I OVERVIEW OF M&A ACTIVITY
Overall, 2016 saw 241 Taiwan-announced M&A deals totalling over US$23.8 billion in deal value, a slight drop from 2015 in terms of both deal numbers and value.2 Multibillion semiconductor mega-deals were the highlights of the Taiwan M&A market in 2016. Industry consolidation was the dominant factor driving deal counts. To date, private equity-backed transactions remain few.
The four semiconductor mega-deals of 2016, each in excess of NT$100 billion, were:
- a the combination of Advanced Semiconductor Engineering (ASE) with Siliconware Precision Industries (SPIL) to form a new joint holding company valued at over US$5 billion;
- b Micron Technology’s acquisition of Inotera Memories valued at over US$4 billion;
- c Hon Hai (Foxconn) Precision Industry’s outbound acquisition of Sharp; and
- d ASML’s acquisition of Hermes Microvision for US$3.2 billion.
Aside from these mega-deals, 2016 also saw increased cross-Strait political tension and some sizeable China-to-Taiwan deals experienced delays in approvals or were eventually abandoned. Regulations were also tightened in mid-2016 after a scandal involving an offeror’s failure to pay in a tender offer for XPEC Entertainment Inc (XPEC) (see Section III.ii, infra) made parties to public M&A stay away from the tender offer route for the remainder of 2016.
ii INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
The primary laws and regulations governing or concerning M&A activities include:3
- a the Business Mergers and Acquisitions Act (M&A Act);
- b the Company Act;
- c the Securities and Exchange Act (SEA);
- d the Fair Trade Act (FTA);
- e the Labour Standards Act (LSA); and
- f the Statute for Investment by Foreign Nationals.
In general, the M&A Act lays out the fundamental framework for various types of M&A activities as well as the associated procedures, including required corporate approvals, announcement and disclosure, protection of creditors and minority shareholders, and certain favourable tax treatments.
i Types of M&A
Under the M&A Act, the principal forms of M&A can be broadly categorised into mergers, acquisitions, share swaps and spin-offs. A direct cash purchase of shares transaction, however, typically is not considered to be an M&A transaction within the M&A Act.
A merger will result in one company surviving and another being extinguished, or all participating companies to be extinguished and combining into a newly formed entity. In a share swap, an acquirer may acquire 100 per cent (and not less) of the issued and outstanding shares of target company with consideration in shares, cash or in kind thereof. An acquisition through a share swap goes through a process substantially similar to an acquisition by way of merger with the key distinction being that the target does not extinguish but becomes a wholly owned subsidiary of the acquiring entity. A spin-off allows a company to carve out an independent operating business division to form a new entity or directly to an acquiring entity.
For most types of acquisitions under the M&A Act, shareholders’ approval, if required, will be by special resolution. Special resolution requires the affirmative vote of a majority of the shares represented at a shareholders meeting with a quorum of two-thirds or more of the outstanding shares of the company or, alternatively for a public company, the affirmative vote of two-thirds of the shares represented at a shareholders’ meeting with a quorum of a simple majority of the outstanding shares of the company. In a take-private transaction, where a listed company’s shareholders are being cashed out, the pertinent rules require that a special resolution be passed by an affirmative vote of two-thirds or more of the entire outstanding shares.
In asset deals, a transfer of all or a major part of the business can qualify as an acquisition transaction under the M&A Act. Partial sales of a business would not qualify, and so may not enjoy the procedural and tax benefits under the M&A Act.
ii Tender offer
Buyouts and take-private transactions historically are often done by way of a tender offer followed by a cash merger to squeeze-out the remaining minority. The SEA and related regulations thereunder provide for the rules governing tender offers. Under the SEA, anyone (alone or together with others) who intends to obtain 20 per cent or more of shares in a public company within a 50-day period is subject to a mandatory tender offer. In launching a tender offer on a Taiwan public company, a foreign acquirer often would establish a Taiwan subsidiary as the vehicle to make the tender offer in order to leverage local financing or squeeze-out the minority, or both.
