Newsletter
NEW M&A LEGAL REGIME
On January 15, 2002, the Legislative Yuan passed the Corporate Mergers and Acquisitions Law (CMAL), which were promulgated on February 6, 2002. The passing of the CMAL shows the government's efforts in removing legal obstacles for M&A activities, simplifying gov-ernment approval procedures and providing tax incentives so as to facilitate the restructuring and globalization of corporate Taiwan. The contents of the CMAL are summarized as follows:
I.Further Amendments to Company Law
Further to the recent amendments to the Com-pany Law in regard to the duties of directors, the CMAL specifically requires that directors act in the best interests of all shareholders with the care of a good administrator in regard to M&A related matters. Directors may be held liable if such duty is breached. (Article 5)
A public issuing company should retain an in-dependent expert to render an opinion on the fairness of share swap ratio or the reasonableness of distributing cash or properties to shareholders before its board of directors adopts an M&A proposal. The fairness opinion needs not be presented to the shareholders if the M&A activ-ity is not subject to shareholders' consent (e.g., a short form merger). (Article 6)
If it is foreseeable that the board of directors cannot perform their duties when the company is conducting a merger or an acquisition, its shareholders may elect a temporary administra-tor to replace the board of directors, by a special shareholders resolution (2/3 quorum and 1/2 af-firmative vote, or alternatively, 1/2 quorum and 2/3 affirmative vote for a public issuing com-pany). (Article 14)
The Company Law provides for a statutory pre-emptive right for subscription of new shares to existing shareholders and employees. The CMAL excludes such right if the purpose of issuing new shares is one of the following (Article 8):
1.All of the new shares are issued solely for acquisition by others;
2.All of the new shares issued are used to acquire the shares of another company;
3.Issuing new shares for share exchange to transform an operating company to a holding company; and
4.Issuing new shares for a demerger transac-tion.
The CMAL recognizes the enforceability of voting agreement, voting trust, and share transfer restrictions for M&A purposes. These ar-rangements are commonly adopted in share-holders agreements but their enforceability was in a gray area previously. A voting trust agree-ment is required to be registered with the com-pany five days prior to the date of the shareholder meeting; otherwise, the shareholders may not use the voting trust agreement as a defense against the company. (Article 10)
According to the CMAL, an agreement may be entered into among shareholders or between the company and the shareholders, setting forth certain reasonable share transfer restrictions such as: (i) right of first refusal, (ii) tag-along right, (iii) board or shareholders meeting's approval for share transfer, and (iv) lock-up period for share transfer or share pledge. For non-public issuing companies, the above restrictions may even be set forth in their articles of incorporation. For public issuing companies, the restrictions should be disclosed in their prospectus. (Article 11)
Further to the Company Law, the CMAL lists the situations where shareholders may request the company to purchase their shares at fair price at the time of a merger or an acquisition. (Article 12)
One of the groundbreaking achievements of the CMAL is to permit ROC companies to merge or demerge with foreign companies or to acquire, or to be acquired by, foreign companies. The CMAL stipulates certain requirements for cross-border M&A activities and provides that certain provisions concerning local M&A ac-tivities may be applied to cross-border transac-tions. (Articles 21, 27, 28, 29, 30, 33, 41)
II.Merger
Further to the short-form merger introduced under the Company Law (Article 316-2, also set forth in Article 19 of the CMAL), the CMAL permits the following types of merger:
1.Whale-minnow Merger
The approval of the surviving company's shareholders is not necessary if (i) the number of new shares to be issued for a merger does not exceed 20% of the surviving company's total issued shares; (ii) the amount of cash or the value of property to be delivered do not exceed 2% of the surviving company's net worth; and (iii) the dissolved company is not insolvent. (Article 18)
2.Cash-out Merger
In addition to the shares consideration allowed under the Company Law, it is now allowed to use cash only, or the combination of shares, cash and other property as the consideration in a merger. (Article 22)
Under the Company Law, if a company fails to notify its creditors or make a public announce-ment thereby allowing the creditors to exercise dissenting rights within 30 days after the merger resolution is made, or if the creditors have timely register dissent, the dissenting creditors would enjoy an accelerated right of payment unless the company provides collateral. Now, under the CMAL, the dissenting creditors are not allowed to exercise their accelerated right of payment if (i) the company sets up a payment trust; or (ii) the company can prove that the merger will have no impact on the creditor's rights. (Article 23)
It was unclear previously when and how the property registration for assets of dissolved company should be made. The CMAL now provides a clear answer to this issue by allowing bulk registration and stipulating the registration procedures and period. (Article 25)
III.Acquisitions
The CMAL provides the following types of acquisitions:
1.General Assumption of Rights and Li-abilities
