The Initial Public Offerings Law Review: Taiwan

There are two stock exchanges in Taiwan: the Taiwan Stock Exchange (TWSE) and the Taipei Exchange (TPEx). Both the TWSE and TPEx are main stock exchanges and are members of the World Federation of Exchanges. Shares traded on the TWSE and TPEx are all settled in New Taiwan dollars (NT$).

In general, companies listed and traded on the TWSE are those with relatively larger market capitalisation and business operations, whereas the TPEx offers a listing platform for companies that may have smaller market capitalisation but with higher growth potential, such as companies in the industries of biotechnology and cultural and creative business.

Since 2008, Taiwan has campaigned for foreign companies to launch their initial public offering endeavours in Taiwan. Two stock exchanges in Taiwan, the TWSE and TPEx, took the initiative of setting up a legal regime aiming to serve this goal.

In general, foreign companies seeking a primary listing on the TWSE or TPEx do so through a listing vehicle set up in offshore jurisdictions, such as the Cayman Islands. As at December 2019, there were more than 100 foreign companies that had successfully completed their listing projects, either on TWSE or on TPEx. These companies come from a variety of countries, such as Mainland China, the United States, Japan, Singapore, Vietnam, Cambodia, Malaysia and Thailand.

According to the relevant market statistics, as at May 2021, 953 companies (including domestic companies and foreign companies) were listed on the TWSE with a total market capitalisation amounting to around NT$52,150 billion; 787 companies were listed on the mainboard of the TPEx; and 263 companies were registered with the Emerging Stock Board (ESB) under the Emerging Stock Market (ESM). The total market capitalisation of companies listed on the mainboard and the ESB of the TPEx amounts to around NT$5,888 billion.

The primary regulator for capital markets and publicly issued companies in Taiwan is the Financial Supervisory Commission (FSC). Applications for listing on the TWSE and TPEx are subject to review and approval by the TWSE and TPEx, respectively. After an application is approved, the application will be reported to the FSC for recordation.

i Main stock exchanges

From the history of the development of Taiwan's stock market, the industries of companies listed on the TWSE or TPEx have been closely related to the government's policies and the trend of overall development of Taiwan. In the early days, listed companies in the textile and petrochemical industries increased rapidly, followed by the high-tech industry (including semiconductor, electronic parts and components manufacturing), information technology and biotechnology in recent years.

TWSE

Since the TWSE has stricter listing requirements for the size of share capital, profitability and years of establishment of the issuer, it attracts more established issuers in the technology industry to apply for listing, such as Taiwan Semiconductor Manufacturing Co, Ltd (TSMC); Hon Hai Precision Co, Ltd; ASE Technology Holding Co, Ltd (ASE); and Delta Electronics, Inc.

TPEx

The mainboard of the TPEx targets small and medium-sized issuers with lower listing requirements and has been committed to fostering innovative enterprises and emerging industries, such as the biotechnology and cultural and creative industries, and actively encouraging those companies to list on its platform. According to statistics published on the TPEx's website, as at June 2021, 93 biotechnology companies were listed on the TPEx, amounting to more than 10 per cent of the total companies listed on the mainboard of the TPEx.

It is not common for domestic issuers to pursue dual listings on foreign exchanges. Certain larger-scale companies, with a view to pursuing international visibility, choose to list their shares in the form of American depository receipts (ADRs), such as TSMC and ASE, or in the form of global depository receipts, such as Delta Electronics, Inc.

ii Overview of listing requirements

The listing requirements of the TWSE and TPEx are described in the tables that follow.

General requirements for primary listing on the TWSE

General requirements for primary listing on the TPEx

Apart from the general listing requirements, to offer listing opportunities for enterprises that have growth potential but have not yet generated the required profits, both the TWSE and the TPEx loosened the requirements on profitability for companies in the high-tech and cultural and creative business industries to facilitate the raising of funds by those companies in Taiwan's capital market.

Listing requirements for companies in the technology and cultural and creative industries on the TWSE

Listing requirements for companies in the technology and cultural and creative industries on the TPEx

In March 2018, to respond to the market trend, the TWSE announced a 'diversified listing plan' and amended the relevant listing rules, opening doors for companies with a high valuation (known as 'unicorn' start-ups) to list their shares on the TWSE.