Launching a tender offer requires filing a prospectus with the Financial Supervisory Commission (FSC). The offer period is between 20 to 50 days, extendable by another 30 days subject to approval. The offered terms must be uniform for all shareholders, and typically can be changed during the offer period to be better but not worse. The acquirer should not agree or contract with major shareholders of the target affording them special rights causing the offered terms in substance to be unequal as between major shareholders and other shareholders of the target. Once launched, the acquirer should not acquire shares of the target company from the open market or by other means until the end of the tender offer period. If a tender offer fails, or the acquirer withdraws, the acquirer cannot launch another tender offer on the same target for one year. Where a tender is for over 50 per cent of the target’s outstanding shares, the acquirer may upon completion of the tender offer request the target to convene a special shareholders’ meeting to re-elect the board in order to gain control at board level.
iii DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
i Business Mergers and Acquisitions Act
In June 2015, the Taiwan legislature passed a comprehensive set of amendments to the M&A Act, which came to effect on 8 January 2016. The amendments provide parties to M&A transactions with greater flexibility and convenience on processes and types of consideration with an overall goal of encouraging more M&A transactions. The amendments also sought to strengthen corporate governance in M&A situations by strengthening the provisions on special committee reviews, providing for an increased level of protection to minority shareholders with dissenting shareholders, and getting speedier and more certain payment for any exercised dissenter’s appraisal rights.
One of the most significant changes arising from the latest amendments is the newly introduced flexibility for an acquirer in a share swap transaction to pay with a combination of cash and shares, or even all cash, whereas historically a share swap had always been limited to share-for-share only. An all cash share swap structure provides for practical benefits of potentially more favourable tax treatment for domestic selling shareholders than in an all-cash merger structure, and is also less time consuming and less cumbersome than the traditional two-step (tender offer plus second stage squeeze-out merger) structure in takeover and take-private situations. In 2016, Micron Technology’s acquisition of Inotera Memories and ASML’s acquisition of Hermes Microvision were the first transactions to utilise this new and convenient one-step all-cash share swap structure.
ii Changes to the tender offer rules
In mid-2016, Bai Chi Gan Tou Digital Entertainment, through its Taiwan subsidiary, launched a tender offer for the shares of XPEC. The tender offer conditions (including minimum tender threshold) were met, and the required regulatory approvals were granted. However, in August 2016, in an unprecedented manner, the offeror failed to close and pay for the tender, citing difficulties in securing financing for the acquisition. This caused a huge outcry by the tendering shareholders, and immediately attracted investigations by the authorities.
In the aftermath of the XPEC scandal, the FSC quickly announced, on 18 November 2016, various amendments to the Regulations Governing Public Tender Offers for Securities of Public Companies, tightening various requirements for tender offers and imposing increased obligations on the offeror as well as on the target. First, the offeror is now not allowed to change its payment schedule. Second, the offeror is now required to provide a performance guarantee issued by a financial institution, or otherwise have a certified public accountant or financial adviser issue a confirmation of the offeror’s financial capacity. On the target side, the amendments now also require the board and special reviewing committee of the target company to conduct higher and more comprehensive scrutiny on the identity, financial capacity and source of funds of the offeror, and on the overall fairness of the offered terms and conditions.
These amendments create significantly higher hurdles for transactions taking the tender offer route. In particular, the offeror now practically would need to have the funds in place and parked ahead of closing, when the number of tendering shareholders and regulatory approvals may still be at an uncertain stage. Since the XPEC scandal, parties to public M&A pretty much stayed away from the tender offer route for the remainder of 2016, opting for the more flexible and convenient one-step all-cash share swap structure for take-private transactions.
iv FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
According to statistics published by the Taiwan Investment Commission (IC), foreign direct investment (FDI) as of 2016 totalled US$11.04 billion, a 130.09 per cent growth compared to 2015, while the number of projects as of 2016 totalled 3,414, a 9.9 per cent decline compared to 2015.4 The growth in the FDI amount was attributed to several mega-deals concluded in 2016, including Micron Technology’s acquisition of Inotera Memories and ASML’s acquisition of Hermes Microvision, both closed in Q4 of 2016.