This type refers to a transaction in which a company (i) assumes all of the assets and li-abilities of another company (a.k.a. general assumption), (ii) transfers all of its assets and liabilities to another company (a.k.a. general transfer), (iii) transfers all or major business or assets to another company (Article 185 of the Company Law), or (iv) assumes all of the business or assets of another company that would have a material impact on the com-pany's operation (Article 185 of the Company Law). A special shareholders resolution is required for the above acquisitions (2/3 quo-rum and 1/2 affirmative vote, or alternatively, 1/2 quorum and 2/3 affirmative vote for a public issuing company). (Article 27)
With respect to the transfer of right of claims, the CMAL abolished the requirement to issue notice to each creditor as required by the Civil Code and permits companies to make public announcements of acquisitions. As for the transfer of liabilities, companies are not re-quired to obtain its creditors' consent in ac-cordance with the Civil Code unless otherwise required under private contracts. This new rule also applies to cross-broader acquisitions. (Article 27)
2.Parent-Subsidiary Acquisition
The second type of acquisition is for a com-pany to transfer its assets or business to a 100% owned subsidiary in exchange for new shares to be issued by the subsidiary. Another condition for this type of acquisition is that the financial statements of the subsidiary must have been consolidated to that of the parent at the time of the acquisition. Only the resolu-tion of the board of directors is required to approve this type of acquisition and no shareholders consent is required. This provi-sion also applies to cross-border par-ent-subsidiary acquisitions. (Article 28)
3.Share Exchange
A company may be acquired by a holding company by exchanging 100% of its shares with the holding company and thereby be-coming its wholly owned subsidiary. The share exchange of 100% shares does not need the consent of individual shareholder and may be approved by a special shareholders resolu-tion. (Article 29) Certain matters are required to be provided in the share exchange agree-ment. (Article 30) An ROC company is per-mitted to conduct a share exchange acquisition with a foreign company. (Article 30)
In case a listed company becomes a 100% owned subsidiary of another company through a share exchange as described above and the acquiring company is not a listed company on the Taiwan Stock Exchange (the "TSE") or the ROC Over-the-Counter Stock Exchange (the "ROSE"), the listed company must be delisted after the consummation of the share exchange; however, the acquiring company may become listed in its place. (Article 31)
IV.Demerger (Spin-off)
The newly amended Company Law allows a demerger and stipulates the procedural rules, but is silent on the definition of a demerger. Ac-cording to the CMAL, a demerger refers to an activity where a company (Demerged Co.) transfers parts or all of its business which can be operated independently to another company (Demerger Co.) and the latter issues new shares to the former or the shareholders of the former. (Article 2) A demerger requires a special shareholders resolution. (Article 32)
To protect creditors' rights, the CMAL requires a company conducting a demerger to make public announcement and notify its creditors to register dissent, if any, within 30 days after the proposal of demerger is adopted at a shareholders' meeting of the company. If (i) the company does not comply with the notification requirement, or (ii) when any of the creditors makes a timely dissent, the com-pany does not pay off the debt, provide collaterals, set up a payment trust, or prove that demerger will not have adverse impact on the creditors, the company cannot use demerger as a defense against the creditors. Both companies participa-tion in a demerger are jointly and severally liable to creditors of the Demerged Co. for a period of two years following the demerger. (Article 32)
If a Demerger Co. meets the listing requirements of the TSE or the ROSE, the Demerger Co. may go on listing on the TSE or the ROSE. The TSE and the ROSE are currently revising their listing rules in response to the amendments to the Company Law and the CMAL. To our knowl-edge, the TSE or the ROSE will require a Demerger Co. to pass the profitability tests and irregularity test. As for the possible delisting of a listed Demerged Co., the TSE and the ROSE are still considering the criteria for the delisting of Demerged Co. (Article 32)
V.Tax Incentives and Measures
The CMAL provides the following tax incen-tives and measures and most of them also apply to cross-border mergers or acquisitions:
The goodwill generated from an M&A transac-tion may be evenly amortized for a period of 15 years (Article 35) and the expenses for a period of 10 years. (Article 36)
If after a merger, demerger or an acquisition stipulated in Articles 27 to 29, a company holds more than 90% of the shares of its subsidiary for a period of more than 12 months, such holding company may elect to consolidate the subsidiary in filing of its income tax return (including for purposes of the 10% tax on undistributed re-tained earnings of the subsidiary). (Article 40)
Where a company subscribes to or exchanges for shares issued by another company by transfer-ring its assets or business, if the value of the shares obtained is less than the book value of the business or assets transferred, the losses thus incurred by the acquiring company may be am-ortized within a period of 15 years. (Article 43)
The following taxes are exempted in (i) an ac-quisition stipulated in Articles 27 to 29 (i.e., general assumption of businesses, asset transfer between a parent company and its 100% owned subsidiary; and issuing new shares for share exchange to transform an operating company to a holding company) where at least 65% of the consideration is paid by shares with voting rights, (ii) a merger, and (iii) a demerger:
1.No stamp duty on the agreements concluded;
2.No deed tax on the real property transferred;
3.No securities transaction tax on the shares transferred;
4.No VAT on the goods or services transferred; and
5.The land value incremental tax will be de-ferred, and will become payable when the land acquired is transferred again.
