Taiwan Distressed M&A and Corporate Restructuring Guide 2021

TAIWAN

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This article adopts a question and answer format to cover the legal and regulatory aspects governing distressed mergers and acquisitions (“M&A”) and corporate restructuring and their respective process of execution, while highlighting some commercial aspects and specific sectors for investor to note.

Under Taiwan laws, there are two types of insolvency proceedings, namely a bankruptcy proceeding (similar to a U.S. Chapter 7 bankruptcy) and corporate reorganization procedures (similar to a U.S. Chapter 11 bankruptcy).

Corporate reorganization is only available to public companies (i.e., companies listed on the stock exchange or companies registered as public status companies subject to the jurisdiction of Taiwan Financial and Futures Supervisory Commission (“FSC”), which is similar to the Securities Exchange Commission in the United States).

There are no proceedings in Taiwan that are equivalent to the receivership, assignment for the benefit of creditors, or secured transaction in the United States under Article 9 of Uniform Commercial Code except for the mandatory receivership applicable to banks and insurance companies where only the FSC or its authorised government funds can act as the receiver thereto.

In relation to banks, under Article 62 of the Banking Act of the Republic of China (the “Banking Act”), when there is a concern that a bank is unable to pay its debts when due or there is a risk to the depositors’ interests due to obvious deterioration in the bank’s business or financial status, the FSC shall assign officials to take receivership over the bank, order such a bank to suspend and wind up business, or take other necessary measures. In addition, when a bank’s capital is graded as being seriously inadequate, the FSC shall assign officials to take receivership over the bank within ninety (90) days from the date the bank is listed as having seriously inadequate capital.

Regarding insurance companies, Article 149 of the Insurance Act of the Republic of China (the “Insurance Act”) provides that FSC shall assume conservatorship or receivership over the insurance enterprise, order the enterprise to suspend and wind up business, or liquidate the enterprise in the following manners: when (1) the capital adequacy ratio is categorized as seriously inadequate, and the enterprise or its responsible person fails to complete the plan for capital increase or the corrective action plan for finance or business within the specific period required by the FSC; or (2) the insurance enterprise’s finance or business gets worse under the circumstances other than those referred to in item (1) and the enterprise is unable to pay its debts or fulfill its contract obligations or is likely to undermine the rights of insured parties due to significantly deteriorating business or financial situation.

For companies in bankruptcy, the objective of the trustee and the court is to sell all assets of the company to satisfy the debts; while for companies in a reorganization, the objective of the reorganization administrator is to present a reorganization plan for the company to continue its operations after completion of the reorganization.  In addition, since the only special legislation in Taiwan that addresses distressed M&As is in the context of a company in reorganization, and the Bankruptcy Law of the Republic of China does not provide any provision relating to M&As, this Article will not address any distressed M&A cases in the context of bankruptcy proceedings.

As to the corporate restructuring in this Article, we will focus on only the corporate restructuring of companies that are solvent and that are not in the reorganization proceeding.

In general, corporate restructurings conducted by Taiwanese companies include internal restructuring (without changes in shareholding structure), division (including types such as spin-off, split-off and equity carve outs) and change of domicile.

1. Current State of the M&A Market in Taiwan

• What is the current economic condition of your country and which sectors are the most vulnerable or affected?

On 14 August 2020, the Directorate-General of Budget, Accounting and Statistics, Executive Yuan of the Republic of China, issued a press release appraising the overall economic impact of the COVID-19 pandemic .  The Directorate-General projected a 1.56% GDP for Taiwan for the financial year of 2020, representing the worst projected economic growth rate since 2015.  While the unemployment rate of July 2020 has not significantly increased compared to the previous month and the same period of the previous year, up to June 2020, over 30,000 labors have been forced to take involuntary unpaid leave, the worst seen in ten years.

Tourism-related businesses such as travel agencies, airlines, and hotels, as well as restaurants and retail businesses have taken a significant hit from the pandemic due to travel restrictions and social distancing requirements and are presently viewed as vulnerable sectors.  In contrast, due to the needs and trend of work from home, some technology businesses such as laptop computer manufacturing/supply chain have reported strong rebound in their revenues in Q2 2020.