In terms of geographical division, the Netherlands, the British Virgin Islands, Hong Kong and Japan were the top five originations in terms of FDI in 2016. The ITC sector remained the key industry for FDI investments, trailed by the retail and wholesale sector and then the financial services sector.5
FDI is governed by the Statute For Investment by Foreign Nationals and Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals. For all FDI other than that from Mainland China, investment in Taiwan companies is generally permitted, save for in those industries that are prohibited or restricted as set forth on the negative list, such as defence technologies, Type I telecomm, public infrastructure, public transportation and the financial sector.6 For projects not caught by the negative list, the IC would grant foreign investment approval in one to two weeks. For transactions with a size of NT$1.5 billion (US$50 million) or more, or that otherwise involve restricted or sensitive industries, the review process may take one to three months, and sometimes longer. In extraordinary cases where governmental agencies raise severe concerns, the IC may even stall the review process indefinitely.
In light of the unique cross-strait relation between Taiwan and Mainland China, Taiwan maintains a different set of regulations governing investments from Mainland China investors. In particular, Mainland investors are only permitted to invest in the industries listed on the positive list, and the application process is subject to stricter review. According to statistics published by the IC, investments from Mainland China as of 2016 totalled US$247.63 million, a 1.46 per cent growth compared to 2015, while the number of projects as of 2016 totalled 158, a 7.06 per cent decline compared to 2015.7
v SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
i Micron Technology’s acquisition of Inotera Memories
In February 2016, US-based memory company Micron Technology entered into a definitive share swap agreement with Inotera Memories, a TSE-listed dynamic random access memory (DRAM) maker, to acquire all of the remaining 67 per cent stake in Inotera not yet owned by Micron. The transaction was structured as a one-step all-cash share swap, with Micron paying NT$30 (US$0.95) per Inotera share for an aggregate of around US$4.1 billion, representing around a 30 per cent premium over Inotera’s share price at the time of announcement.8 This deal is one of the first announced deals to take advantage of the new all-cash share swap structure that became available from January 2016, and is also one of the largest in the global DRAM industry.
Inotera Memories was originally a joint venture between Nanya Technologies and Qimonda of Germany. During the 2008 financial crisis, Qimonda, prior to its bankruptcy, sold its entire stake in Inotera to Micron. Over the years, Micron has invested significantly in Inotera both financially and in terms of upgrading its technology processes. The full acquisition of Inotera allows Micron to take the entire output of Inotera as well as to gain greater efficiency in production.
This Inotera transaction received shareholders’ approval without much trouble, as Micron and Nanya together already held more than 60 per cent of Inotera, close to the two-thirds mark required for taking a listed company private under the newly amended M&A Act. Concurrently with the Inotera transaction, Nanya Technologies used a portion of its proceeds from exiting Inotera to invest US$1 billion in Micron shares in a parallel transaction. Micron financed the Inotera acquisition in part with an NT$80 billion local syndicate loan.
Prior to the Inotera acquisition, Micron already controlled Rexchip, another 12 inch DRAM located in Taichung, Taiwan, from its Elpida acquisition that completed in 2013. With both Rexchip and Inotera now part of Micron, Taiwan’s mainstream DRAM fabrication capacities are now completely part of the Micron family. The US, Japan and Taiwan tie-up in the DRAM business accomplished by Micron allows it to make significant headway in catching up to Samsung and SK Hynix in the DRAM space.
ii ASML’s acquisition of Hermes Microvision (HMI)
In June 2016, ASML, a leading provider of lithography systems for the semiconductor industry, entered into definitive share swap agreement with HMI, a leading supplier of pattern verification systems used for advanced semiconductor devices, to acquire HMI and take it private in an all-cash transaction for about NT$100 billion.9 The transaction entitles each HMI shareholder to receive NT$1,410 per share. The price per share reflects a 31 per cent premium over HMIs 30-day volume-weighted average price prior to announcement. This deal again takes advantage of the new all-cash share swap structure.
