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Author: Marine Yang \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Author: Jamie Yang<\/p>\n
Overview<\/strong><\/p>\n Taiwan has been a member of the World Trade Organization (\u201cWTO\u201d) since 2002 and the Taiwan government is keen to revitalise its economy through investments from foreign and domestic sources. Following this trend, facilitation of foreign direct investments (\u201cFDI\u201d) have been a significant policy focus for the Taiwan authorities.<\/p>\n According to Mergermarket research data, Taiwan announced 35 deals totalling US$12bn in Q1-Q3 2016, and high-technology sectors accounted for 88.7% market share by value.[1]<\/a>\u00a0Despite the overall increase in M&A deal value, domestic M&A activities in Taiwan dropped by 28.2% to US$5.2bn in Q1-Q3 2016. The M&A uptick in 2016 was mainly driven by the semiconductor sector, comprising two mega FDI deals: Netherlands-based ASML Holding\u2019s acquisition of Hermes Microvision for US$3.1bn, and US-based Micron Technology\u2019s acquisition of Inotera Memories for US$4.0bn.<\/p>\n In terms of outbound investments, technology was also the most favourable sector, with a mega deal worth US$3.8bn in Japan: Taiwan\u2019s giant electronics manufacturer Foxconn\u2019s purchase of a major stake in Sharp, which represented the largest acquisition by a foreign company in Japan’s insular tech industry. It was reported that Foxconn also aims to acquire Toshiba in 2017.<\/p>\n \n Although Taiwan has pursued various measures to attract FDI, foreign investors have criticised the laws governing FDI for a long time. Regulations governing FDI principally derive from the Statutes for Investment by Foreign Nationals<\/em> and the Statutes for Investment by Overseas Chinese<\/em>. Fundamentally, the laws require a pre-investment approval of the Taiwan Investment Commission (\u201cTIC\u201d) for almost all the FDIs. TIC would review the investment application on a case-by-case basis after consultation with other governmental agencies, such as the Central Bank of the Republic of China (Taiwan) and the Financial Supervisory Commission (\u201cFSC\u201d). On top of this approval requirement, Taiwan also maintains a negative list of industries closed to FDI, including public utilities, power distribution, natural gas, postal service, telecommunications, mass media, and air and sea transportation. Railway transport, freight transport by small trucks, pesticide manufactures, real estate development, brokerage, leasing, and trading are open to FDI subject to certain criteria.[2]<\/a> In the latter case, foreign investors may invest in such industries only up to a specified level and with the specific approval of the relevant competent authority which is responsible for enforcing the policies behind the restrictions. However, even if a FDI has met the specified qualifications, the TIC approval may not be guaranteed due to policy-driven concerns.<\/p>\n Historically, Taiwan has a very unique political relation with the People\u2019s Republic of China (\u201cPRC\u201d) and both the governments of Taiwan and PRC assert sovereignty over Taiwan. Despite political issues, since 2009, Taiwan has gradually been relaxing restrictions on investments from PRC in some sectors as cross-strait relations have improved. Taiwan has opened more than two-thirds of its aggregate industrial categories to PRC investors. PRC investors, however, continue to be restricted or prohibited from investing in certain industries in Taiwan according to the positive list solely for PRC investors. PRC investments are clearly distinguished from FDIs. In June 2013, Taiwan and the PRC signed the Cross-strait Agreement on Trade in Services under the Economic Cooperation Framework Agreement, but legislative review of the services agreement has been stalled due to public opposition in Taiwan. The new government in 2016 has questioned these moves and several high profile deals launched by PRC investors were rejected.<\/p>\n Significant deals and highlights<\/strong><\/p>\n Micron Technology\u2019s acquisition of Inotera Memories Micron Technology, Inc. announced that it had completed the acquisition of Inotera Memories, Inc. on December 6, 2016. Micron acquired all of Inotera’s outstanding shares for consideration worth NT$30 per share or approximately US$0.94 per share. This represents a transaction value of approximately US$4.0bn. The Micron-Inotera merger was the largest deal in 2016 by dollar amount. The deal was also of great importance in DRAM industry competition and international politics.<\/p>\n Taiwan-based Inotera Memories, a DRAM manufacturer, was a subsidiary of Formosa Plastics Group, the largest chemical company in Taiwan. Micron is a US-based company having a broad portfolio of high-performance memory technologies – including DRAM, NAND and NOR Flash, and the world\u2019s third-largest DRAM company after Samsung and SK Hynix. Micron has been licensing its technology to Inotera as a strategic partner with Inotera since 2008.