PRIVATE PLACEMENT SYSTEM INTRODUCED

03/01/2002

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On 15 January 2002, the Legislative Yuan gave its third reading to an amendment to the Securi-ties and Exchange Law, which took effect on 6 February. Prior to the amendment, a public is-suing company was, as a principle, required to publicly offer its securities, and to set aside a certain proportion of the securities for subscrip-tion by shareholders and employees. The latest amendment introduced the private placement system that has been practiced for many years abroad. The main points of the amendment are as follows:

Private placement is defined as actions by a public issuing company to offer securities to specific persons. When making a private placement, a company need not set aside a certain proportion for employees’ or share-holders’ subscription, nor need it allocate a certain proportion for underwritten public sale. Besides, a company is not permitted to adver-tise to or encourage the public to purchase the securities; otherwise, the placement will be regarded as a public offering. There must also be no deceptive, fraudulent or otherwise mis-leading actions by the public issuing company.

Private placement procedures

1.Shareholders’ meeting: When a public is-suing company intends to make a private placement of securities (other than ordinary corporate bonds), such placement must be stated in the notice of a shareholders’ meeting. The notice must also disclose: (1) the basis and rationale for the pricing of the private placement; (2) the method of se-lecting offerees and the relationship be-tween subscribers and the company; and (3) the reasons why a private placement is considered necessary.

2.Voting requirements: A private placement excludes employees and shareholders from their preemptive rights and thereby im-pinges on the rights and interests of the shareholders. It, therefore, requires a spe-cial resolution adopted by the shareholders’ meeting. That is to say, the private placement must be approved by at least two-thirds of the voting rights represented at a shareholders’ meeting attended by shareholders representing a majority of the total issued shares of the company. But a private placement of ordinary corporate bonds requires only a special resolution of the board of directors.

3.Separate tranches allowed: If the motion placed before the shareholders’ meeting specifies procedures for placement in tranches, the company may make the placement in multiple tranches within one year after the date of the resolution. In the case of a placement of ordinary corporate bonds, the company may make it in multi-ple tranches within one year after a resolu-tion of the board of directors.

4.Report to SFC on completion: A company need not seek prior approval from or make registration with the Securities and Futures Commission (SFC) before making a pri-vate placement of securities. It needs only to file a report with and submit the relevant documents to the SFC within 15 days after receipt of all payments. In the case of a placement in tranches, a report must be filed after completion of each tranche.

Under the Company Law, the maximum amount of corporate bonds that a company may issue is equal to the balance of its total assets less its total liabilities and in-tangible assets. But under the amended SEL, where a public issuing company is-sues ordinary corporate bonds by private placement, the above limit is relaxed to four times the balance of the company’s total assets less its total liabilities, instead of the limit defined by the Company Law.

Permitted offerees: The offerees of a private placement are limited to (1) financial institu-tions, including banks, bills finance compa-nies, trust enterprises, insurance companies and securities firms; (2) natural persons, ju-ristic persons and funds that meet certain cri-teria; and (3) directors, supervisors and man-agers of the company and its affiliates. The total number of subscribers in categories (2) and (3) must not exceed 35. The “certain cri-teria” required of subscribers in category (2) will be further defined in the Enforcement Rules of the law and may include minimum annual income, minimum assets size, adequate financial status, adequate financial knowledge and experience, etc.

The following restrictions are applicable to the resale of privately placed securities by sub-scribers within three years after such purchase:

1.Securities acquired by a financial institu-tion may only be transferred to another fi-nancial institution, and only on the condi-tion that there are no securities of the same type traded on the open market.

2.Securities that have been held for more than one year but less than three years may be transferred to financial institutions or to persons or funds meeting certain criteria, subject to certain limits on the holding pe-riod and trading quantities. Those limits will be further defined in the Enforcement Rules.

3.Securities may be directly transferred in private, but the quantity traded on any one occasion may not exceed one trading unit, and at least three months must elapse be-tween any two trades.

The above restrictions on transfers of privately placed securities do not apply in the following circumstances: (1) after three years following the acquisition; (2) transfers that are effected by statutory requirements, such as inheritance; and (3) other circumstances approved by the com-petent authority.

The above restrictions on transfers must be conspicuously stated in the company’s share certificates, as well as the prospectus or related documents given to subscribers.