any required regulatory approvals or third-party consents will also delay the closing of the transaction. Otherwise, once a deal has been reached and the definitive agreements are signed, a share purchase is typically the quickest to close, as it requires only that the selling shareholders be available to transfer and deliver their shares to the buyer. Mergers and share exchanges require that the target company convene a shareholder meeting, with notice periods prescribed by statute, and thus take somewhat longer. The timetable for asset purchases is very case-dependent, and largely hinges on the consents and procedures needed to transfer the particular target assets.
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
Depending on the structure of the transaction, mergers and acquisitions involving private companies in Taiwan are governed by several laws and regulations, including:
- the Company Act, which provides the basic framework for transactions involving Taiwan companies, including provisions regarding transfers of shares, mergers, and sales of assets;
- the Business Mergers and Acquisitions Act, which governs mergers, share exchanges, spin-offs, and certain other statutory acquisitions;
- the Statute for Investment by Foreign Nationals and the Act Governing Relations between the People of the Taiwan Area and the Mainland Area and the rules thereunder, which apply to transactions that involve foreign investments or dispositions, and in particular, investments from mainland Chinese investors (ie, China);
- the Fair Trade Act, which sets the thresholds and procedures for antitrust review; and
- the Labour Standards Act, which governs employee matters.
While the parties are free to specify their choice of governing law in the transaction documents, the actual act of transferring shares, a businesses or assets in Taiwan, as well as any corporate actions to be taken by a Taiwan company, will nonetheless be subject to Taiwan law, and thus it is typically advisable to use Taiwan law as the governing law for consistency.
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
In Taiwan, buyers can expect to acquire full legal title to target shares or assets, and sellers are expected to give representations and warranties that they have full legal title to the target shares or assets, free from encumbrances, and that they have capacity and authority to execute such transfer.
Shares of private companies in Taiwan are typically transferred by means of physical share certificates, which must be chopped (endorsed) by the seller and delivered to the buyer. Title to shares is legally transferred upon the completion of these steps, but the target company should also update its company registration (to the extent applicable) with the relevant authority, to publicly reflect any applicable changes to the target company (such as changes in the directors).
Transfers of assets are typically reflected by the parties signing a transfer agreement and physically transferring possession of those assets to the buyer. In the case of certain assets such as real estate, vehicles and intellectual property, there are specific applications and registrations that need to be made with the relevant authority.
Beneficial ownership is recognised only to a limited extent under Taiwan law, and thus a buyer must acquire legal title to be assured of having full rights over shares or assets in Taiwan.
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
In a share purchase where the company has issued share certificates, each selling shareholder must execute the transaction documents and physically endorse and deliver its share certificate to the buyer. This can be logistically difficult where the target company has a large number of shareholders. However, private companies in Taiwan are frequently closely held by a few groups of friends and relatives, and it is not uncommon for the controlling shareholders to have taken steps that can mitigate these issues, such as holding the share certificates in central custody or obtaining powers of attorney from minority shareholders to negotiate and act on their behalf.
If there are minority shareholders who are unwilling or unavailable to sell their shares, the buyer can acquire full ownership of the target company by means of a merger or share exchange. In the case of a private company, a merger or share exchange requires the approval of a majority of shareholders at a shareholder meeting where at least two-thirds of the shares are present. Once approved and effected, the buyer acquires either all of the assets and liabilities of the target company (in the case of a merger) or all of the shares of the target company (in the case of a share exchange). Any minority shareholders that dissent to the merger or share exchange are entitled to exercise appraisal rights, in which case the company would be required to petition a Taiwan court to determine a fair price for their shares.
Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
In an asset purchase, the parties are generally free to specify the assets and liabilities to be included or excluded at their discretion. Any assets or liabilities that are not specifically transferred to the buyer can be presumed to remain with the seller. An exception is where a statutory spin-off or general assumption is used, in which case there are certain shared liabilities required by statute.