As part of the transaction, certain major shareholders and officers of HMI also agreed to reinvest in ASML part of the proceeds to be received by them from selling their HMI shares in the transaction. ASML agreed to issue a total of 5.9 million ASML shares (corresponding to approximately 1 per cent of ASML shares then outstanding) at a subscription price of NT$3,106 per share (for an aggregate value of approximately €500 million).
iii ASE’s acquisition of Siliconware Precision Industries Co, Ltd (SPIL)
ASE’s acquisition of SPIL has been the most eye-catching and most frequent headline-making M&A case for Taiwan in the past few years. Both ASE and SPIL are global leading outsourced semiconductor assembly and test companies, and both are dual-listed in Taiwan and the US. On 21 August 2015, ASE launched an unsolicited tender offer for 25 per cent of the Taiwan-listed shares or American depositary receipts (ADRs), or both, of SPIL at NT$45 per SPIL common share or NT$225 per ADR, a 34 per cent premium on the-then SPIL shares trading price prior to announcement but only a 0.29 per cent premium if looked at from the average over the 90 trading days prior to announcement.10 Unsolicited tender offers have historically been rare in Taiwan M&A, and the management of SPIL viewed ASE’s attempt as hostile.
Despite an unfavourable recommendation made by the review committee of the SPIL board, ASE was able to successfully close the 25 per cent tender offer. The 25 per cent mark was cleverly picked so as to avoid antitrust clearance globally, which, if required, could have undermined the purchase through tender offer, which had a limited time frame. In response, SPIL quickly persuaded Foxconn/Hon Hai Precision, the world’s largest EMS provider, to enter into a mutual share exchange that would allow Foxconn to also acquire a 25 per cent stake in SPIL. A share-for-share exchange at the desired volume required the transaction to be approved at a SPIL shareholders’ meeting. The transaction with Foxconn died after a close vote that just barely missed the passing threshold at SPIL’s shareholders’ meeting.11
In December 2015, SPIL attempted to introduce another white knight, China’s Tsinghua Unigroup, to invest in SPIL for a 25 per cent stake. In response, ASE announced a second tender offer matching the premium proposed in the Tinsghua Unigroup transaction, intending to increase its shareholding to 49.71 per cent.12 This time, the proposed increase in ASE’s stake in SPIL required antitrust clearance in Taiwan, but the review by Taiwan’s Fair Trade Commission (FTC) went long, and the second tender offer ultimately failed due to ASE’s inability to obtain clearance within the maximum permitted offer duration.
The drama between ASE and SPIL went on for almost 10 months from 2H 2015 and well into 2016, finally seeing some progress towards friendlier negotiations when on 26 May 2016, ASE and SPIL announced that they would jointly establish a new multibillion dollar industrial holding company (new holdco) through two simultaneous share swaps. The joint share swaps will result in the new holdco issuing its shares as consideration in exchange for all ASE shares at a swap ratio to exchange one ASE common share for 0.5 new holdco common shares; and the new holdco paying NT$51.2 in cash per SPIL common share as consideration to swap all SPIL shares (the cash consideration is valued at approximately NT$173 billion), thereby making both ASE and SPIL wholly owned subsidiaries of the new holdco as sister companies under one roof.13 The market reaction was generally positive to this amicable end. This transaction, as of Q1 2017, is pending, inter alia, approval from China’s MOFCOM for clearance.
vi FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Common financing sources in Taiwan include straight bank and debt loans, corporate and convertible bonds, and equity financing by way of special (preferred) shares and private placement of shares. In light of a generally low interest rate environment in Taiwan, M&A acquirers in recent years have continued to use debt financing as a primary source of funds for M&A.