<\/p>\n Because Micron suffered heavy losses during the first two quarters of 2016, paying a 30% premium above market price in acquiring Inotera attracted criticism from analysts. Nonetheless, Micron would join the Taiwan Semiconductor Manufacturing Corporation (\u201cTSMC\u201d) industry cluster through this merger, shortening delivery time for key clients.[3]<\/a><\/p>\n Inotera agreed to the merger in the face of strong competition from Tsinghua Unigroup Ltd., a PRC state-backed DRAM company. Notably, Inotera\u2019s former CEO and key person Charles Kao, left the company to join Tsinghua in 2015. Thereafter, engineers left Inotera in large numbers to join Tsinghua and its affiliates. The talent-poaching by Tsinghua triggered criminal investigation by the Taiwan authorities over industrial espionage and trade secret leaks.[4]<\/a><\/p>\n ASML Holding\u2019s acquisition of Hermes Microvision ASML Holding NV announced on November 22, 2016 that it had completed acquisition of Hermes Microvision Inc.[5]<\/a> ASML agreed to buy Taiwan-based Hermes for about NT$100bn (US$3.1bn). ASML paid NT$1,410 per share in cash, or 31% more than Hermes Microvision\u2019s average closing price in the previous 30 days. ASML financed its purchase with cash, about \u20ac1.5bn (US$1.7bn) of debt and \u20ac500 m of ASML stock that will be bought by Hermes Microvision\u2019s main shareholder and the Taiwanese company\u2019s executives. Part of the proceeds will be reinvested in Hermes Microvision.[6] We saw a trend of chip equipment makers consolidating to acquire the scale needed for further R&D; the larger scale also puts them in a better position to negotiate with large clients.<\/p>\n ASE\u2019s takeover of SPIL The merger of Advanced Semiconductor Engineering Inc. (\u201cASE\u201d), and its rival Siliconware Precision Industries Co. (\u201cSPIL\u201d) was undoubtedly the deal that attracted most Taiwan public attention in 2016.<\/p>\n ASE, the world\u2019s largest chip packager and tester, proposed a hostile takeover of SPIL, its second-largest rival. It is said that another rival, the PRC state-backed Tsinghua Unigroup\u2019s intention to acquire SPIL, prompted ASE to make the first move.[7]<\/a> ASE made two rounds of tender offer to achieve its purpose.<\/p>\n In August 2015, ASE made a tender offer to acquire 5% to 25% of SPIL shares at NT$45 per share. By the end of the tender offer period in September, ASE held 36.83% of SPIL shares.[8]<\/a> SPIL\u2019s management strongly resisted the takeover, and invited Foxconn Technology Group to act as a white knight.<\/p>\n In December 2015, ASE made a second-round tender offer for SPIL\u2019s shares.\u00a0 ASE made a merger control filing to the Taiwan Fair Trade Commission (\u201cFTC\u201d). According to FTC\u2019s solicitation of public opinion announced in February 2016, ASE proposed to acquire a minimum of 5% and a maximum of 24.71% outstanding common shares of SPIL via tender offer. ASE was to hold up to 49.7% of SPIL shares in the proposed tender offer.[9]<\/a> \u00a0The prescribed waiting period under the Fair Trade Act of Taiwan (\u201cFTA\u201d) is typically 30 days after completion of the merger control filing.<\/p>\n FTC held impact evaluation conferences for the proposed ASE-SPIL deal on February 23, 2016. The FTC announced that the waiting period was extended to May.[10]<\/a> The deal was fraught with uncertainties.<\/p>\n Thereafter, ASE and SPIL negotiated another solution. On May 26, 2016, ASE and SPIL announced their plan to set up a holding company to hold 100% of ASE and SPIL shares. One share of the holding company exchanges for two ASE shares, and each SPIL share exchanges for NT$55 in cash.[11]<\/a> This means SPIL\u2019s shareholders would be cashed out entirely. The merger control filing was completed in October 2016.[12]<\/a> FTC approved the filing on November 16, 2016.[13]<\/a><\/p>\n Industry noted that the merger would benefit Taiwan\u2019s economy as it could result in a quality upgrade of the local chips packaging and testing sector, strengthening its export position. Regarding the FTC-approved transaction, many commentators noted that SPIL received the better deal. The hostile takeover by ASE was unsuccessful and it eventually had to acquire SPIL by negotiated merger.<\/p>\n MediaTek Inc\u2019s acquisition of Richtek Technology Corp In September 2015, MediaTek Inc. launched a tender offer for Richtek Technology Corporation (\u201cRichtek\u201d), to acquire approximately 35%-51% of Richtek\u2019s outstanding shares for NT$195 per share. Upon completion of the tender offer, MediaTek then further acquired the remaining equity of Richtek\u2019s outstanding shares.[14]<\/a> As a result of the merger, Richtek was delisted from the Taiwan Stock Exchange (\u201cTWSE\u201d) in April 2016.[15]<\/a><\/p>\n MediaTek is a fabless semiconductor company and a global leader in IC design, providing cutting-edge systems-on-a-chip (SoC) solutions in wireless communication, WiFi, HDTV, DVD, and Blu-Ray. Richtek specialises in analogue IC and inventive power management solutions.