• Are you seeing significant M&A or corporate restructuring transactions generally or are expected in the near future?

Based on our experiences and communications with fellow bankers and accountants, many M&A deals and plans have been put on hold since April of 2020. However, several major acquisition deals (pending merger control filing and approval) were still announced from June to August, including Carrefour’s acquisition of the “Wellcome” supermarket chain in Taiwan from Dairy Farm Group (HK) and Taishin Financial Holding Co., Ltd.’s acquisition of Prudential Life Insurance Taiwan.

Further, we expect the companies affected by the pandemic, notably companies in the tourism, hospitality, food and beverage and manufacturing sectors, to seek reorganization relief under the Company Act of the Republic of China (the “Company Act”), restructure their bank loans with their banks in the near future should the situation not improve or simply close down and liquidate.

As to the corporate restructuring transactions, we expect that listed companies will review their internal structures and try to carry out corporate restructuring to create more optimal organization either to improve efficient or attract additional investments.

• What are the latest trends and statistics in your jurisdiction in the field of distressed M&A and corporate restructuring?

We do not see an active market in Taiwan for distressed M&A and the number of deals appear to be limited.  From 2009 to 2017, there have been 4 insurance companies taken over by the Insurance Development Fund under the aforementioned regulatory receivership.    The recent M&A appear to be acqusitions of companies with healthy financial conditions.

We have seen a number of company restructuring in listed companies with the aim to improve efficiency and consolidate the work force.  These transactions are usually conducted in the manner of internal restructuring by the sale of assets and transfer of employees among the existing subsidiaries, without invoking the procedures for division under the BMAA.

As to division, companies usually conduct division under the BMAA in order to separately bring the new entity to IPO or conduct an M&A transaction for selling the new entity.

Recently change of domicile to Cayman Islands is popular among startup companies originally incorporated in Taiwan as Cayman Islands Companies Law provides more flexibility for shareholding structures and employee stock options. Cayman Island companies are also usually used as the vehicle for IPO in Taiwan stock market and stock market outside of Taiwan since the Taiwan laws are stricter compared to Cayman Islands’ laws. For example, any Chinese investor’s investment into Taiwan companies (regardless of the amount) is required to go through a lengthy approval process, while Chinese investors investing into a foreign holding company of a Taiwan subsidiary will not require Taiwan governmental approval as long as the Chinese investors’ shareholding percentage of the foreign holding company does not exceed the minimum quota and Chinese investors’ do not have control over the foreign holding company.  In addition, although Taiwan laws allow issuance of preferred shares, not all of the commonly seen preferred shareholders’ rights may be incorporated into the articles [of incorporation].

• What are the opportunities available to foreign investors in such distressed M&A and corporate restructuring transactions?

The Taiwanese government adopted policies to provide special subsidies and relief packages for vulnerable industries that have seriously suffered financially from the pandemic, such as retailers, restaurants, manufacturing businesses, agriculture businesses and transportation and tourism businesses [6].  Foreign investors may have more distressed M&A opportunities in such sectors.  However, regardless of the sector, there are no policies that have been passed to regulate or are otherwise specifically favorable to foreign investors as buyers in distressed M&A or corporate restructuring.  Instead, since 2019, the Taiwanese government has adopted various policies to provide tax incentives, land incentives, low-interest loans, research & development subsidies, and other incentives for foreign investors to counterbalance any regional disincentives created by US-China trade tensions, [of which foreign investors can take advantage of in distressed M&A and corporate restructuring transactions.

A government-sponsored portal, “Invest in Taiwan” https://investtaiwan.nat.gov.tw/showPage?lang=eng&search=reward, was created to provide more details to potential investors.

• How far does the government assist in distressed M&A and corporate restructuring activities?

