Newsletter
Recent Amendments to the Regulations Governing the Approval of Investments in Taiwan by PRC Person(s) and Subsequent Influences on Cross-Border M&A Transactions
Since the structure of foreign investments in Taiwan is becoming more diverse and complex in recent years, in an effort to ensure more comprehensive reviews and reinforce control over investments in Taiwan by PRC persons by broadening the statutory scope of PRC persons, on December 30, 2020, the Investment Commission, Ministry of Economic Affairs ("IC") promulgated the amendments to Articles 3, 4 and 6 of the Regulations Governing the Approval of Investments in Taiwan by PRC Persons (the "Approval Regulations"), and announced the new administrative rules on Article 3, Paragraph 2 of the Approval Regulations (the "New Administrative Rules"), both of which took effect on the same date. Such amendments and new rules will result in certain influences on international M&A transactions.
1. Summary of Amendments to Approval Regulations and New Administrative Rules
(1) The rules on the definition of "third-area PRC investors" are becoming stricter.
According to Article 3, Paragraph 2 of the Approval Regulations, a "PRC Investor" is statutorily defined to include any company located in any "third area" (an area other than the PRC or Taiwan) and invested in by PRC person(s) whereby the shares held or capital contributed by PRC person(s) in aggregate exceed 30% of the total number of issued shares or total amount of capital contribution of said third-area company, or any PRC person(s) has an effective control over said third-area company. In addition, with respect to the above 30% shareholding rule, according to the New Administrative Rules, the 30% shareholding threshold must be examined on each offshore holding level, rather than being understood as the ultimate shareholding percentage in a third-area company by one or more PRC persons (similar to a weighted calculation method).
In the case of a multi-layer shareholding structure, if PRC person(s) holds more than 30% shareholding in any level, such shareholder level will be also regarded as a PRC investor, and its total shareholding in the next-level shareholder will be included in the calculation base of the said 30% shareholding threshold to decide whether the next-level shareholder is a PRC investor. Consequently, the New Administrative Rules have become stricter since it is more possible to regard a third-area company as a PRC investor.
(2) There are more types of structures that would be considered "PRC investments" requiring the IC’s prior approval.
Furthermore, in addition to holding equity or director seats, considering that in practice certain contractual arrangements that involve PRC investors may also give rise to concerns regarding PRC investors having potential control over the finances and operations of Taiwan companies, the IC amended Article 4 of the Approval Regulations to provide that PRC investors must also obtain the IC’s prior approval if, by contracts or otherwise, such PRC investors are considered by the IC as having control of Taiwan sole proprietorships, partnerships, limited partnerships or non-TWSE/TPEx listed or non-emerging stock companies pursuant to the Approval Regulations.
From the aforesaid summary of the amendments, it is understood that the regulations on the definition of PRC investors and types of PRC investments requiring the IC's approval are becoming stricter. Some structures or contractual arrangements that were previously not considered PRC investments (hence no prior approval is required) will be possibly regarded as PRC investments under the new regulations and thus should be subject to the IC's stricter review for what is considered PRC investments.
2. Influences on the International Private Equity Funds' M&A Activities
In recent years, due to the emerging growth of international private equity funds (“PE Funds”), M&A transactions led by or involved with international PE Funds are becoming more prevalent. In Taiwan, since there are different investment regulations and intensities of review required for general foreign investments and PRC investments respectively, the applicable standard of review to the acquisitions by international PE Funds of Taiwan companies' shares is based on whether international PE Funds involve PRC investors or only foreign investors.
In practice, the IC usually requests international PE Funds to disclose their upper-level shareholding structure so as to confirm the PE Funds' identities (i.e., whether there are any PRC investors involved) and applicable review regulations, while reviewing their investment cases. After the new regulations took effect, it can be reasonably expected that the IC will request for more comprehensive disclosure of the upper-level shareholding structure of international PE Funds.
The said IC review practice usually has a major impact on investments and M&A activities of international PE Funds in Taiwan because general partners and limited partners of PE Funds usually enter into confidentiality agreements to avoid disclosing the investment status of individual limited partners. If, due to these confidentiality agreements, it is challenging for international PE Funds to fulfill the IC's disclosure requests, the timeline of the IC's review may be prolonged. In this connection, it is recommended that investors should formulate their plan in the pre-transaction stage in order to avoid the delay in the transaction process.
3. Influences on the Structure of International M&A Transaction
In addition to PRC investors not able to make investments in Taiwan without the ICs prior approval, PRC businesses may not engage in "business activities" in Taiwan without approval or without establishing a Taiwan branch or office. Violation of the said restriction will be subject to imprisonment of not more than 1 year and a criminal fine according to Act Governing Relations between the People of the Taiwan Area and the Mainland Area (the "Relations Act") and other civil liabilities.
There are no clear rules on the definition of "business activities". Whether the activities constitute the business activities is decided by the court on a case-by-case basis. According to a court decision, business activities, which should be restricted according to the Relations Act, refer to constant and continual activities carried out by PRC businesses that will influence the rights of a Taiwanese person(s) who also engages in such activities, which may pose a substantial or potential danger to trade safety in Taiwan. Business activities may not be limited to business operations provided in the Company Act but also specifically include selling PRC real estate, opening a bank account in Taiwan, engaging in wire transfer, serving as a manager in a Taiwan company, recruiting talent, or arranging the execution of employment agreements in Taiwan for PRC companies.
Therefore, if the buyers in international M&A transactions are PRC investors or involve PRC investors, such investors should carefully consider the transaction structure at the planning stage in order to ensure that the applicable IC approvals are duly obtained in accordance with the laws for any changes in offshore shareholding structures, and to prevent any circumstance where PRC investors invest, or engage in business activities, in Taiwan without the IC's prior approval. PRC investors should also avoid the misconception that it is fine to close the Taiwan subsidiaries or branches and still engage in business activities in Taiwan without any entity.
Conclusion
Since the amendments to the Approval Regulations and the current review practice of the IC will significantly influence international investments and M&A transactions, investors should assess all possible legal risks in Taiwan at the early stage arising from the potential PRC investments while planning and engaging in cross-border M&A transactions.