\u00a0 Analysts say that MediaTek acquired Richtek with an eye towards wireless power charging and future IoT business opportunities.[16]<\/a><\/p>\n Taiwan Optical Platform\u2019s proposed purchase of Eastern Broadcasting On October 14, 2016, Taiwan Optical Platform announced that it plans to invest NT$11.12bn (US$ 347m) to acquire a 65% stake in Taiwanese television company Eastern Broadcasting from the Carlyle Group. Taiwan Optical Platform plans to finance the entire NT$11.12bn stake purchase by bank loans. Taiwan Optical Platform received conditional merger control clearance from FTC on March 1, 2017.[17]<\/a><\/p>\n Eastern Broadcasting was founded by Ling-Lin (Gary) Wang, and currently operates several television channels such as EBC News and EBC Foreign Films. In 2006, private equity Carlyle Group acquired a majority of shares in Eastern Broadcasting (but Wang still owns 21.32%), and Carlyle had been attempting to sell off its shares to other buyers before selling to Taiwan Optical Platform.<\/p>\n In December 2015 Carlyle, which owned 61% of Eastern Broadcasting shares, had planned to sell all of its shares to Dan Mintz. Wang, which owns 21.32% of Eastern Broadcasting shares through Eastern Media International, also planned to sell all shares to Dan Mintz together with Carlyle.[18]<\/a> Mintz, a United States citizen, founded the DMG Entertainment Group with Wen-Ge (Peter) Xiao, whose father was a senior commander of the Chinese People\u2019s Liberation Army.[19]<\/a> The proposed deal eventually fell through amid heightened public scrutiny, as it was suspected that this deal was PRC-funded and Mintz requested a 10% discount.[20]<\/a><\/p>\n If the Taiwan Optical Platform-Eastern Broadcasting deal is consummated, then Taiwan Optical Platform will own the majority of shares in Eastern Broadcasting. Unlike the deal with Mintz, Wang\u2019s stake was excluded from the Taiwan Optical Platform offer. As the second-largest shareholder, Wang had intended to purchase the Carlyle-controlled shares and claimed that Eastern Media had a right of first refusal and Carlyle was in breach of their previous agreement[21]<\/a>. Wang has filed a lawsuit against Carlyle to claim his right of first refusal, but Carlyle replied that Wang has the right of first offer, not the right of first refusal. Having the right of first offer requires a seller to inform the other party in advance about the number of shares it intends to sell, inviting them to make an offer, but the seller can decide to take or reject such offer, and Carlyle did not receive Wang\u2019s offer, according to Carlyle.<\/p>\n In addition, because the proposed merger will result in vertical integration between a system operator and a channel producer, the deal is currently under review by Taiwan\u2019s National Communication Commission (\u201cNCC\u201d). The press said NCC has asked Taiwan Optical Platform to elaborate on how the acquisition would facilitate the robust development of the nation\u2019s communications industry, how it plans to preserve the diversity of public opinion, how it plans to enrich Eastern Broadcasting\u2019s content, and how its financial plan ensures the sustainable development of the network. Another issue raised in this deal is the application of prohibition on government and political parties\u2019 investment, directly or indirectly, in TV channels or TV systems. It was reported that one elected county councilor purchased 1,000 shares in Taiwan Optical Platform, infringing on regulations. This may result in Taiwan Optical Platform\u2019s breach of the prohibition (as a political person holds its shares) and Taiwan Optical Platform may be disqualified for buying Eastern Broadcasting.<\/p>\n Key developments<\/strong><\/p>\n FDI Regulations As mentioned above, almost all FDIs are subject to TIC approval. The TIC reviewing process may take 20-30 days for cross-border M&A deals. Under some circumstances, the Taiwan authorities may even attach conditions to FDI approvals. Considerations may include an assessment of the impact of proposed investments on a sector\u2019s competitive landscape and protection of minority shareholders and employees. As investments from PRC investors are treated differently from FDIs, FDI deals with unclear funding sources may be rejected where there might be a PRC-sourced capital.<\/p>\n Foreign investors have expressed concerns about a lack of transparency, consistency, and predictability in the FDI reviewing process. The Taiwan authorities attempted to loosen the reviewing process of FDI and proposed to replace a pre-investment approval requirement with a post-investment reporting mechanism for FDIs of small dollar amount.[22]<\/a> In June 2015 the Legislative Yuan passed amendments to a number of statutes, including the Mergers and Acquisitions Act (\u201cM&A Act\u201d) and the Company Act, and promulgated the new Limited Partnership Act, to clarify investment criteria and structure for M&A deals and introduce new business forms (e.g. the limited partnership and the closed company).