Newsletter
RULES FOR POST-DEMERGER LISTING
The legal framework for company demergers was introduced to enhance companies' operating efficiency by their reorganizing or restructuring to respond to the problems of a bloated organ-izational structure or excessive diversity of business lines.
When a listed company is demerged, it may be left with less capital than the amount required for initial stock listing. To protect investors, the regulatory authority has devised a tiered set of measures including change of trading method, suspension from trading, or delisting of the company's securities, according to the circum-stances. The criteria for applying these measures have been incorporated into Articles 49 and 50 of the Operating Rules of the Taiwan Stock Ex-change (TSE).
If a listed company spins off a division or more that is capable of independent operation, and after the demerger the company's paid-in capital remains above the statutory minimum, its secu-rities can continue to be listed if it submits the relevant documents, as required by the regula-tory authority, at least 15 business days before the demerger record date. Trading in the com-pany's listed securities should be suspended from 10 days before the demerger record date until the day before the record date, unless the company's capital will not be reduced as a result of the demerger, so that the company does not need to issue new shares; or unless the company does not need to confirm its shareholder list after the demerger; or unless there is no difference in shareholders' rights before and after the book closure date, so that there is no need for suspen-sion of margin trading and short selling or for mandatory closure of short-selling positions.
Legislation in most countries takes the view that after the demerger of a listed company, the ex-isting or newly formed company that acquires its business or assets (the "Acquiring Company") is an entity with a separate legal personality from that of the listed company, and must therefore reapply for listing under the same rules as ap-plied to a previously unlisted company. How-ever, some Japanese scholars take the view that when examining the qualifications for listing of a derivative legal entity of this kind, the financial data of the existing listed company may be consulted if appropriate. They also suggest that in consideration of the fact that a company's de-cision to restructure itself through a demerger is not taken lightly, the conditions for listing of the Acquiring Company (such as capital and prof-itability requirements) should be relaxed to sim-plify or accelerate the listing procedure, in order to optimize operating efficiency.
However, in view of the various forms of demerger, the new TSE rules provide different degrees of relaxation in the listing requirements for Acquiring Company, according to circum-stances. These are briefly outlined below:
1.In the case of a horizontal split (where the listed company registers a reduction in capital due to the demerger, the newly formed Acquiring Company issues new shares in exchange for the spun-off busi-ness, and all the new shares go to the shareholders of the demerged listed com-pany, pro rata to their existing sharehold-ings), shares in the newly formed Acquir-ing Company can be listed and traded im-mediately if the following conditions are met: the Acquiring Company's most recent pro-forma financial statements at the time of application show a paid-up capital of at least NT$600 million; the operating profit and net pre-tax profit as shown in its con-solidated financial statements meet the statutory requirements; its financial state-ments for the most recent fiscal year show no accumulated deficit; there are no certain circumstances considered by the TSE to make listing inappropriate; its pro-forma financial statements for the most recent year have been certified by a CPA; and it has arranged centralized deposit of its shares and conducted a pre-listing public offering in accordance with the relevant provisions.
This is the simplest kind of demerger, with the newly formed Acquiring Company having an identical shareholder structure after the demerger as the demerged com-pany had before the demerger. Therefore the criteria for review are the most relaxed: only pro-forma capital and profitability are examined, there is no scrutiny of the dis-persal of shareholdings, and no minimum time period since establishment is imposed. The review procedure is conducted by documentary review only, as with merger cases, and the listing decision is made by TSE management.
2.In the case of a vertical split (where the listed company does not register a reduc-tion in its capital, the newly formed Ac-quiring Company issues new shares in exchange for the business transferred to it, and all the new shares go to the demerged listed company), or a synthetic demerger (where the listed company registers only a partial reduction in capital, and the new shares are divided between the demerged listed company and its existing sharehold-ers), when the newly formed Acquiring Company applies to the TSE for listing, in addition to meeting the above provisions for a horizontal split, it must also comply with the statutory requirements for disper-sal of shareholdings, there must be no ad-ditional circumstances considered by the TSE to make it unsuitable for listing, and the spun-off division must have been es-tablished for at least five years.
In any type of the demerger described above, if a single Acquiring Company acquires businesses demerged from more than one listed company at the same demerger record date, then the time period since establishment, as required under the review criteria, is calculated on the basis of whichever of the demerged businesses will ac-count for at least 50% of the total operating revenue or operating profit of the Acquiring Company, and at least 10% of its total operating revenue or identifiable assets. If more than one independent operating division is spun off from one listed company or more, the longest estab-lished of them may be selected as the basis for calculating the time since establishment of the Acquiring Company.
In a demerger of any of the above types, where the securities of the listed company have been listed for more than three years (including any previous OTC trading period), and the Acquiring Company applies to the TSE within one year after the amendment to its company registration to reflect the acquisition, for listing to be allowed it must comply with the relevant provisions, according to the type of demerger. In the case of a horizontal split, where the newly formed Ac-quiring Company's listing application documents are in order, and on review by TSE management the application is found to comply with the relevant provisions, the TSE may announce listing after seeking approval from the regulatory authority.
In the case of a vertical split or synthetic demerger, in addition to meeting the conditions for a horizontal split, the newly formed Acquir-ing Company's listing application must be re-ported to the TSE board for approval. Where the Acquiring Company is an existing company, its listing application must not only satisfy all the above requirements for horizontal split, vertical split and synthetic demerger, but must also be reviewed by the TSE's Securities Listing Review Committee.
The above provisions apply both to a listed demerged company and to the Acquiring Com-pany. TSE's amended Operating Rules do not make any separate provision regarding the pro-cedural requirements for the listing of the Ac-quiring Company. Thus it would appear that the listing procedure should be conducted according to the TSE's Procedures for Review of Securities Listings, which includes requirements for three months' prior trading on the emerging stock market and other provisions. The regulatory authority should seriously consider whether re-laxing the review criteria for the listing of the Acquiring Companies without making corre-sponding adjustments in the listing procedure, is not at odds with the purpose of encouraging easier listing for the Acquiring Companies.