We strongly encourage any foreign individual, company or corporation (a “Foreign Buyer”) that is contemplating the acquisition of either (i) a Taiwan company Target (a “Taiwan Target”) or (ii) an offshore Target (an “Offshore Target”) that has a Taiwan subsidiary, to consider the effects of Taiwan’s foreign investment regulations on the planned transaction. While Taiwan’s foreign investment regulations can directly impact the structure of such an acquisition, an equally important, but often overlooked, issue is the effect these regulations may have on post-acquisition reorganization and operation of the Target.
Pursuant to Taiwan’s Statute for Investment by Foreign Nationals, any direct acquisition of a Taiwan Target by a Foreign Buyer requires Foreign Investment Approval (“FIA”). In addition to the obvious effect that obtaining the FIA would have on the timing of the acquisition, the related FIA regulations may also affect the transaction structure. For instance, the FIA regulations make it practically impossible to structure a direct acquisition of a Taiwan Target with any type of holdback, earn out or other form of deferred payment mechanism. (See our article here for more information on the effects of the FIA process on deferred payment mechanisms as well as a convenient workaround.)
In a large global acquisition, Foreign Buyer may be transacting with an offshore Seller to purchase an Offshore Target that has subsidiaries worldwide, including in Taiwan. Under these circumstances, FIA is typically not required in Taiwan. A common exception to this general rule arises when (i) Offshore Target’s Taiwan subsidiary has minority shareholders and (ii) these minority shareholders will have their shares purchased by either the Offshore Target or the Foreign Buyer as part of the transaction. FIA is required under these circumstances as there is a direct transfer of Taiwan assets (i.e., the shares in the Taiwan subsidiary) to a foreign purchaser.
Whether FIA is required for Foreign Buyer’s initial acquisition, Foreign Buyer should always consider the impact of the FIA regulations on any expected post-acquisition transactions in Taiwan. Common post-acquisition transactions that require prior FIA include:
(a) injecting equity capital into the Taiwanese subsidiary;
(b) providing a loan to the Taiwanese subsidiary for a term exceeding one year;
(c) investing in another company through the Taiwanese subsidiary;
(d) transferring some or all of the shares in the Taiwanese subsidiary to another person, including any post-acquisition restructuring of Foreign Buyer and related companies which results in the transfer of shares of the Taiwan subsidiary; and
(e) reducing the capital of, or winding down, the Taiwanese subsidiary.
As stated above, any foreign corporation or individual that is contemplating the purchase of a Taiwan Target or an Offshore Target that holds a Taiwan subsidiary should first evaluate Taiwan’s foreign investment regulations, with respect to not only the structuring of the initial acquisition, but also the post-acquisition operations and reorganization of the Target.
For more information on mergers, acquisitions, and foreign investment matters in Taiwan, please contact Gregory Buxton at email@example.com or +886 223112345 ext. 548.Written February 29, 2016 By Gregory A. Buxton.