Foreign private equity firm activity levels remain low in Taiwan after KKR’s 2011 buyout attempt to take Yageo, a world-leading passive components maker, private was blocked by Taiwan’s regulatory authorities. Since then, various foreign private equity firms have been focusing on exiting from their prior investments in Taiwan. For instance, the Carlyle Group reached a US$351 million deal to exit from Eastern Broadcasting and a US$1.76 billion deal to exit from Ta Chong Bank Ltd.14 The Longreach Group considered selling its stake in EnTie Commercial Bank after taking control in 2007, but eventually reached consensus to further postpone its plan to exit.15 MBK’s third attempt to offload China Network Systems (CNS), which it acquired in 2007, over the years has seen another roadblock, with the National Communications Commission virtually blocking the deal from moving forward, resulting in MSPEA and Far Eastone withdrawing their bid for CNS. On the other hand, local Taiwan-based private equity firms have been the dominant players in recent years, but have yet to participate in big-ticket, headline-making transactions.
vii EMPLOYMENT LAW
i Employment overview
The LSA is the primary legislation governing employment-related matters such as hiring and termination, severance, minimum wage, work hours, overtime, holidays, retirement and pensions. The LSA sets the floor, so all employment terms and conditions shall not be less favourable than those provided in the LSA. Currently, the minimum wage is NT$21,009 per month and NT$133 per hour, with effect from 1 January 2017. In general, normal work hours are eight hours a day and 40 hours a week.
ii Developments regarding work hours, overtime and work days
In December 2016, the Taiwan legislature passed a set of amendments to the LSA, which came to effect on 1 January 2017. The amendments focus on strengthening protection of employees in areas such as holiday schedules, overtime payments, work days and working hours. While not directly affecting the M&A process, the potential of increased labour costs resulting from the new regime under the LSA will need to be assessed more carefully by parties to potential M&A transactions.
iii Developments in non-compete clauses
In the employee non-compete realm, the general validity of a non-compete clause was first expressly confirmed by the LSA in 2015. On 7 October 2016, the Ministry of Labour further amended the Enforcement Rules to the LSA to elaborate on the reasonable scope of non-compete clauses. Key points to note include the following: the non-compete duration shall not be longer than two years, or the life of the trade secret or knowhow to be protected by the employer, whichever is shorter; and consideration for the non-compete obligation has to be separate from the employee’s salary, and shall be paid in a lump sum upon the departure of the employee or on a monthly basis during the term of the non-compete clause.
viii TAX LAW
i Taxation overview
The taxes most relevant to M&A are capital gain tax and securities transaction tax. The government resumed levying income tax on individuals’ capital gains from certain types of securities between 2013 to 2015. However, in light of the economic recession and a drop in trading volume in the stock market at that time, such policy was once again abolished by the government. Currently, capital gains realised from securities transactions are exempted from income tax from 1 January 2016, provided that the alternative minimum tax regime still applies (currently, 12 per cent for corporates).
The securities transaction tax applies to the transfer of Taiwan government bonds, stock certificates issued by a company, corporate bonds and other securities approved by the government for public offering. The tax rate for stock certificates is 0.3 per cent of the transaction value. The tax obligor of securities transaction tax is the seller, while the buyer is obligated to withhold the tax amount from a transaction’s proceeds and then pay the same to the tax authority on the next day following closing.
ii Favourable tax treatments under the M&A Act
The M&A Act provides a number of favourable tax treatments applicable to specific types of transaction. For mergers, acquisitions of assets or shares and spin-offs with voting shares as consideration equivalent to 65 per cent or more of the transaction value, the following tax treatments will apply:
- a stamp duty: exempted;
- b deed tax: acquisitions of real estate are exempted from deed tax;
- c securities transaction tax: exempted;
- d business tax: transfers of goods or services are exempted from business tax; and
- e land value increment tax can be deferred until the next transfer.