Major requirements for companies applying for diversified listing

To assist the development of innovative industries, improve fund raising channels and expand the scope of the capital market, the FSC announced in December 2020 that starting in the third qurater of 2021, the TWSE would establish the Taiwan Innovation Board (TIB), and the TPEx would establish the Pioneer Stock Board (PSB) under the ESM.

Major requirements for companies applying for TIB listing on the TWSE

Compared to the listing requirements set by the leading global exchanges such as the New York Stock Exchange, Nasdaq and the Hong Kong Stock Exchange, there are some features that are particular to the TWSE and TPEx and that may appear unique compared with the others. A few examples are stated below.

ESM registration

The ESM of the TPEx, comprising the existing ESB and the incoming PSB starting Q3 2021, is established for companies to prepare themselves for going public before they are eligible to be listed on the TWSE or TPEx. The ESB applies to companies in all industries whereas the PSB is exclusively for companies in (1) the information and digital industries; (2) the information security industry that combines 5G, digital transformation and national security; (3) the biomedical technology industry; (4) the national defence and strategic industries; (5) the green and renewable energy industry; (6) the strategic stockpile industries relating to the provision of key supplies; or (7) other innovative industries.

The shares of the companies registered on the ESM are traded over the counter. A domestic issuer must be registered on the ESM for at least six months before applying for listing on the main board of the TWSE or TPEx.

This requirement is not mandatory for foreign issuers. They can choose to be registered on the ESM for six months or be sponsored by the lead underwriter for not less than six months before applying for listing on the main board of the TWSE or TPEx.

Protection of minority shareholders

Retail investors contribute to a substantial part of trading in the Taiwanese stock exchanges, so the government has always been cautious in respect of the protection of minority shareholders in listing companies.

Out of the same rationale, the TWSE and TPEx require that foreign companies applying for listing amend their articles of association so that certain matters prescribed in the Checklist of Shareholders Rights Protection (the Checklist) promulgated by the TWSE or TPEx can be built into the applicants' charters. The matters prescribed in the Checklist basically reflect material provisions regarding shareholder rights protections provided under the Company Act and the Securities and Exchange Act.

iii Overview of law and regulations

TWSE review rules

The requirements for listing on the TWSE (for both domestic issuers and foreign issuers) are set forth in the Taiwan Stock Exchange Corporation Rules Governing Review of Securities Listings (the TWSE Listing Rules), the Taiwan Stock Exchange Corporation Procedures for Review of Securities Listings and the Operational Procedures for the Review of Foreign Securities for Listing by the Taiwan Stock Exchange Corporation.

TPEx review rules

The requirements for domestic issuers' listing on the TPEx are set forth in the Taipei Exchange Rules Governing the Review of Securities for Trading on the TPEx, while the requirements for foreign issuers' listing on the TPEx are set forth in the Taipei Exchange Rules Governing the Review of Foreign Securities for Trading on the TPEx.

For registration with the ESM by both domestic issuers and foreign issuers, the requirements are set forth in the Taipei Exchange Rules Governing the Review of Emerging Stocks for Trading on the TPEx.

Corporate governance requirements

Before filing the listing application, a foreign company applying for listing on the TWSE or TPEx is required to comply with certain corporate governance requirements. Some material requirements are described below.

Implementation of certain internal rules

A foreign company applying for listing is required to adopt the following internal rules: (1) rules of procedure for board of directors' meetings; (2) rules for the election of directors; (3) rules for shareholders' meetings; (4) operational procedures for endorsements and guarantees; (5) operational procedures for lending funds; and (6) rules and procedures for the acquisition and disposal of assets.

Election of independent directors

The foreign company must have at least three independent directors accounting for not less than one-fifth of the total number of directors.

Audit committee

The board of directors of the foreign company must establish an audit committee. All independent directors shall be members of the audit committee, and the audit committee shall comprise solely independent directors. Among the independent directors, at least one of them shall have accounting or financial expertise, and at least one of them shall be domiciled in Taiwan.

The responsibilities and powers of the audit committee shall comply with those specified in the relevant Taiwan laws and regulations. For example, certain material corporate matters, such as the foreign company's annual and semi-annual financial reports, require the majority consent of all audit committee members before being submitted to the board of directors for resolution.

