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The Intellectual Property and Commercial Court ruled that Article 45 of the Financial Holding Company Act shall not apply to share swap mergers
Pursuant to Paragraphs 1 and 2 of Article 45 of the Financial Holding Company Act (hereinafter referred to as the "FHCA"), when a financial holding company or its subsidiary engages in transactions other than credit extension with the counterparties listed in Paragraph 1 of said Article, the conditions of such transactions shall not be more favorable than those offered to similar counterparties, and it shall be approved by a resolution of more than two-thirds of the directors present and more than three-fourths of the attending directors. The Intellectual Property and Commercial Court ruled that this provision shall not apply to share swap mergers (Ref. Nos. 111-Shang-Su-3 and 111-Shang-Su-5) for the following main reasons:
1. The individual chapters of the FHCA regulate different matters based on their respective legislative purposes:
The FHCA is divided into Chapter 1 (General Provisions), Chapter 2 (Swap and Segmentation), Chapter 3 (Business and Finance), Chapter 4 (Supervision), Chapter 5 (Penalties), and Chapter 6 (Supplementary Provisions) in order to regulate different matters based on their respective legislative purposes.
Furthermore, according to the general explanation of the draft FHCA, the key points of the relevant provisions of Chapters 2 and 3 indicate there are essential differences among the various provisions in regulating business transfers, share swaps, or avoiding conflicts of interest when dealing with related party transactions or corporate governance mechanisms. Therefore, they are unrelated to one another.
2. In a share swap merger between a financial institution and a financial holding company, the special provisions of the FHCA shall prevail only when both the FHCA and the Mergers and Acquisitions Act (hereinafter referred to as the "MAA") regulate share swap:
When a law provides a special provision for the same matter regulated in another law, the special provision shall prevail, as stipulated in Article 16 of the Central Regulation Standard Act. The so-called special provision for the same matter refers to the situation where the legal effects of the special provision and the provision in the aforementioned other law are mutually exclusive and cannot coexist.
Furthermore, pursuant to Article 1 of the MAA and its legislative intent, the MAA intends to remove obstacles from the Company Act, Securities and Exchange Act, etc., and simplify process in order to facilitate mergers and acquisitions. Additionally, pursuant to Paragraph 2 of Article 2 of the MAA and its legislative intent, it shall be interpreted that in a share swap merger between a financial institution and a financial holding company, the special provisions of the FHCA shall prevail only when both the FHCA and the MAA regulate share swap. If there are no specific provisions in the FHCA, then the regulations of the MAA shall apply.
3. Considering the consistency of law, the transactions other than credit extension engaged by a financial holding company or its subsidiary specified in Paragraphs 1 and 2 of Article 45 of the FHCA shall be interpreted as the daily business of the financial holding company or its subsidiaries.
Banks engage in the business of granting credit to others, while financial holding companies engage in transactions other than credit extension. In addition, Article 44 of Chapter 3 (Business and Finance) of the FHCA clearly aims at regulating credit granting transactions in the daily business of the banking subsidiaries and insurance subsidiaries of financial holding companies. Therefore, considering the consistency of law, the transactions other than credit extension engaged by a financial holding company or its subsidiary specified in Paragraphs 1 and 2 of Article 45 of Chapter 3 (Business and Finance) of the FHCA shall be interpreted as the daily business of the financial holding company or its subsidiaries.
4. Pursuant to the legislative intent of Paragraphs 1 and 2 of Article 45 of the FHCA, Article 45 shall not apply to share swap transactions as they are not part of the daily business of financial holding companies.
According to the legislative intent of Paragraphs 1 and 2 of Article 45 of the FHCA, these provisions are intended to prevent directors, supervisors, major shareholders of companies, and their related parties from using their positions to conduct non-arm's length "asset transactions" with the company. In addition, the six types of transactions provided thereunder are all transactions involved in the daily business of financial holding companies. Share swap transactions do not fall within the scope of Article 45 as they are not part of the daily business of financial holding companies. Therefore, Article 45 cannot be considered as a special provision for share swap, and does not apply to share swap transactions.
5. The transactions other than credit extension provided in Paragraph 1 of Article 45 of the FHCA can be executed upon approval by the board of directors. Moreover, it is difficult to compare the terms and conditions of various merger and acquisition transactions, and the MAA already establishes special review and assessment mechanisms for share swap transactions.
An M&A transaction shall be completed by the board of directors and the shareholders' meeting as shareholder rights will be affected. Nevertheless, decisions regarding general business operations can be made solely by the board of directors according to the principle of separation of ownership and control.
A transaction other than credit extension provided in Paragraph 1 of Article 45 of the FHCA can be executed upon approval by the board of directors, whereas a share swap shall be completed by the board of directors and the shareholders' meeting. Moreover, it is difficult to compare terms and conditions of different M&A transactions.
Furthermore, the MAA intends to remove obstacles from the Company Act, Securities and Exchange Act, etc., and simplify process in order to facilitate mergers and acquisitions. Accordingly, Paragraph 7 of Article 29 of the MAA exempts share swap mergers from avoidance of conflicts of interest when dealing with related party transactions and does not require a special resolution by the board of directors. A conflict between regulations will occur if the transactions other than credit extension specified in Paragraphs 1 and 2 of Article 45 of the FHCA is interpreted to include share swaps.
Since the MAA already has set up special mechanisms for share swap transactions such as exemption from avoidance of conflicts of interest and independent expert opinion on price reasonableness, there is no room for the application of Article 45 of the FHCA.
6. Pursuant to the following Article 11 of the Financial Holding Company Investment Management Regulations formulated by the Financial Supervisory Commission (hereinafter referred to as "FSC") and the FSC letter, the FSC is also of the opinion that Chapter 3 (Business and Finance) of the FHCA does not apply to share swaps:
(1) Article 11 of the Financial Holding Company Investment Management Regulations formulated by the FSC in accordance with Paragraph 9 of Article 37 of Chapter 3 (Business and Finance) of the FHCA provides:
"An investment project in which a financial institution is merged into the subsidiary of a financial holding company through share swap pursuant to Articles 26 and 27 of the FHCA shall be submitted for approval together with the application for the financial institution to become the subsidiary of a financial holding company through share swap pursuant to Article 26 of the FHCA, and this regulation does not apply."
(2) The FSC letter dated September 15, 2022 (Ref. No. 1110224326) indicates: "Pursuant to the legislative intent of the MAA, it intends to remove obstacles to mergers and acquisitions imposed by existing law in order to facilitate organizational changes through mergers and acquisitions by companies. Nevertheless, Chapter 3 of the FHCA aims at regulating the business and financial matters of financial holding companies. The aforementioned two regulations are not dealing with the 'same matter', and therefore the principle that the special provision prevails over the general provision does not apply."
The aforementioned judgment not only symbolizes a victory for the financial holding company Lee and Li represents, but also clarifies the standards for the interpretation and application of the FHCA and the MAA. In addition, since financial institutions are required to obtain approval from the FSC (the competent authority) before engaging in a share swap transaction with a financial holding company and becoming a subsidiary thereof pursuant to Paragraph 1 of Article 26 of the FHCA, when structuring such deals, it is advisable to consult with the FSC in advance to confirm the legal feasibility and address any related concerns that the FSC might have in order to ensure the smooth process of such transaction.