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In October 2002, the Securities and Futures Commission (SFC) issued two regulations, (1) allowing public companies to privately place overseas bonds and overseas shares, and to par-ticipate in private placements of overseas de-positary receipts; and (2) allowing Qualified Foreign Institutional Investors (QFIIs), overseas Chinese, and foreign nationals to invest in do-mestic securities privately placed by companies listed on the Taiwan Stock Exchange (TSE), or listed on the over-the-counter (OTC) market or emerging stock market (ESM) of the GreTai Securities Market (GTSM).
I. Private placement of overseas securities:
The SFC explicitly set out the requirements to be complied with by a public company when pri-vately placing overseas securities, including mandatory reporting and disclosure procedures. The main points are as follows:
1.Before a public company privately places overseas securities, it must obtain a letter of consent from the Foreign Exchange De-partment of the Central Bank of China. Within 15 days after receiving all payments for such securities, it must enter the rele-vant information into the TSE's stock market monitoring system, and file a writ-ten statement of the data so entered with the CBC's Foreign Exchange Department.
2.If a TSE- or OTC-listed company is subject to a limit on the proportion of foreign in-vestment in it, then before making a private placement of overseas securities conferring shareholder rights it must obtain a letter from the TSE or GTSM confirming that the shares represented by the overseas securi-ties that the company intends to issue are subject to monitoring, to ensure that the total shareholdings of foreign investors do not exceed the statutory limit.
3.After a public company completes a private placement of overseas bonds, by the tenth day of each month it must enter updated information on the balance of its issued overseas bonds into the TSE stock market monitoring system, and file a written statement of the data so entered with the CBC’s Foreign Exchange Department.
Article 43-8 of the Securities and Exchange Law imposes restrictions on the transfer of privately placed securities by their subscribers and purchasers (including restrictions on the eligibility of transferees, and a prohibition on transfer within three years following the date of the securities' delivery). Therefore, in ad-dition to the above disclosure requirements, the SFC requires that when a public company privately places overseas securities, it must state explicitly in the private placement agreement that subscription to such securities, and their transfer, take place outside the ROC, and accordingly are to be performed in ac-cordance with the laws of the country in which the placement is made; but that if a holder of such privately placed overseas securities sub-sequently completes redemption, conversion or subscription formalities within the ROC and thereby acquires shares in the issuing company, then Article 43-8 of the SEL will apply, and the shares so acquired will be sub-ject to the article's restrictions on transfers of privately placed securities.
If a TSE- or OTC-listed company privately places overseas securities conferring share-holder rights, the private placement agreement must state that shares acquired on the basis of such securities by redemption, conversion, or subscription, and through subsequent rights issues due to the conversion of earnings or capital reserve into capital, cannot be listed on the TSE or on the OTC market until three years after the date of delivery of the privately placed securities. At that time, a supplemental public issuance report should be filed with the SFC in accordance with the provisions of the Criteria Governing the Offering and Issuance of Securities by Securities Issuers, appending the relevant documents and a lawyer's written legal opinion as to whether the original over-seas securities were privately placed in ac-cordance with the laws of the country of placement. Only then may an application for listing be made to the TSE or GTSM. If the securities concerned are not overseas securi-ties conferring shareholder rights privately placed by a TSE- or OTC-listed public com-pany, then no supplemental public issuance can be made in respect of shares acquired on the basis of such securities by redemption, conversion or subscription, and through sub-sequent rights issues due to the conversion of earnings or capital reserve into capital.
If overseas securities privately placed by a public company are overseas bonds convertible into shares in another company, or are overseas bonds with stock warrants for subscription to shares in another company, then under the pro-visions of the SEL the holder may not exercise such rights of conversion or subscription until three years after the date of delivery of the pri-vately placed securities.
If funds raised by a public company's private placement of overseas securities are to be used for direct or indirect investment in mainland China, then they are subject to the restrictions on the amount of investments in mainland China contained in the Guidelines for Handling Ac-quisition and Disposal of Assets by Public Companies and in the Criteria Governing the Offering and Issuance of Overseas Securities by Issuers, and the SFC will take such investments into consideration when reviewing subsequent applications by the company to offer and issue securities.