[23]<\/a> Other amendments were proposed in 2015, such as the relaxation of FDI regulations, but were not passed. Therefore, the uncertainty embedded in the FDI reviewing process still exists.<\/p>\n Moreover, in 2015 the Taiwan authorities formulated new reviewing policies targeted at foreign private equity investors, making it more difficult for private equity to make investments. Current guidelines state that private equity investors seeking to acquire companies in \u201cimportant industries\u201d must provide, for instance, a detailed description of the investor\u2019s long-term operational commitment and the investment\u2019s impact on sector competition. Foreign investors have experienced lengthy reviewing periods for private equity transactions.<\/p>\n Mergers and Acquisition Act The major laws regulating M&A activities in Taiwan are the M&A Act. In June 2015, amendments to the M&A Act were passed by the Legislative Yuan but became effective from January 2016. Among all the changes, the amendment has provided more flexibility in choosing the consideration in M&A deals; that is, shares, cash or other assets can be used as the consideration for a share swap or spin-off deal. From now on, a share swap deal in Taiwan is not necessarily a share-to-share deal. This mechanism was used in Micron Technology\u2019s acquisition of Inotera Memories, where Micron initiated a share swap to acquire the entire equity of Inotera Memories by offering cash only to Inotera Memories\u2019 shareholders.<\/p>\n Despite potential conflict of interests, the 2015 amendment to the M&A Act has also clarified the exercising of a voting right in an acquisition or a spin-off transaction by specifying that even if a company holds the shares of target company in the acquisition or spin-off, or such company itself or its representative has been elected as a director of the target company, such company may still exercise a voting right in the shareholders\u2019 meeting to approve the proposed transaction.<\/p>\n The amendment to the M&A Act also introduced a number of provisions to protect shareholders’ interests. In particular, if a listed company will become delisted or dissolved in an M&A deal and the surviving or acquiring company is not a listed company, the threshold of the shareholders\u2019 resolution of the listed company to be delisted or dissolved to approve the M&A deal will require the consent of the shareholders who represent two-thirds or more of the total outstanding shares issued by such company. Conversely, under other situations, material decisions relating to a company only require the approval of a majority of the shareholders present at shareholders\u2019 meeting who represent two-thirds or more of the total number of its outstanding shares. This may impact the practice of privatisation deals in order to secure the shareholders\u2019 approval for delisting.<\/p>\n To ensure the due process and protect shareholders\u2019 interests, the amendment requires the public company to set up a special committee to review the fairness of an M&A deal. The special committee should engage independent experts to issue opinions regarding the reasonableness of the deal price. Then the special committee is required to submit their conclusions to the board and the shareholders\u2019 meeting. The amendment also has simplified the process for dissenting shareholders to exercise their appraisal rights: when the dissenting shareholders have exercised their appraisal rights to request a company in an M&A transaction to buy back their shares but failed to reach an agreement on the price with the company, within a specified period after the relevant shareholder resolution approving the M&A transaction, the company is required to first pay the amount it considers fair to the shareholders and then file a motion for a court ruling on the fair price, which decision will apply to all dissenting shareholders. In the past, the dissenting shareholders needed to file such motion at their own cost. This amendment has facilitated the process of determining the fair price in one action.<\/p>\n In Taiwan, a commonly-seen takeover of a public company is that the acquirer begins to acquire the target company\u2019s shares in the market to gain partial possession before launching a tender offer. This practice invited concerns about market manipulation by the acquirers under the Securities and Exchange Act. Cases were brought to the court to determine whether the acquirers had the intent to manipulate the market price of the target company and the Supreme Court has ruled that if the acquirers acquire shares with a view to control the management of the company, then these persons did not possess the intent to manipulate the market price.<\/p>\n To avoid any uncertainty and put a potential takeover of a public company on alert, the amendment to the M&A Act has introduced a reporting requirement: if a person, individually or jointly with others, acquires more than 10% of the total shares issued by a public company aiming to facilitate an M&A deal, that person is required to, within 10 days of such acquisition, report to the FSC. Any violation would void such person\u2019s voting rights with respect to those shares that exceed 10% of the total shares issued by the public company.