The Taiwanese government usually only facilitates distressed M&A or corporate restructuring activities for distressed companies in key industry sectors, such as financial institutions.  For example, the Banking Act and the Insurance Act expressly provide the authorization for regulatory receivership, which does not apply to other industry sectors.  Generally, before initiating the receivership arrangements under such laws, Taiwanese government would adopt certain arrangements to encourage mergers or takeover of banks and insurance companies in violation of the Banking Act or the Insurance Act to avoid the regulatory receivership. For example, the government in the past indemnified the winning bidders for the liabilities they need to assume from the insolvent banks.  Taiwanese government may, at its discretion, and on a case by case basis, assist certain companies in negotiating with the banks for a delayed payment plan, especially when it is expected that such companies would go bankrupt and result in serious unemployment.

2. Distressed M&A

• What are the laws and regulations governing M&A in your country? Is there any special law specifically targeting distressed M&A?

The key legislation governing M&A transactions is the Business Mergers and Acquisitions Act of the Republic of China (the “BMAA”).  A variety of rules found in the Company Act, the Securities and Exchange Act of the Republic of China (the “SEA”), the Fair Trade Act of the Republic of China, the Labor Standards Act of the Republic of China (the “LSA”), and the Statute for Investment by Foreign Nationals of the Republic of China (the “SIFN”) are also relevant in M&A deals.  However, the only legislation that specifically deals with a distressed company’s M&A is set forth in Article 51 and Article 52 of the BMAA.   Another provision is Article 156-4 of the Company Act which deals with the government’s subscription of new shares issued by a company in a governmental bail-out program.

Article 51 of the BMAA provides that a plan of corporate reorganization may contain the proposal for the merger or acquisition.  Please note that this corporate reorganization refers specifically to the reorganization proceeding under Article 282 of the Company Act which is a type of insolvency proceeding only available to public companies.  If the corporate reorganization of a company includes M&A transactions, supporting documents must be produced, which would constitute an integral part of the plan of reorganization.  The M&A does not need to be approved by the shareholders or the board of directors, but the reorganization plan must be prepared and filed by either of (1) shareholders who have been continuously holding shares representing 10% or more of the total number of issued shares for a period of six months or longer; (2) creditors of the company who have claims equivalent to 10% or more of the capital from the total number of issued shares; (3) labor unions; or (4) two-thirds or more of the employees of a company in accordance with the corporate reorganization procedures.

Further, Article 52 of the BMAA provides that if the merger or acquisition is entered into during the course of corporate reorganization by the company, a dissenting shareholder is not entitled to the dissenter’s right to demand the company to buy back its shares, which is otherwise available to the dissenting shareholders in an ordinary M&A transaction.

However, Articles 51 and 52 of the BMAA have never been tested since the reorganization proceeding is only available to public companies and no such company has ever entered into an M&A transaction.

Article 156-4 of the Company Act also provides the basis for the government’s subscription of a company’s shares in a bailout program.  To improve its financial structure or resume its normal operation, the company participating in the special governmental bailout program may issue and transfer new shares to the government as consideration for receiving governmental financial assistance.  Such new share issuances will not be subject to the restrictions regarding the issuance of new shares set forth in the Company Act, such as the shareholders and the employees’ preemptive rights.  It is possible that after the bailed-out company resumes its normal operation and financial condition, the government may sell such shares to a third-party acquirer through a public bidding process or to the company upon its repayment of government funding.  However, Article 156-4 was promulgated in 2009 after the global financial crisis but has never been put into practice.

Except for the foregoing two scenarios, even for distressed companies, the regular M&A procedures would apply, which do not provide any special relief to buyers or sellers with respect to the sellers’ indebtedness and liabilities.  Other than the said provisions concerning M&A deals for a company in reorganization, none of the requirements for M&A deals, such as the governmental approvals for regulated industries and for foreign investors, antitrust filing, and foreign and China ownership restrictions, are lessened for M&A of distressed companies.

2.1   Due Diligence

• Briefly describe the general process of legal and tax due diligence which is to be conducted on target company in case of a distressed M&A, specific risks, and mitigation?

For a distressed M&A with respect to a company not yet in reorganization, the extent of due diligence that can be performed will largely depend on the cooperation of the target company as publicly available information is very limited in Taiwan.