When the acquired company disposes of the shares paid by the acquiring company so that the number of shares held accounts for less than 65 % of the consideration received for the acquisi-tion, the land value incremental tax deferred will become payable by the acquired company. (Ar-ticle 34)
In a merger, demerger, or an Article 27 or 28 acquisition, if the acquiring company meets the same qualifications for tax incentives as the ac-quired, merged or demerged company, the ac-quiring, surviving or demerger company may assume the tax incentives previously enjoyed by the target company. (Article 37)
If all or the major assets or business is transferred in an acquisition and over 80% of the considera-tion is paid by shares with voting rights, and the target company thereafter transfers the shares to its shareholders, the income generated from disposing the assets will not be included in the taxable income of the target company and the losses thus incurred cannot be deducted from the taxable income. (Article 39)
The 5-year loss carry forward of each of the participants can be assumed by the surviving company in proportion to the percentage of shares in the surviving company held by the shareholders of each of the participants in a merger. This provision also applies to a branch of a foreign company established after a cross-border merger. (Article 38)
For the purposes of encouraging companies to merge with or to acquire companies with losses and repay bank loans for the acquired company, the CMAL authorizes the Executive Yuan to issue regulations exempting the corporate in-come tax on income generated by the acquiring companies from the acquired property or assets for a certain period of time. (Article 37)
VI.Employment Law Issues
In a merger or an acquisition, a 30-day written notice must be issued to those employees who will be transferred to the surviving company or the acquiring company. The employees being notified will have a 10-day period to respond to the transfer notice. Consent of the employees will be deemed given if no response is given within the 10-day period. The seniority of the employees transferred should be recognized by the surviving company or the acquiring company. Once the consent is given, the employees cannot demand any severance pay if they refuse to be transferred to the surviving company for any personal reasons. (Article 16) The employees objecting to the transfer should be entitled to severance pay to be borne by their employer prior to the merger or acquisition. (Article 17)
In the case of a merger, the remaining of the pension fund reserve of the dissolving company should be transferred to the surviving company or the newly-incorporated company after the pension and severance pay of the employees who will not be transferred to the surviving or newly-incorporated company are paid in full. (Article 15)
In the case of an acquisition, after the acquired company paid the pension and severance pay to the employees who will not be transferred to the acquiring company, the acquired company should transfer to the acquiring company the pension fund reserved for the employees who will be transferred to the acquiring company in proportion. (Article 15)
VII. Financial Measures
Companies engaging in M&A activities and meeting certain criteria may apply for special project finance sponsored by the Executive Yuan. (Article 44)
Amendment of Fair Trade Law and Securi-ties Exchange Law to Facilitate M&A Activi-ties
In addition to the promulgation of the CMAL, the Legislative Yuan also adopted an amend-ments to the Fair Trade Law (FTL) and the Se-curities and Exchange Law (SEL), which were promulgated by the President on February 6, 2002.
The amendment to the FTL focuses on the pro-visions governing the combination activities. The key feature is that the pre-combination ap-proval system has been changed to a prior filing system. Further, to promote more timely ex-amination of business combination cases, the previous two-month review period was reduced to one month, except in cases where there are grounds for believing that competition may be restricted. If the FTC raises no objection within 30 days after a filing, the combination can law-fully proceed without the need for the FTC to issue an approval as in the past.
The second important change to the FTL is the threshold of the sales amount for combination application. Previously, the revenue threshold was NT$5 billion regardless of the nature of the business. As a result of the amendment, the thresholds differ, depending upon whether the parties are in the financial sector or not. The current thresholds are (i) NT$10 billion for a non-financial enterprise; provided, that the revenue of the other participant reaches NT$1 billion; and (ii) NT$20 billion for a financial enterprise; provided that the revenue of the other participant reaches NT$1 billion.
The third important change is exempting the following transactions from the filing require-ments: (i) a combination where one participant has already held 50% or more of the voting shares in or capital of the other participant; (ii) a combination where 50% or more of the oting shares in or capital of both participants are owned by another enterprises; (iii) a transfer of its entire or major business, assets, or all or part of its business that can be operated independ-ently by an enterprise to a newly established enterprise wholly owned by it (i.e., a spin-off); and (iv) a purchase of its shares by a company from its shareholders and thus causing an exist-ing shareholder's shareholding to reach a level of one-third or more of the total voting shares or capital stock of the enterprise.
Under the amended SEL tender offer rules, only a pre-filing is required, thus simplifying the ap-plicable procedures. Acquisitions under the circumstances specified in the amended SEL are not required to be undertaken by tender offer. Once started, the tender offer generally may not be aborted. Unless the SFC agrees otherwise, incomplete implementation or unapproved abor-tion of a tender offer will render the acquirer ineligible for making another tender offer for shares in the same target company within a pe-riod of one year. Interim alteration of the terms disadvantageous to the sellers in a tender offer and insider trading are prohibited.