<\/p>\n Tender offer rules In August 2016, a Japan-based investor, through its subsidiary in Taiwan, Bai Chi Gan Tou, failed to honour its payment obligation in a tender offer for the Taipei Exchange-listed game developer XPEC Entertainment Inc. (\u201cXPEC\u201d). This deal represented the first default on a tender offer settlement in Taiwan\u2019s M&A history. Investors who had purchased XPEC shares following announcement of the tender offer in May 2016 suffered huge losses when the Japanese investor announced its intention to forego closing of the tender offer. Investigations in securities fraud and market manipulation surrounding this failed tender offer are still undergoing.<\/p>\n In response to this first-time defaulted tender offer, FSC made a great deal of amendments to tender offer rules, all of which are effective now. The regulatory requirements and restrictions of launching a tender offer are tightened. First of all, the bidder is required to post a guarantee of performance, which may be either a guarantee issued by a financial institution guaranteeing the performance of the bidder, or a confirmation letter issued by a licensed and independent securities firm or accountant affirming that the bidder possesses the financial resources to complete the acquisition. The bidder is required to further disclose in detail its intended source and plan of funding to complete the acquisition, along with the contracts securing such funding, and the reasonableness of its funding plan, including an analysis of the bidder\u2019s most recent two-year financial statements from solvency, liquidity, and profitability perspectives.<\/p>\n Under previous tender offer rules, the target company\u2019s board of directors, via its review committee, should render its recommendation of the tender offer to its shareholders but the focus of this recommendation was the fairness of the bid price, supported by an external expert\u2019s fairness opinion. Such external fairness opinion was a defence of directors\u2019 fiduciary duties.<\/p>\n However, under new rules, the tender offer review committee is required to conduct a more in-depth investigation into the identity and financial capability of the bidder, including an assessment of the source of the bidder\u2019s acquisition funding and the fairness of the tender offer terms. The due diligence procedures and materials relied on by the review committee, together with the committee\u2019s recommendation on the tender offer to the shareholders, should be published and forwarded to the board of directors, who should further conduct its own diligence into the above issues and make its own independent assessment. Now it\u2019s a two-phase reviewing process before making recommendation to shareholders.<\/p>\n The rationale behind these new rules is to make the process more stringent and shut out any unworthy bidders. However, such amendments may slow down the process of consolidation because there are a number of practical obstacles in implementing these amendments. For example, enhanced disclosure will certainly balance the information asymmetry amongst stakeholders, but the requirement asking the target company board to investigate and assess the bidder within a short period seems unrealistic, especially where the bidder is not willing to cooperate, as in a hostile takeover. It is also questionable on one hand whether a third party, such as a financial institution, would be willing to issue a guarantee of performance to an unfamiliar bidder; on the other hand, the bidder will incur substantial costs if required to engage such guarantee. Whether all these amendments can achieve their intended goals, or whether further adjustments to the mechanism are necessary, remains to be monitored in the future.<\/p>\n Competition law Taiwan\u2019s Fair Trade Act (\u201cFTA\u201d) was enacted in 1992. FTC examines business practices that might impede fair competition.\u00a0 Merging parties are required to make pre-merger filing to FTC, the competition authority in Taiwan, to see if the proposed transaction meets certain criteria. FTC is then given an opportunity to review and, if necessary, prohibit or impose conditions on the proposed merger. Pre-merger filing threshold Mergers exceeding the filing thresholds below are required to make pre-merger filing:<\/p>\n
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\n<\/a>ASML, a Dutch manufacturer, is the industry leader in lithography machines that etch the lines into materials deposited on silicon disks, which create the tiny circuits that enable chips to process complex computations. Hermes\u2019 equipment checks that steps in the manufacturing have been properly completed. Their technologies are complementary to each other.<\/p>\n
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\nFTA defines mergers as follows:<\/p>\n\n
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