1. Company registration information on the government’s website only reveals the address, the business scope, the names of directors and supervisors, and the branch’s location and address. The shareholders’ information is not publicly available.
2. Information regarding ownership of the company’s assets is limited to real estate property, aircraft, patents, and trademarks. Information about the company’s ownership of shares in other companies and tangible assets are recorded in private records kept by the company.  Copyrights do not require registrations in Taiwan.
3. Information about encumbrances on mainly mortgages or court attachments on the real estate property, movable equipment, machinery, patents, and trademarks owned by the target company are publicly available. Pledge records of shares for private companies are not publicly available.  Pledge of bank deposits may only be found through banks with the target company’s consent.
4. Information regarding the tax payment by the target company is not publicly available. However, the target company can apply for the issuance of “No-Tax-Delinquency Certificate” with municipal/county governments for the buyer’s verification.
5. Loan or financing information is not publicly available.
6. The buyer may only find court decisions that have been rendered through the Judicial Yuan administrated website, but information about pending litigation or foreclosure information is not available.

For a distressed company in company reorganization proceedings, because the creditors are required to report their claims during the claim period and the M&A if any would be driven by the court appointed reorganization administrator, the buyer would have a much better understanding of the liabilities and the reorganization plan through the reorganization administrator.  The creditors’ information or the reorganization plan is not publicly available information, so it is up to the reorganization administrator to decide whether, and to what extent to disclose such information to potential buyers based on his/her fiduciary duty to the company in reorganization. Claims not reported in the claim period would be released.  The reorganization plan, if approved, would be binding on the creditors and shareholders.

In light of the foregoing, the due diligence required for a distressed M&A transaction involving a company not in a reorganization proceeding will be difficult and will depend entirely on the company providing true and accurate information.  One obvious way to mitigate risk is to hold back a significant percentage of the consideration and to seek, at the very least, verification from the banks about the target’s amount of indebtedness.

• How assets of a company are generally valued (government monitored or market-driven) from an M&A perspective? What factors should the acquiring company consider before initiating a transaction involving a distressed M&A?

The assets of a company are generally valued based on their fair market value, and will usually be with reference to an appraisal report and/or a fairness opinion commissioned by the board. The governmental agencies are only concerned whether or not the price proposed is based on the fair market value and if the shareholders’ interest are protected.  In the absence of complaints filed, they usually will not challenge the price determined by the board when there is an appraisal report and/or fairness opinion.

Further, proceedings for revocation of fraudulent transfers are also available under Taiwan laws, of which transactions that are likely to be prejudicial to the rights of the creditor of the seller in an asset acquisition and where both the seller and buyer are aware of such prejudice may be filed to the court for revocation by the creditor or the bankruptcy trustee (if the company files for bankruptcy after such transaction).

To mitigate the risk of claims by shareholders or creditors against the board members, normally the company will obtain an appraisal by an independent expert (e.g., Certified Public Accountant) and a fairness opinion letter for pricing from another expert.  Under the SEA, public companies must adopt policies to govern the acquisition and disposal of assets, therefore, the valuation and disposal of their assets should be made pursuant to such policy.

Except for a purchase of assets via an auction or a private sale in a bankruptcy procedure or an M&A transaction in a corporate reorganization, the liabilities of the target company will not be released and the buyer will assume all such successor liabilities post-closing.  Therefore, before initiating a distressed M&A transaction, it is advisable that the buyer agrees with the target company’s major creditors regarding the post-closing arrangement.

2.2  Transaction Structuring

• What are the probable structures in case of distressed M&As permitted under the law (acquisition of asset or shares or other models)? Briefly describe the merits and demerits of each model.

The M&A forms available under the BMAA include a merger, a stock swap, acquisition of all assets or substantially all assets, general assumption of assets, liabilities, and businesses, and acquisition of an independently operating division (division).  The buyer may also choose to buy shares from shareholders one by one if there are not many shareholders or buy only selected assets without assumption of liabilities, but these two transactions are not deemed the M&A forms under the BMAA, so the buyer would not be eligible for any tax benefit provided under the BMAA.

However, none of the foregoing M&A activities will release the buyer from successor liabilities, except for purchase of only selected assets without assumption of liabilities.    If the target company subsequently enters into the bankruptcy proceeding or becomes insolvent and the creditor believes the price is too low detrimental to the interest of the creditor, then the creditor may still seek to cancel the transaction on the basis of fraudulent transfer.   However, such cases are rare.

