Your business team has discovered a company in Taiwan (the “Target”) which has an interesting new technology, a foothold in the China market, or some other asset or relationship which they feel would be a welcome addition to your company.  The business team has recommended that your company (“Foreign Co.”) acquire the Target.  So, now you must consider how best to structure this acquisition.  There are, of course, many and varied issues to consider when structuring any Taiwan acquisition.  This brief note focuses on only one (but an important one) of these issues:  deferred purchase price payment mechanisms (e.g., holdbacks, escrows, earn-outs, etc.).

Without going into detail, any foreign company wishing to acquire a company in Taiwan must apply to the Investment Commission (the “IC”) of the Taiwan Ministry of Economic Affairs for Foreign Investment Approval (“FIA”).  As part of the approval process, the IC needs to confirm that the seller is receiving fair value for its interest in the Target.  In and of itself, this appears to be a rather innocuous provision.  However, in practice the IC will not grant a FIA in a situation where the seller will tender its shares in Target at closing for (a) some amount of consideration at closing, plus (b) a conditional payment of additional consideration some time after closing.  In order to procure a FIA, the IC must find that the amount of consideration paid at closing is equal to the fair value of the Target shares tendered by the seller at closing.

The question then becomes how do you structure any kind of escrow arrangement, holdback or earn-out if the IC is not going to assign any value to conditional payments which may or may not be made post-closing?

The simplest and most common workaround is to set up a local, Taiwan acquisition vehicle.  Rather than purchasing Target directly, Foreign Co. sets up a local Taiwan company (“Taiwan Co.”) to acquire the Target.  When you set up Taiwan Co., you will still need to go through the FIA process.  But, the nature of the FIA review will be different than the review for an acquisition.  The review in connection with establishing Taiwan Co. will focus on whether Foreign Co. has adequately funded Taiwan Co. to carry out its expected business and operations in Taiwan.  This FIA process is relatively straightforward.  And, once the FIA is granted, Foreign Co. can then fund Taiwan Co. with sufficient amounts to acquire the Target.
Taiwan Co.’s acquisition of the Target would be further subject to another FIA review.  But, like the review in connection with Taiwan Co.’s initial funding, the FIA review of a domestic acquisition by a foreign-invested Taiwan enterprise would not include an examination of the consideration to be exchanged for the Target’s shares.  In effect, Taiwan Co. would be free to enter into a purchase agreement for shares of Target including any manner of escrow, holdback or earn-out provisions you felt necessary and advisable under the circumstances.