The transfer of certain assets such as real estate, vehicles and intellectual property require specific applications and registrations that need to be made with the relevant authority. If employees are to be transferred to a new entity, their consent will be required; similarly, the assignment of any contracts to a new entity also typically requires consent from the counterparty, depending on the provisions of the contract.
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
Foreign buyers are required to obtain foreign investment approval prior to acquiring a Taiwan company, including when acquiring a minority interest or forming a new Taiwan company. Foreign investment is generally permitted in Taiwan, except in a limited number of industries where foreign investment is restricted or prohibited for national security reasons, such as telecommunications, mass media and certain transportation sectors.
Investment from China is subject to a separate set of restrictions and very high scrutiny. In contrast with other foreign investment, Chinese investment in Taiwan is generally prohibited except in particular industries that have been specifically opened by the government. Even in these cases, the interpretation of the rules and the level of expected scrutiny can vary depending on the prevailing political climate, and experienced Taiwan counsel is essential for buyers who may have any degree of Chinese ownership (including minority, indirect or beneficial ownership).
Antitrust review may also present an obstacle in private acquisitions. Taiwan’s antitrust thresholds include both revenue and market share criteria, so companies with low revenue but relatively high market share may still trigger the requirement. Issues regarding market share can sometimes prolong the review, as there is often considerable ambiguity regarding what should define a particular company’s market share.
Additional regulatory authorities may be involved in certain regulated industries, such as financial institutions, telecommunications and media. Pre-approval from the Central Bank of Taiwan may also be required if the closing of the transaction requires a large amount of foreign currency to be exchanged into Taiwan dollars.
Are any other third-party consents commonly required?
In a share purchase or share exchange, the target company retains its corporate structure, and thus third-party consents are typically not needed unless specifically required, for example in the case of a change of control provision in a contract or under the terms of a particular licence or permit.
In an asset purchase where the business is being transferred to a new entity, employees will need to consent to be transferred to the new entity; similarly, the assignment of any contracts to the new entity also typically requires consent from the counterparty, depending on the provisions of the contract.
Must regulatory filings be made or registration fees paid to acquire shares in a company, a business or assets in your jurisdiction?
Regulatory requirements are discussed above in question 6.
Advisers, negotiation and documentation
In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
Financial advisers are sometimes retained by parties to assist with communicating with the counterparty and providing advice on pricing and other matters, although their involvement in Taiwan transactions remains rare. More commonly, accountants are retained to assist with financial and accounting due diligence. The terms of the appointment are determined case-by-case.
Duty of good faith
Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?
The Civil Code of Taiwan recognises a pre-contractual duty to act in good faith. A party that acts dishonestly or in bad faith during contract negotiations may be liable for damages caused to the other party, even if the contract is not ultimately signed.
What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
Transaction documents in Taiwan are conceptually similar to other jurisdictions. Primary documents may include merger agreements, share exchange agreements, share purchase agreements, and asset sale agreements, depending on the structure of the transaction. Ancillary documents, such as shareholder agreements or voting agreements, may also be used depending on the needs of the transaction.
Are there formalities for executing documents? Are digital signatures enforceable?
In Taiwan, contracts are typically executed by using chops, that is, stamps or seals engraved with the name of the signing party. Where the signing party is a company, two chops will be used, one with the name of the company and one with the name of the company’s chairperson.
It is also customary in Taiwan for the parties to mark each page of a contract, either by chopping across the edges of each page of the contract, or by signing or initialling on each page.
Although there is no explicit rule prohibiting digitally signed agreements, courts in Taiwan continue to give more evidentiary weight to original signatures, and thus it is customary in Taiwan for parties to execute documents in person or exchange original signatures by mail. Contracts are frequently executed in duplicate so that each party can hold an original document.
Due diligence and disclosure
Scope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
As in other jurisdictions, the scope of due diligence can vary widely, typically depending on the amount and risk profile of the investment. Matters that are typically covered include corporate structure and organisation, permits and licences, litigation and government investigations, finances, material contracts, intellectual property, and employee matters. Buyers are expected to conduct their own due diligence, including preparation of due diligence reports.
Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
As the Civil Code of Taiwan recognises a pre-contractual duty to act in good faith, a seller can be liable for pre-contractual or misleading statements. The transaction documents may include a provision that limits seller liability only to those express representations and warranties in the definitive agreements, but a court may find that such limitation should not apply where there is evidence of fraud or bad faith.
Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
Limited basic corporate information is available for all Taiwan companies, including the total authorised and issued share capital, and the names and respective shareholdings of directors and supervisors. Notably, full shareholding information is not publicly available, unless all of the shares are held by the directors and supervisors.
Additional searches can be performed to check for litigation records or administrative penalties, but such publicly available information is limited and may not be complete.
Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
In general, if a buyer has knowledge of circumstances that constitute a claim before signing, the seller may be able to defend against liability in regard to this claim, but because enforcement of such provisions has not been significantly tested in the courts, it is generally advisable that the parties should carefully define the coverage of knowledge to avoid any unnecessary disputes.
Pricing, consideration and financing
How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
Pricing in private transactions may be initially proposed based on a valuation methodology, but tends to be heavily negotiated regardless of the starting point. A local financial adviser can be helpful for choosing an appropriate valuation methodology and managing expectations between the buyer and seller, although their involvement in Taiwan transactions remains rare.
The locked-box structure, where the purchase price is fixed on signing, tends to be more common in Taiwan because of its simplicity and certainty for the sellers. For foreign buyers, if a working capital or closing adjustment is used, the buyer may be required to amend its foreign investment approval application to reflect the final purchase price, so local counsel should be consulted to ensure that this does not affect the timing of the transaction.
Form of consideration
What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
Cash is the most common form of consideration. Other forms of consideration are technically possible, including shares, but are uncommon in private transactions. In particular, for foreign buyers that need to obtain foreign investment approval prior to closing, the authority typically disfavours non-cash consideration.
Except for statutory mergers or share exchanges, there is no explicit statutory obligation to pay multiple sellers the same consideration in respect of an acquisition by way of a sale and purchase agreement, but such arrangements might risk later being challenged as being dishonest or misleading in dealing. Foreign buyers subject to foreign investment approval may also have to justify such arrangements to the authority.
Earn-outs, deposits and escrows
Are earn-outs, deposits and escrows used?
Earn-outs, deposits and escrows are sometimes used and are becoming more acceptable among Taiwan practitioners. When used, they are sometimes limited only to management or controlling shareholders. For earn-outs in particular, there is often uncertainty as to whether the earn-out compensation can be treated as part of the original purchase price for tax purposes, which may lead to adverse tax consequences for the sellers.
How are acquisitions financed? How is assurance provided that financing will be available?
Outside of the leveraged buyout context, acquisitions are typically financed using the buyer’s own funds. Bridge loans may be used in roll-up structures where the sellers are expected to subscribe to shares of the buyer, prior to receiving the purchase price for their shares.
If a transaction is dependent on the buyer’s financing, the sellers may ask the buyer to provide a commitment letter or proof of internal approval from the financing bank prior to signing.
Limitations on financing structure
Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
There are no specific restrictions on financings structures; however, a seller may be restricted from giving financial assistance to a buyer, as the Company Act contains certain restrictions on the ability of a Taiwan company to lend to any shareholder of the company or any other person. Moreover, the Company Act prohibits a Taiwan company from serving as a guarantor of any nature, unless otherwise permitted by any other law or by the articles of incorporation of the company.
Conditions, pre-closing covenants and termination rights
Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
Private M&A transactions will normally be subject to closing conditions, except in very simple share purchases that are not subject to regulatory approvals. Customary closing conditions include accuracy of representations and warranties, compliance with pre-closing covenants, absence of material adverse effect on the target company, and obtaining required consents and approvals. Additional closing conditions may be negotiated and specified depending on the buyer’s due diligence.