If the merger or acquisition transaction is made under a corporate reorganization plan approved by a court, except for the debts to be assumed by the merged company or acquiring company as set forth in the plan, upon the completion of the reorganization process, the merged company or the acquiring company will be released from all prior debts and liabilities of the target company.

Therefore, due to the limited due diligence and the risk for assumption of liabilities, the buyer may want to consider only purchasing the distressed company’s assets.  In addition, the purchase should be carefully structured so that the buyer is not considered as assuming all aspects of the business operations, which would result in the assumption of all of the target’s liabilities.

• What are the roles and responsibilities of the stakeholders—acquirer, target, governmental departments, legal and tax advisors, etc. in case of a transaction involving a distressed M&A?

The roles of stakeholders in a distressed M&A are no different from a regular M&A. However, roles and responsibilities of stakeholders are different in an M&A transaction involving a target company in reorganization.

The reorganization administrator in lieu of the board of directors will manage the company in reorganization.  After filing for a petition for corporate reorganization, the court may decide to approve or deny the petition.  Upon approving the reorganization petition, the operation of the business of the company and the power of controlling and disposing of the property thereof shall be transferred from the board of directors to the reorganization administrator(s) appointed by the court, and the reorganization supervisor(s) shall supervise such transfer, which shall then be reported to the court.  Upon such transfer, the shareholders’ meeting and directors and company supervisors shall cease to function.  At the time of the aforesaid transfer, the directors and managerial officers of the company shall hand over to the reorganization administrator all statements and records of accounts and documents relating to the business and finance of the company and all property thereof.

In addition, directors, supervisors, managerial officers, and employees of a company shall have the obligation to answer the enquiries made by the reorganization supervisors or reorganization administrator regarding the operation and financial activities.

However, as a practical matter, since the company in reorganization still operates its business through managerial officers and employees, the M&A, if any, will need to first be submitted to the management for consideration.

Therefore, for a company in reorganization, to conduct an M&A transaction, the buyer would need to negotiate the M&A transaction first with the management and then with the reorganization administrator, the reorganization supervisor, and the advisers they appoint.  In addition, since the reorganization plan must be approved by the creditors and shareholders, before it is submitted to the court for approval; the buyer will need to reach out to the creditors holding the majority of the indebtedness and the majority shareholders and negotiate the terms with them.

Government agencies are usually only concerned about redundancy issues in distressed M&As.

2.3  Tax Considerations

• What are the general tax exemptions and reliefs for such distressed M&A transactions? Is the requirement to pay any tax or fees to the government?

The security exchange tax of 0.3% of the sale price will apply to a share acquisition transaction.  However, if the consideration is paid by share exchange for 65% or above of the total outstanding shares of acquired entity, such security exchange tax and stamp duty can both be exempted.

If the acquirer acquires the assets and business operations of the target company or an independent department or business unit and assumes all obligations thereof, the deed tax of real property title transfer can be exempted and the land value increment tax may be registered under the title of acquirer for the payment upon future transfer.  However, the real property title registration fees will be payable by the acquirer.

No tax exemption is specifically available for distressed M&As. After the merger, spin-off, or acquisition, any tax concession previously enjoyed by the merged entities will continue to be applicable to the surviving or newly created company.  However, it is required to manufacture the same products or provide the same services that were originally approved for tax concessions by the merged entities in order to continue the concessions obtained previously.

The unexpired and unutilized net operating losses of the participating entities prior to the merger or spin-off may be carried over to the surviving or newly created entity according to the percentage of shareholding in the surviving or newly-created company held by all shareholders of the participating entities.

Income tax exemption is available if the shares acquired by a company because of transfer of its entire or substantial portion of business or assets to another company, or due to spin-off, is greater than 80% of the consideration of the entire transaction, and all the shares so acquired have been transferred to the shareholders of the transferor.

2.4  Documentation

• What are the key documents that need to be prepared to give effect to a distressed M&A?

Similar to a regular M&A, key documentation would include the major deal agreement (e.g. share purchase agreement, share swap agreement, assets purchase and sale agreement and division plan) and ancillary deal agreements (e.g. transition agreements and employment agreements), depending on the form of the M&A deal.