iii Introduction of anti-tax-avoidance measures
In July 2016, the Legislative Yuan passed an amendment to the Income Tax Act aiming to introduce anti-tax-avoidance measures. Among other measures, if a profit-seeking enterprise directly or indirectly holds 50 per cent or more of shares in an affiliate established in a tax heaven, such affiliate may be deemed a ‘controlled foreign company’ (CFC), and the undistributed surplus of CFC may be subject to Taiwan income tax. In addition, a foreign company that has substantial activities in Taiwan may be deemed a domestic entity for tax purposes (i.e., through having a place of effective management in Taiwan). These measures are to deter Taiwanese companies from avoiding tax by establishing entities in tax havens. The effective date of such amendment will be decided by the government.
ix COMPETITION LAW
i Taiwan’s merger control regime
The FTA is the primary legislation providing for merger control. A ‘combination’ of enterprises will require clearance by the FTC if certain market share and revenue thresholds are met.
According to FTC published statistics, a total of 71 combinations were notified to the FTC in 2016, an increase of 11 cases over 2015. Among the filings reviewed in 2016, 33 were given with clearance, while the rest were closed due to reasons such as lack of jurisdiction, their non-notifiable nature, incomplete documentation or withdrawal.
ii Market share and revenue thresholds
Merger clearance from FTC would be required where any of the following of thresholds (as of end of 2016) are met:
- a market share: as a result of a combination, the market share of the acquiring enterprise reaches one-third, or the market share of any participating enterprise reaches one-quarter before combination; or
- b revenue: the revenues of the enterprise controlling or controlled by the participating enterprises and those under common control with the participating enterprises shall be included for the calculation below:
• non-financial institutions: one participating enterprise’s domestic revenue in the last fiscal year reaches NT$15 billion and another enterprise’s domestic revenue in the last fiscal year reaches NT$2 billion;
• financial institutions: one participating enterprise’s domestic revenue in the last fiscal year reaches NT$30 billion and another enterprise’s domestic revenue in the last fiscal year reaches NT$2 billion; or
• global revenue: one participating enterprise’s global revenue in the last fiscal year reaches NT$40 billion and at least two participating enterprises’ domestic revenue in the last fiscal year reaches NT$2 billion.
iii Waiting periods and other considerations
The typical waiting period is 30 days, but the FTC can extend such period by another 30 days. In practice, in sensitive cases, the FTC may repeatedly ask for supplemental information to postpone the start of the waiting period to allow a longer time for its review.
The FTC’s review of a merger filing is conducted by an economic analysis depending on the type of combination (i.e., horizontal, vertical, conglomerate combination). The FTC is also authorised to impose conditions or obligations on the merger clearance so as to eliminate concerns about restrictions on competition. For instance, the FTC may request the participating enterprise to:
- a dispose of certain shares or assets;
- b transfer part of its business;
- c discharge someone from a particular position;
- d continue to supply key facilities; or
- e license IP rights to others.
The strength of semiconductor deals and industry consolidations continues well into 2017. With rising political tensions between China and Taiwan, cross-Strait transaction levels are likely to further decrease and remain low. With the US market continuing to be strong, and with the Trump administration emphasising ‘Made in the US’ policies, an increase in outbound investments to the US by Taiwan’s technology and manufacturing industries can be expected, and are already on the move. The government’s policy of encouraging investments into Southeast Asia will also increase Taiwan’s transaction activities in that region.
1 Thomas T M Chen, John Lin and Raymond Wang are partners at Jones Day.
2 2016 Bloomberg’s Global M&A Market Review – Legal Ranking.
3 Note: Financial institutions M&A are principally governed by another set of dedicated laws.
4 Press release, Investment Commission, 20 January 2017.
5 See footnote 4.
6 Negative list, see file://tast11ms/Users$/JP023809/My%20Documents/M&A%20Review/L2.pdf.
7 See footnote 4.