Compensation committee

The board of directors of the foreign company must establish a compensation committee comprising at least three members, one of whom shall be an independent director. The professional qualifications of the committee members and its responsibilities and powers shall comply with those provided in relevant Taiwan laws and regulations. For example, the compensation of the directors and managers of the foreign company shall be assessed by the compensation committee before being submitted to the company's board of directors for resolution.

i General overview of the IPO process

Below is a brief overview of the IPO process in Taiwan. The time frames set forth in the table reflect common practice. Specific time frames for individual applicants may vary depending on surrounding circumstances.

Domestic issuers

Foreign issuers

ii Pitfalls and considerations

The TWSE or TPEx conduct a thorough and substantive review of IPO application documentation during the IPO process. According to rules governing the review of securities and foreign securities for trading on the TWSE or TPEx, the TWSE or TPEx shall deny approval for a company's application if any of the following circumstances exists:

1. the applicant company has conducted any activities in violation of the principle of good faith in the most recent five years, or its directors, general manager or de facto responsible person violated the same principle in the most recent three years (for a TPEX listing application, the five-year period for the applicant company is shortened to three years);
2. the board of directors or supervisors of the applicant company are not able to independently perform their functions; or
3. in respect of an applicant company that has been registered with the ESM since the most recent fiscal year, any of its incumbent directors or material shareholders (those who hold 10 per cent or more of the total issued shares) traded the company's shares not on the ESM platform.

Other major concerns that the TWSE or TPEx may have about an applicant company's application, and for which the TWSE or TPEx may deny approval, include but are not limited to the following:

1. the finance or business of the applicant company is not independent from those of certain other persons (e.g., the business of an applicant heavily relies on one or two buyers);
2. the applicant company has had material labour disputes or environmental pollution issues and has not made any improvement;
3. the applicant company has had material transactions not on an arm's-length basis and has not made any improvement;
4. the applicant company has failed, in a material respect, to effectively implement its accounting system, internal control system or internal audit system, or has failed to prepare financial reports in accordance with relevant laws and regulations and generally accepted accounting principles; and
5. there has been a serious deterioration in the applicant company's business operations.

iii Considerations for foreign issuers

Necessity of using a listing vehicle

While the common practice for a foreign company to come to Taiwan for listing is to set up a listing vehicle in an offshore jurisdiction, such as the Cayman Islands, legally speaking, a foreign company is not required to do so and may make the listing application with the company that operates its main business.

However, in reality, owing to the requirement to amend the articles of association for minority shareholders' protection as described in Section II.ii, using a listing vehicle has proved to be a more viable approach. As of today, all foreign companies (except for one) that ever came to Taiwan for listing are all using listing vehicles incorporated in the Cayman Islands.

PRC elements

Under Taiwan law, a PRC investor refers to any individual, juristic person, organisation or any other institution from Mainland China. It also includes any company located in a third area (an area other than Mainland China and Taiwan) and invested in by PRC investors whereby (1) the shares held or capital contributed directly or indirectly by PRC investors in aggregate exceed 30 per cent of the total number of shares or total amount of capital contribution of the third-area company, or (2) PRC investors have control over the third-area company.

If more than 30 per cent of a company's total issued shares are owned by PRC investors, it is not allowed to apply for listing in Taiwan. Similarly, the TWSE and TPEx will not approve a foreign company's listing application if PRC investors have majority seats in the company's board or have control over the company's management or operation.

Similar to all major stock exchanges around the globe, the TWSE and TPEx also have a disclosure requirement. To ensure that the disclosure requirement will be properly followed after the occurrence of an event having a material effect on the shareholders' equity or the trading price of a listing company, both TWSE and TPEx listed companies are required to publicise the material information on the Market Observation Post System (an electronic platform established by the TWSE) within the prescribed time limits.

Such material information includes, among other things: (1) any material change on the finance or business of a listed company or its responsible person; (2) entry or termination of material business contracts; (3) change of auditors for a reason other than regular replacement; and (4) appointment of or change in the chair or general manager of a listed company.

In recent years, the government has continued to encourage foreign companies to apply for listing on the TWSE or TPEx. To attract more foreign applicant companies, the FSC has taken measures such as (1) speeding up the review process of the TWSE and the TPEx and shortening the review time from eight weeks to six weeks; and (2) waiving the profitability requirements for primary listing for emerging innovative enterprises that are performing well on the scale of operations.

Thanks to the above policy, the TWSE and TPEx are more open-minded to companies intending to apply for listing in Taiwan and are more willing to discuss with an applicant company its issues relating to the listing application. As such, a healthy increase in IPO activity in Taiwan is expected in 2021.