However, for a company in reorganization, in addition to the usual M&A deal documents, there must be a reorganization plan which incorporates the M&A deal documents for approval.

2.5  Approvals

• Is there a requirement to obtain any consent or approval from the relevant government department for such distressed M&A transactions?

The approval requirements for a distressed M&A involving a target company not subject to the reorganization procedures are the same as those approvals required for a regular M&A.    With respect to a foreign buyer, the typical approval would be a foreign investment approval.  The additional approvals may include antitrust filing, approvals from the FSC, Executive Yuan of the Republic of China in the case of financial institutions or public companies, or any other governmental agencies for regulated industries.

If a distressed M&A involves a target company subject to the reorganization procedures, the M&A transaction proposal must be included in the reorganization plan, which shall be approved by the creditors and shareholders at the interested parties meeting and then submitted to the court for final approval.

2.6  Closing

• What considerations should be factored before concluding the final close of the deal?

For a distressed M&A involving a target company not subject to the reorganization procedures, before closing a distressed M&A deal, it is advisable to put in place an escrow arrangement for holdback and request as closing deliverables certificates from banks regarding loan payments and discharge of loans.

If a distressed M&A involves a target company that is subject to the reorganization procedures, the reorganization plan will provide the creditors’ rights and entitlements in/post such M&A transaction, as well as the general debt relief arrangement which parties should consider carefully before concluding the deal.  As the reorganization plan will be subject to the creditors’ and court’s approval, these parties would not prefer a deal which requires a substantial holdback amount for future indemnities.

3. Corporate Restructuring

• What are the legal and regulatory requirements governing corporate restructuring in your jurisdiction?

We will focus on only the corporate restructuring of companies that are solvent and that are not in the reorganization proceeding.

In general, corporate restructurings conducted by Taiwanese companies include internal restructuring (without changes in shareholding structure), division (including types such as spin-off, split-off and equity carve outs) and change of domicile.

Internal Restructuring

As to internal restructuring, if it does not involve division of an independently operating division to another entity in exchange for issuance of new shares by the transferee, the re-arrangement of management, financial, operational and/or labor matters will be mainly subject to the Company Act with respect to transfer of a portion of the assets and business, and the LSA with respect to transfer of relevant employees, and the SEA with respect to the procedures for disposal of assets by listed companies.  These transactions are usually decided at the board’s level.  The shareholders’ approval is only required in limited cases, such as sale of substantially all or all of the assets.

Division

If the company restructuring involves division of an independently operating division to another entity in exchange for issuance of new shares by the transferee, it falls within the definition of “division” under the BMAA.  The BMAA provides for the company division procedures, which includes a division plan for shareholders’ meeting’s approval, dissenting shareholders’ right and creditor protection.  Similar to the dissenting shareholders’ right in the case of a merger, the shareholders that vote against the division may demand the company to buy back their shares at the fair market value after the shareholders approves the division.  If the dissenting shareholder and the company cannot reach mutual consensus on the fair market value, the company must file to the court for a court verdict to decide the fair market value.

In addition, the creditors’ protection procedure applies to the division transactions that upon the shareholders’ resolution of the division, the company shall immediately notify the known creditors and make a public announcement of the division and specify a period of not less than 30 days to allow for creditors’ objection. The company that has not given notice or made public announcement, or fails to fully repay the debts (whether they are due or otherwise) to the creditor who has raised an objection to the division, to come up with an appropriate security, to create a trust exclusively for the objecting creditors to their satisfaction, or to certify that such a division is without prejudice to the rights of creditor, shall be jointly liable for the debts and/or liabilities incurred by the transferee company prior to the closing of division.

In addition, if the company is a listed company, under the BMAA, the company must set up a special committee to review the fairness and reasonableness of the division plan and the proposed transaction, then report the review results to the board of directors and if the resolution by the shareholders is required, to the shareholders’ meeting.

