In response to the recent failed tender offer by a Japanese firm for the Taipei Exchange-listed game developer XPEC Entertainment Inc. (“XPEC”), the Taiwan Financial Supervisory Commission (“FSC”) on September 28 announced a draft proposal of new rules regulating offers to purchase shares of public companies in Taiwan.
XPEC represented the first default on a tender offer settlement in Taiwan’s history. Investors who had purchased XPEC shares following announcement of the tender offer bid in May suffered massive losses when the Japanese bidder announced its intention to forego closing of the tender on August 30.
Current tender offer rules in Taiwan are comparable to rules in developed securities markets worldwide, with the exception that the bidder is not required to purchase tendered shares exceeding its intended acquisition quota. With the proposed rule revisions, bidder eligibility criteria and procedural requirements on the part of the bidder and the target company are further tightened, the salient points of which are:
- Guarantee of performance: Cash tender offers are required to be accompanied with either a guarantee issued by a financial institution guaranteeing the performance of the bidder, or a confirmation letter issued by a licensed and independent securities firm or accountant affirming that the bidder possesses the financial resources to complete the acquisition.
- Heightened disclosure: The bidder shall, among the extensive information already required to be disclosed in connection with the tender offer, disclose in detail its intended sources and plan of funding to complete the acquisition, along with the contracts securing such funding, and the reasonableness of its funding plan, including an analysis of the bidder’s most recent 2-year financial statements from solvency, liquidity, and profitability perspectives. Bidder shall also disclose the approval status of all governmental authorities whose approvals are required to complete the acquisition, and the fact that it has already paid the entire acquisition amount into the settlement account of the designated clearing bank. Further, the bidder shall provide a formal statement of undertaking regarding its intention to complete the acquisition. In the event that the acquisition amount is not paid into the settlement account, offerees may withdraw from the tender offer.
- Additional target company obligations: In rendering its recommendation of the tender offer to target company shareholders, the tender offer review committee of the target company is now required to conduct a more in-depth investigation into the identity and financial capability of the bidder, including an assessment of the source of the bidder’s acquisition funding and the fairness of the tender offer terms. The due diligence procedures and materials relied on by the committee, along with the committee’s recommendation on the tender offer to the shareholders, shall be published and forwarded to the board of directors of the company, who shall conduct its own diligence and into the above issues and make its own independent assessment, thereafter disseminating to the target company shareholders its evaluation of these issues and acceptance or rejection recommendation, along with the reasons for its recommendation.
- Prohibition on extension of closing. Subject to limited exceptions, in principle, the bidder is prohibited from extending the closing date for payment of offer proceeds as set forth in the offer prospectus.
The supervisory logic behind prohibiting extension or withdrawal of tender offers except in narrowly tailored circumstances signify, among others, the risk of bidders using tender offers to manipulate the market, which would have a significant impact on investors, shareholders and the stock market alike. Nevertheless, companies may face practical obstacles in implementing these proposed amendments.
Enhanced disclosure would presumably balance the information asymmetry amongst stakeholders, but the added burden to the target company board to investigate and assess the bidder within the already congested statutory response time frame may not be wholly practicable, especially where the bidder does not cooperate with the board’s investigation. Other involved parties, for example, the bidder or the bid sponsor, or the various financial or legal advisors involved in the offer, may be better suited to assume the main responsibility of such investigative burden, as part of their diligence into the bidder’s financial resources, and to assist the target’s board in the effort.
Requiring a third party financial institution to issue a performance guarantee may increase the bidder’s costs of mounting an offer bid substantially. Nevertheless, requiring a confirmation from the banker or financial advisor that resources are available to the bidder sufficient to satisfy full acceptance of the offer is a commendable change in line with international practice, albeit the standards for issuance of such confirmation still needs to be developed.
It is a fine balance to be tread between taking decisive action to minimize a similar default affair from occurring in the future, while fostering a healthy capital market. Already, activity in the market has been sluggish for an extended period of time, and the authorities had been careful to avoid applying direct or indirect brakes; discussions on taxation of gains from sales of securities vaporized quickly after being revived. Whether the proposed amendments can generate their intended effect, or whether further tweaks in the mechanism are necessary, remains to be seen.