Newsletter
Self-Regulations of Taiwan Venture Capital Funds Receiving Investments from Insurance Companies
Given the potential issue of insurance companies' indirect interference with the management of the corporations that are invested by a Taiwan venture capital fund in which the insurance companies have invested, that occurred in the battle over the control and management rights of TECO Corporation back in 2021, the Taiwan Venture Capital Association (the "Association"), in order to reduce the competent authority's concern about the relatively loose regulation over Taiwan venture capital funds, enacted the "Self-Regulations of Venture Capital Funds Receiving Investments from Insurance Companies" (the "Self-Regulations"), which was approved by and recorded with the Industrial Development Bureau of the Ministry of Economic Affairs (the "MOEA") on January 12, 2022. The Association hopes that through self-disciplining, the fundraising, operation and management of Taiwan venture capital funds may stay flexible to a certain extent.
To reinforce the self-regulation of venture capital funds, the MOEA announced the amendments to Articles 8 and 10 of the "Regulations for the Guidelines for Venture Capital Investment Industry" on January 28, 2022.
According to the current Regulations for the Guidelines for Venture Capital Investment Industry and relevant regulations, venture capital funds shall apply for a recommendation letter from the Industrial Development Bureau, MOEA if it wishes to solicit investments from certain types of investors engaging in regulated businesses, such as the National Development Fund of the Executive Yuan, banking enterprises, insurance enterprise, securities enterprises, financial holding companies, etc. Once the amendments to Articles 8 and 10 of the Regulations for the Guidelines for Venture Capital Investment Industry are passed, a venture capital fund that wishes to apply for a recommendation letter from the Industrial Development Bureau of the MOEA to solicit investments from insurance companies will be required to sign the Self-Regulations as a pre-requisite. If a venture capital fund is in material violation of the Self-Regulations, the Industrial Development Bureau of the MOEA will refuse to issue a recommendation letter to any other venture capital fund that is established or managed by the person in charge, the representative or the executive managers of the violating venture capital fund within the following five years.
Accordingly, the Self-Regulations are of utmost importance to those Taiwan venture capital funds that intend to solicit or have received investments from insurance companies. Among the Self-Regulations, the most important articles are as follows:
1. Venture capital funds shall not, directly or indirectly, interfere with any fight over the control or management rights of any of the companies they invest in.
2. Venture capital funds shall expressly stipulate the following items under the management service agreement, limited partnership agreement, operating plans or internal investment management rules and relevant documents: (a) the plan and scope of the investment; (b) the capital contribution amount and the types of liabilities of the shareholders or partners; (c) means, conditions and timeframe of capital contribution by the shareholders or partners; (d) duration of the fund; (e) voting rights; (f) post-investment management mechanisms, such as providing relevant financial reports on a regular basis, disclosing information on beneficial owners, preventing conflict of interests, etc.; (g) the allocation of expenses, profits or loss make-up; (h) transfer of interests; (i) agreed dissolution causes; (j) capital contribution withdrawal of shareholders or partners; (k) liquidation; (l) liabilities for breach of contract; (m) governing law and dispute resolution; (n) contract amendment; and (o) the clauses expressly required under the Insurance Act, Articles 6 and 9 of the Regulations Governing Use of Insurers' Funds in Special Projects, Public Utilities and Social Welfare Enterprises and the life and non-life insurance associations.
The abundant capital of Taiwan insurance companies have always been what the venture capital enterprises actively strive to solicit; however, after the proposed amendments to the Regulations for the Guidelines for Venture Capital Investment Industry and the Self-Regulations are passed, we recommend that venture capital enterprises handle the arrangements of fund formation contracts and the post-investment management matters in a more prudent and cautious manner.