Change of domicile

The Taiwanese companies usually conduct a change of domicile restructuring transaction in order to create a foreign holding company which holds the Taiwan subsidiary to facilitate overseas initial public offerings (“IPO”) in the future.  This restructuring type has become very popular in the past few years, especially for biotech companies because they generally think their companies are undervalued by the Taiwan stock markets.

Due to the Taiwan regulatory restrictions to prohibit a foreign company without operations to conduct a direct stock swap transaction between the Taiwan company and the newly incorporated foreign company, whereby all the shareholders of the Taiwan entity exchange their shares for the shares of the foreign company, this change of domicile restructuring is usually conducted in the manner whereby the foreign holding company must enter into a sale and purchase agreement with each shareholder of the Taiwan company, according to which the existing shareholders of a Taiwanese company will sell all of their shares to the foreign holding company and use the same proceeds to purchase the shares of such foreign holding company.

Shareholders’ meeting resolution is not mandatory in a change of domicile as the sales of existing shares and later subscriptions of new shares are between a shareholder and such foreign holding company.  However, usually, there will be a migration agreement to which the Taiwanese company, the foreign holding company and the shareholders are parties, and the board of such Taiwanese company will resolve to approve the execution of migration agreement and related documents.  In addition, due to the Taiwan foreign investment approval requirements, the companies will need to arrange for the cash flow for purchase of the Taiwan company’s shares and subscription of the foreign holding company’s shares.

• What are the companies preferring in relation to corporate restructuring? Are companies considering internal restructuring—labor or financial restructuring or an overall restructuring of the entire business?

It is observed that in the case of corporate restructuring, the Taiwan companies would usually choose the type of transactions that may avoid shareholders’ approval and regulatory approval. Therefore, sale and transfer of partial business or assets along with transfer of employees is commonly used.   However, if the transfer would result in substantial tax payment, then they would consider the transactions under the BMAA (namely mergers, general assumption of business and assets, purchase and sale of major assets, stock swap and division) which provides tax incentives to transactions that meet requirements.

Aside from restructuring that involve consolidation of subsidiaries, companies sometimes consider company restructuring which involves suspension of certain businesses and layoff of employees in the affected businesses. In that case, the focus would usually be on compliance with the Taiwan labor laws, especially those in relation to lay-offs.

An overall restructuring of the entire business is less common in Taiwan.

3.1  Approvals corporate restructuring

• What are the legal and regulatory compliances and filings required to give effect to a corporate restructuring?

Subject to certain exceptions for companies in regulated sectors, there are no regulatory filing requirements for internal restructuring of private companies. With respect to internal restructuring of listed companies, they should follow the procedures under their internal procedures for acquisition and disposal of assets, which usually involve the board of directors meeting and the appraisal report.  As to division, the procedures under the BMAA must be followed.

For a change of domicile, the foreign holding company that is to  acquire the existing shares from a Taiwan company’s shareholders will need to apply for the foreign investment approval with the Investment Commission, the Ministry of Economic Affairs of the Republic of China in accordance with the requirements and procedures set forth in the SIFN.

Please note that if the corporate restructuring results in employee transfers, the employee transfer procedures in the LSA and the BMAA must be followed.

3.2  Tax Considerations

• Are there any tax incentives that a company may claim owing to corporate restructuring? Is the requirement to pay any tax or fees to the government?

There is no specific tax incentive applicable to internal restructuring or change of domicile.

Under the BMAA, the tax incentives below may apply to a division transaction:

(1) any and all deeds and certificates created for the division are exempted from stamp duty;
(2) the transfer of real property is exempted from deed tax;

(3) the transfer of securities is exempted from securities exchange tax;

(4) the transfer of commodities or labor service is deemed as not falling within the scope of imposition of business tax; and

(5) the land value increment tax duly born by the existing land title holder may be registered under the name of the transferee company after the division and the payment may be deferred until future transfer by such transferee company.

3.3  Other Factors

• How are the duties of directors affected due to the corporate restructuring?

Directors will be subject to their general duty of care and fiduciary duty in the corporate restructuring.