II. Foreign investors' subscription to private placement of securities
According to the SFC's regulations, QFIIs, overseas Chinese and foreign nationals may invest in private placements of domestic se-curities by TSE-, OTC- or ESM-listed public companies, and overseas Chinese and foreign nationals may invest in public companies' private placements of overseas bonds, over-seas depositary receipts and overseas shares.
A foreign investor who intends to subscribe to a private placement of domestic securities of the above types by a TSE-, OTC- or ESM-listed public company, should comply with the requirements and qualifying condi-tions set out in Article 43-6 of the SEL and in the SFC's ruling dated 13 June 2002 (file ref-erence Tai-Cai-Zheng-Yi-Zi No. 0910003455). Foreign investors intending to subscribe to a private placement of overseas securities should comply with the provisions on eligibility and conditions for subscription, and number of subscribers, of the laws of the country of placement.
If a company making a private placement of securities is subject to statutory restrictions on the proportion of foreign investment in it, then when making the placement it must also en-sure that it controls the level of foreign in-vestment:
1.Private placement of domestic securities: Foreign investors' holdings of privately placed shares and of pre-existing shares must be separately controlled, and the company is responsible for controlling the number of foreign investors subscribing to the placement.
2.Private placement of overseas securities: Before making a private placement of overseas securities conferring shareholder rights, the company must obtain a letter from the TSE or GTSM confirming that the shares represented by the overseas securi-ties that the company intends to issue are subject to monitoring, to ensure that the overall proportion of foreign shareholdings does not exceed the statutory limit.
If a company making a private placement of securities is subject to restrictions on the proportion of foreign investment in it, then the following conditions apply when foreign in-vestors purchase in secondary markets pri-vately placed securities that confer share-holder rights, or such securities are otherwise transferred to them:
1.Securities privately placed in the ROC: Before making the transaction, a foreign investor should first consult the share-holder service agent of the company con-cerned, to confirm that there is no danger of the limit on foreign investment being ex-ceeded.
2.Securities privately placed overseas: The acquisition of such securities involves transfers between foreign nationals outside the ROC, and does not affect the calcula-tion of the level of foreign investment in the company. Therefore the SFC will not impose any controls on such transactions.
When a foreign investor subscribes to a pri-vate placement of overseas securities, such securities' redemption or conversion into shares is 'ubject, mutatis mutandis, to the general procedures for foreign nationals' in-vestment in securities, as set out in the Regu-lations Governing Investment in Securities by Overseas Chinese and Foreign Nationals. Transfers of such privately placed securities are also subject to the restrictions of Article 43-8 of the SEL.
To ensure that foreign investors who subscribe to or otherwise purchase privately placed overseas securities clearly understand the re-strictions placed on such securities by the SEL and other relevant legislation, a TSE- or OTC-listed company must explicitly state in the private placement agreement that shares acquired on the basis of such securities by redemption, conversion, subscription, or through subsequent rights issues due to the conversion of earnings or capital reserves into capital, cannot be listed on the TSE or GTSM or sold in ROC markets until three years after the date of delivery of the privately placed overseas securities, and then only after the issuer has reported their supplemental public issuance to the SFC in accordance with the provisions of the Criteria Governing the Of-fering and Issuance of Securities by Securities Issuers, submitting the relevant documents and a lawyer's written legal opinion as to whether the private placement of the securities was conducted in accordance with the laws of the country of placement.
If the privately placed overseas securities are overseas bonds convertible into shares in an-other company, or overseas bonds with stock warrant for subscription to shares in another company, then in accordance with the provi-sions of the SEL the holder may not exercise the right of conversion or subscription until three years after the date of delivery of the privately placed securities.
By establishing the procedures and rules for the private placement of overseas securities, the above regulations of the SFC should be helpful in popularizing this type of market transaction in practice.