What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
The transaction documents will typically require that the parties use reasonable efforts to satisfy the closing conditions, with a higher level of obligation given for closing conditions that are under a party’s control, such as internal approvals. Additional obligations may be imposed depending on the nature of the transaction and the closing conditions involved; for example, if a key third-party consent is required, or if the parties anticipate potential difficulties in obtaining foreign investment approval or antitrust approval.
Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
Pre-closing covenants are typically included in the transaction documents. Customary pre-closing covenants include operation of the business in the ordinary course, reasonable efforts to satisfy the closing conditions and complete the transaction, and notification of any fact or condition that may impede the closing of the transaction. Additional pre-closing covenants may be negotiated and specified depending on the buyer’s due diligence.
Performance of pre-closing covenants is typically included as a condition to closing, and thus breach of the pre-closing covenants typically provides the buyer with the right to choose not to close the transaction. Termination fees or specific penalties are sometimes tied to a breach of pre-closing covenants, but are relatively uncommon for private transactions in Taiwan.
Can the parties typically terminate the transaction after signing? If so, in what circumstances?
The transaction documents will typically provide for several termination rights, including where the parties fail to close by a long-stop date, where there is a material breach by a party, or where the closing conditions are otherwise unable to be fulfilled.
Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
Break-up fees and reverse break-up fees are sometimes used, but are relatively uncommon for private transactions in Taiwan. As such, there are no customary terms for such arrangements. There are no specific restrictions on break-up fees, but because enforcement of such provisions has not been significantly tested in the courts, it is generally advisable that the parties should keep the amount of such fees reasonable in light of their respective costs and risks.
Representations, warranties, indemnities and post-closing covenants
Scope of representations, warranties and indemnities
Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
Seller representations, warranties and indemnities are typical in private M&A transactions. Sellers will typically represent as to their authority to enter into the transaction and their valid title to the shares being sold. The controlling or management shareholders, or sometimes all of the sellers, will also typically represent as to the condition and operations of the company, including due organisation, compliance with laws, permits and licences, litigation and government investigations, finances, material contracts, intellectual property, employee matters and tax matters. Additional representations and warranties may be negotiated and specified depending on the buyer’s due diligence.
Indemnities in a purchase agreement or merger agreement typically cover a seller’s breach of representations, warranties and covenants. Depending on the relative positions of the sellers, indemnities are sometimes provided only by the controlling or management shareholders.
Limitations on liability
What are the customary limitations on a seller’s liability under a sale and purchase agreement?
Limitations on seller liability vary widely depending on the dynamics of the transaction, particularly for private transactions. For example, sellers may sometimes insist on several and not joint liability, particularly in the case of minority shareholders where the controlling or management shareholders are willing to take full liability. Sellers may also ask for a cap on indemnification (which may be as high as 100 per cent of the purchase price), a de minimus threshold for indemnification, and limitations on the survival periods for breaches of representations and warranties.
Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
Representation and warranty insurance has recently been introduced in Taiwan, but their use remains rare.
Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
Post-closing covenants are commonly included in transaction documents, but their scope can vary widely depending on the interests of the parties. For example, buyers often request that sellers give a noncompetition and nonsolicitation covenant for a period of time following the closing of the transaction. Sellers will sometimes request that the buyer give a commitment to maintain the target company’s existing employees for a minimum period of time after closing.
Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
For sales of Taiwan shares where share certificates have been issued, a securities transaction tax of 0.3 per cent is imposed on the transaction price. The tax is the legal responsibility of the seller, and may be withheld by the buyer on behalf of the seller when the purchase price is paid to ensure payment and a clean title, and the amount can also be allocated among the parties through reimbursement.
Stamp duty is also imposed on contracts executed within Taiwan for the sale of real property or movable properties.
Corporate and other taxes
Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
Currently, sales of Taiwan shares where share certificates have been issued are exempt from capital gains and income tax, except to the extent that alternative minimum tax applies. Sales of other assets are subject to corporate income tax. As taxes are imposed on sales, sellers are expected to bear the costs of these taxes. However, if the shares are held via one or more layers of holding companies, taxes could apply at each level and would need to be analysed separately.