If the corporate restructuring is conducted by way of division under the BMAA, the BMAA provides for specific duties for the directors. The board of directors shall, in the course of conducting the division, in the best interest of the company, fulfill its duty of care. Any director involved in decision-making shall be liable for any damage to the company as a result of breach of applicable laws, ordinances, Articles of Incorporation or the resolution of the general meeting in dealing with the division; provided, however, that upon producing sufficient evidence of minutes or written statement concerning disagreement, the director may be exempted from the liability.  Last, a director who has a personal interest in the transaction shall explain to the Board meeting and the shareholders meeting the essential contents of such personal interest and the cause of approval or dissent to the resolution.

• How is the general mode of treatment of employees of the restructured entity? Are there any mandatory provisions under the law for compensation or reemployment in case employees are retrenched or severed owing to restructuring?

In the internal restructuring involving a transfer of employees, Article 20 of the LSA provides that when a business entity is restructured or changes in ownership, except for those workers to be retained through negotiations between the old and the new employers, the employer shall terminate labor contracts with the remaining workers by giving the minimum advance notice and pay severance payment. The new employer shall recognize the prior period of service of those workers to be retained.  The severance payment is half a year for each year of services up to six months.  The advance notice period for the terminated employees varies depending on the services of years, up to 30 days.  However, if the number of terminated employees reach certain threshold, the Republic of China  Massive Lay-Off Law will apply which will require at least 60 days prior notice and preparation and negotiation of a massive lay-off plan with the terminated employees.

In the case of a division conducted under the BMAA, the BMAA provides for detailed retention procedures.  The transferee shall, no later than 30 days before the closing day of the division, serve a written notice expressly describing labor conditions to any employee transferring to the transferee according to the negotiation between the existing and the new employers. Any employee within 10 days upon receiving the notice shall notify his/her decision of whether to accept the conditions in writing to the transferee (new employer). The absence of such notice from the employee shall be deemed as consent to be employed by the transferee after the division.

The period of service the employee accepting the continued employment covered at the divided company before the division, shall be recognized by the transferee after the division. The divided company shall terminate the labor contract with any employee not retained under the division plan or declining the continued employment; the employee shall be entitled with a prior notice of termination of employment or a wage in lieu of the prior notice in accordance with the LSA, and be duly paid the pension, or render severance pay as the LSA prescribes.

[1] See at https://www.dgbas.gov.tw/ct.asp?xItem=46217&ctNode=5624&mp=1

[2] See at https://eng.dgbas.gov.tw/ct.asp?xItem=46251&ctNode=3339

[3] See at https://focustaiwan.tw/business/202006240022

[4] See at https://www.taipeitimes.com/News/feat/archives/2020/03/17/2003732834 and https://www.taipeitimes.com/News/feat/archives/2020/03/17/2003732834

[5] See at https://www.taipeitimes.com/News/biz/archives/2020/07/20/2003740203

[6] See at https://www.ey.gov.tw/Page/5A8A0CB5B41DA11E/ad3f40f1-9a79-47f6-8a2b-0883ba2c0b05

Authors:

Jacqueline Fu, Managing Partner, Taipei

Jacqueline Fu’s practice focuses on general corporate and commercial transactions, mergers and acquisitions (M&A), venture capital transactions, private equity fund investments, and securities laws.  In connection with her general corporate practice, Jacqueline advises Taiwan public companies and subsidiaries of multinational companies on the legal issues encountered in their day-to-day operations, including incorporation and management of foreign-owned entities in Taiwan, company, labor, consumer protection, antitrust, and anti-corruption laws, and corporate governance and legal compliance.  Jacqueline also advises multinational companies on acquiring Taiwan public or private companies with a presence in Greater China. She has acted as lead counsel in Taiwan on structuring and successfully completing preferred stock transactions mirroring the Silicon Valley venture capital transactions, within the boundaries of Taiwan company laws.

Richard Hsu, Associate, Taipei

Richard Hsu is an associate in the firm’s Taipei office. He is experienced in serving clients in the banking, insurance, private equity, venture capital, electronics, fast-moving consumer goods, sports, and entertainment sectors. He has advised numerous Fortune 500 companies and listing companies on their cross-border investments, transactions, anti-trust filings, project finance facilities and regulatory compliances.

Other jurisdiction chapters from Distressed M&A and Corporate Restructuring Guide 2021