PUBLIC COMPANIES MAY ISSUE NEW SHARES BEFORE REGIS-TRATION AMENDMENT

05/01/2002

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According to the provisions of the Company Law prior to recent amendments, a company may not issue new shares before completing the registration amendment procedures for such an issuance. Because of this, when holders of convertible bonds, bonds with option, or pref-erence shares with option exercise their rights to convert their bonds into or to subscribe shares, the issuing company would first have to issue entitlement certificates exchangeable for shares to such persons, and then apply to the Ministry of Economic Affairs (MOEA) for registration, be-fore it could issue and deliver new shares to the holders of the entitlement certificates.

The above procedures were so time-consuming that most investors were unable to use converti-ble bonds as a vehicle for arbitrage, and this had discouraged them from investing in the con-vertible bond market. To invigorate the bond market and enhance the hedging and arbitrage functions of convertible bonds, the proviso to the amended Article 161 Paragraph 1 of the Com-pany Law relaxes the above restrictions by delegating to the securities regulatory authority the power to make regulations governing the procedures for new share issuances and registra-tion amendments by public issuing companies.

Under an order issued by the Securities and Fu-tures Commission (SFC) on 25 March 2002, when an holder of the entitlement certificates requests to the issuing company to convert bonds into or to subscribe shares, the issuing company may first issue the shares and subsequently carry out the necessary registration amendment. The above SFC order also sets out in detail how these procedures should be carried out:

Since the registration amendment has not yet been made with respect to the newly issued shares, the registration amendment date that should have been stated on share certificates may be replaced by the effective date or ap-proval date as notified by the SFC. However, the issuing company must make registration amendment in its capital due to the issuance of new shares with the MOEA at least once every quarter. When filing for such amendment, it must also append the letter of acknowledg-ment or letter of approval issued by the SFC at the time of the original issuance of convertible bonds, bonds with option, or preference shares with option.

Such new shares must still be certified in ac-cordance with the Rules Governing Certifica-tion of Corporate Stocks and Bonds, and the company must make a public announcement of the number of new shares issued in the previous quarter within 15 days after the end of each quarter. Where no physical share cer-tificates are issued for the new shares, the is-suing company need not to have the stocks certified, but must still make a public an-nouncement.

The issuing company must deliver the new shares to holders of the entitlement certificates within five business days after being requested for conversion or subscription, and the new shares may be traded on Taiwan Stock Ex-change (TSE) or Over-the-Counter (OTC) market from the date of delivery.

If the issuing company intends the new shares to be listed jointly with previously listed shares with equal rights and duties, the issuing company's rules for bond conversion or share subscription must include the following ex-plicit provision: "From at least three business days prior to the issuing company's registra-tion with TSE or OTC for public announce-ment regarding the record date of share divi-dend distribution, cash dividend distribution, or cash injection subscription, bond conver-sion or share subscription shall be suspended until the record date."

On this basis, when bondholders or preferred stock holders exercise their rights to convert or to subscribe to new shares, the issuing company may make its own decision either to issue new shares according the above SFC order or to de-liver the entitlement certificates to such holders.