ACQUIRED COMPANY'S SHARES HELD BY ACQUIRING COMPANY NEED NOT BE REISSUED

05/01/2004

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In an interpretation dated 26 July 1999, the Ministry of Economic Affairs (MOEA) stated that when companies merge, shares in the sur-viving company held by the absorbed company, shares in the absorbed company held by the sur-viving company, and shares held by absorbed companies in each other, must all be cancelled at the time of the merger. Thus the problem of a company acquiring shares in itself would not arise. On 11 March 2002, the MOEA further stated that when a surviving company issues new shares in respect of a merger by absorption, it need not issue new shares in respect of its own holdings of shares in the absorbed company.

Based on the same principles, the MOEA stated in an interpretation dated 11 February 2004 that when a company uses a share exchange under the Corporate Mergers and Acquisitions Act to ac-quire as its 100% subsidiary another company in which it was already a shareholder, the acquiring company need not issue new shares in exchange for its existing shareholdings in the acquired company, unless otherwise provided in the Fi-nancial Holding Company Act (FHCA).

Financial holding companies should be guided by the Ministry of Finance interpretation dated 29 September 2003, which states that if a finan-cial holding company acquires a financial insti-tution as its subsidiary by a 100% share ex-change under the FHCA, and the transaction results in the financial holding company acquir-ing shares in itself, then the situation must be handled as follows:

Within three years from the date of the share exchange, the financial holding company should transfer the affected shares to em-ployees, or use them for equity conversion in conjunction with the issuance of bonds with stock warrant, preferred shares with stock warrant, convertible bonds, convertible pre-ferred shares, or stock warrants. The transfer or conversion procedure, price, quantity, time limits, and method of transfer should be stated in notes to the holding company's financial statements. Shares that are not transferred within the above period will be deemed as unissued shares and cancelled.

Shares in itself that a financial holding com-pany acquires through a share exchange may not be pledged, and the company may not enjoy shareholder's rights in such shares for as long as it continues to hold them.