Employees, pensions and benefits
Transfer of employees
Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
When a buyer acquires the shares of a Taiwan company by means of a share purchase or share exchange, the target company’s existing employment contracts are unaffected by the transaction, and thus the existing employees remain employed under the same terms by the target company.
When a buyer acquires a Taiwan company by means of a merger, a statutory spin-off or a general assumption of assets, the affected employees must be served written notice at least 30 days prior to the closing of the merger informing them of the proposed transfer of their employment to the buyer. Such employees will then have 10 days from the receipt of such offer to accept or reject the new offer. Any employee who rejects the offer is entitled to receive a severance payment in accordance with Taiwan labour laws when the merger is effected and his or her employment is terminated. Employees who accept (or fail to reject) the offer will be automatically transferred to the buyer upon the effectiveness of the merger.
When a buyer acquires a business or assets from a Taiwan company by means of an asset purchase, employees will not be automatically transferred. Each individual employee will need to agree to resign from his or her existing employment and accept new employment with the buyer. Typically the buyer will offer the target employees at least equivalent compensation and recognition of prior years of service, but additional inducement may be appropriate depending on the case or individual.
Notification and consultation of employees
Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
Except for a merger, statutory spin-off or general assumption of assets, generally an acquisition by itself would not trigger any obligation to notify or consult with employees, unless there is a relevant requirement under a collective bargaining agreement with a labour union or if there is the possibility that the transaction may result in a mass redundancy of employees, as defined under the Taiwan labour laws.
Transfer of pensions and benefits
Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
Most employees in Taiwan are now enrolled under a national pension plan under the Labour Pension Act, which is a defined contribution plan that maintains individual accounts for each employee. These accounts are portable and thus the employees will retain their accumulated value when transferring to a new employer.
Some companies may have employees that are enrolled under pension plans governed by the Labour Standards Act, a legacy defined benefit plan that is applicable only to employees hired prior to July 2005. These accounts are considered assets of the employer and are not transferrable except in limited situations, such as in a merger, provided that certain funding requirements and procedures are satisfied. If a target employee’s pension benefit is unable to be transferred, the parties may need to agree on a method to cash out or buy out the employee’s accumulated pension benefit as an incentive for the employee to transfer to the new employer.
Update and trends
What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
The Legislative Yuan (the national legislature of Taiwan) passed an amendment to the Company Act on 6 July 2018, approving the largest revision to the Act since 2001. It is noteworthy that one of the major purposes of this amendment is to foster start-up companies, and we believe that some of these provisions would also offer more flexible tools for private M&A transactions in Taiwan, such as additional flexibility on voting rights for preferred shares, the elimination of the par value requirement, and the confirmation of the legality of shareholders’ voting agreements in respect of allocation of board seats.
In terms of deal size in the domestic market or inbound transactions, there are no noticeable upward or downward trends. Larger-sized deals, such as Micron’s purchase of Inotera, are largely a factor of the specific company rather than increasing trends in valuation. However, for outbound deals, deal size has been increasing, perhaps as more Taiwan companies are becoming more and more familiar with overseas acquisitions. Even traditional companies with large government stakes, such as Taiwan Cement Corporation, have ventured out of Taiwan to make acquisitions.
In addition, several sectors are undergoing consolidation: industrial computers (IPC), passive components and pharmaceuticals. This year we have seen multiple investments and control transactions in these sectors, involving publicly held consolidators such as Yageo, Posiflex, Portwell, Lotus Pharmaceuticals, Formosa Labs and Bora Pharmaceuticals. The manufacturing sector, meanwhile, posted an increase in revenue for the sixth quarter in a row, despite a lower than expected electronics demand. The growth came from high-performing traditional industries, such as base metals and plastics. We expect these trends will have a downstream effect on overall private company M&A in Taiwan.