Overview of Recent Trends

Inbound transactions

Due to the outbreak of the COVID-19 pandemic, there has been a slowdown in inbound activity into Taiwan since 2020. According to the statistical data compiled by the Investment Commission of Taiwan’s Ministry of Economic Affairs (the “Investment Commission”), the foreign direct investment amount in Taiwan in 2021 was USD7,476,273,000, which was approximately 18.24% less than the amount in 2020 and approximately 33.22% less than the amount in 2019.

Since the fourth quarter of 2019, there have been many active buyers from outside Taiwan, especially from China, Japan, Hong Kong and Singapore, in industries that are dominated by heavy investment in manufacturing and computer equipment. Many of these transactions were driven by opportunities created by the US–China Trade War, where a Chinese customer may need substitutes for supplies originally offered by international suppliers who are now banned from doing business with Chinese customers. Factors such as COVID-19 variants arising through mutations also affected foreign direct investments in Taiwan in 2021. Today, border quarantine and several other government restrictions continue to slow down cross-border transactions and economic activities.

In terms of industry sectors that attract foreign direct investment, renewable energy ranks at the top by virtue of the Taiwanese government’s policies promulgated in recent years, which aim to expand the capacity of energy generated by renewable sources. Offshore wind power is one of the major types vigorously promoted by the Taiwanese government. Numerous international players have collaborated with domestic suppliers in offshore wind farm investments in Taiwan, most of which are located in the Taiwan Strait, off the island’s west coast. The solar power industry, which is one of the current administration’s priorities, is another green-energy source that has grown significantly in recent years. The Taiwanese government expects the accumulated installed capacity of solar photovoltaics (PVs) will reach 20GW by 2025. 

In 2021, the growth of renewable energy industries in Taiwan was continually impacted by the COVID-19 pandemic. Due to border quarantine requirements, foreign technical personnel’s entry into Taiwan for the construction of off-shore wind farms was delayed, which subsequently held up the construction schedule of the wind farms, leading to the need for an increase in capital to operate such ongoing wind farm projects. Under pressure, several foreign investors sought different financing plans. 

On the other hand, a few policies released in 2021 presented great opportunities for foreign investors to invest in the offshore wind farms in the near future. After consulting the relevant stakeholders, the Bureau of Energy announced on 19 August 2021 the “Finalised Plan for Zonal Development Auction” which aims to build a total capacity of 15GW of offshore wind farms in the next ten years. 

Just before the outbreak of the COVID-19 pandemic, there were several significant foreign investments into offshore wind farms. For instance, the prominent global institutional investor Caisse de dépôt et placement du Québec (CDPQ) co-invested with a Taiwanese local investor Cathay PE in the 605MW Greater Changhua 1 Offshore Wind Farm ("Greater Changhua 1") in 2020. CDPQ and Cathay PE will jointly own 50% of the Greater Changhua 1, with Ørsted, a multinational power company based in Denmark and the original investor in the Greater Changhua 1 Offshore Wind Farm, retaining the remaining 50% shareholding. The 50-50 partnership is the first of its kind in the Asia-Pacific offshore wind sector and will help stimulate further opportunities in the Taiwanese market for offshore wind farms.

In terms of the types of investors, a few international private equity funds have been conducting privatisation of listed companies obtained through Taiwanese government approvals during 2019. In late 2018, a consortium by US private equity firm KKR & Co announced it had acquired a majority and controlling interest in LCY Chemical Corporation, formerly listed on the Taiwan Stock Exchange. During 2019, a proposed acquisition of Microlife Corporation by an affiliate of Morgan Stanley Private Equity Asia, another take-private acquisition, also received approval from the Investment Commission. In addition, in mid-2019, a consortium led by Taiwan’s CDIB Capital successfully completed a leveraged buyout and de-listing of Jintex Corporation Ltd, a manufacturer of textile and leather chemical auxiliary agents. It is expected that these deals will further attract other international private equity funds’ attention to tap into Taiwan’s M&A niche for SMEs (small and medium-sized enterprises), which account for the vast majority of Taiwan’s companies in various industries.

Outbound transactions

Contrary to the inbound transactions, the outbound transactions continue to grow despite the global travel restrictions and economic uncertainty due to the COVID-19 pandemic. According to the statistical data compiled by the Investment Commission, the outbound investment amount in 2021 was USD12,599,132,000, which was approximately 6.73% higher than the amount in 2020 and approximately 45.62% higher than the amount in 2019. The reason for such outbound investment increase may be the US-China Trade War in 2020 and the supply chain crisis caused by port congestion in 2021. From 2018 to 2019, the United States imposed a series of sanctions on China by raising tariffs and restricting investments, which directly impacted Taiwanese investors in China. Numerous Taiwanese enterprises have since deployed to the United States or Southeast Asia through direct investment or offshore M&A, and this trend of offshore M&A continued through 2019 to 2021. Although the US–China Trade War seemed to ease a lot after the Biden administration took office in the US in 2021, there were other new factors arising in 2021 which drove up the outbound investment amount. Due to a series of incidents, such as port congestion and the continuing COVID-19 pandemic, a supply-chain crisis has arisen which has led to a surge in transportation costs across different industrial sectors, and consequently, there are incentives for Taiwanese manufacturers to move their factories aboard to be closer to the marketplace in order to save transportation costs.

From past experience in Taiwan's M&A market, we have observed that Taiwanese companies and investors demonstrate a sustained interest in overseas acquisitions, within specific industry vertical integration, and there is increased sophistication and willingness by companies to engage in horizontal combinations and consolidations. Taiwanese companies have accelerated to expand their business overseas, to diversify their over-concentrated supply chains, and to expand businesses, global sales channels and customers through M&A.

Development of the Regulatory Landscape for M&A

Regulations on foreign investors

Recent developments

For decades, the general regulatory framework of foreign investment in Taiwan did not change a lot. Foreign investors were required to obtain foreign investment approval from the Investment Commission prior to acquiring a Taiwanese company. Foreign investment is welcomed in Taiwan, except in a limited number of industries where it is restricted or prohibited for national security reasons, such as military industries, telecommunications, media and certain transportation sectors. 

Following the initial outbreak of COVID-19 in the beginning of 2020, the Investment Commission temporarily relaxed the requirement for the notarisation of power of attorney (POA) documents. Under the temporary rule, foreign investors may provide a copy of a POA first and supplement the original notarised POA within six months after obtaining the foreign investment approval. 

Anticipated material changes in the near future

Although the general regulatory framework of foreign investment in Taiwan has not changed a lot in the past decades, an amendment to the “Statute for Investment by Foreign Nationals” is currently being proposed by the Executive Yuan and being reviewed by Taiwan's Congress. The proposed amendment will dramatically change the regulatory landscape of foreign investment in Taiwan. One of the biggest changes is that, in the future, a pre-approval of foreign investment will only be required in certain cases. That is, most foreign investment below a certain threshold will not need to obtain prior approval from the Investment Commission and will only be required to report to the Investment Commission afterwards, which is contrary to the current regulations requiring every foreign investment case to obtain prior approval. However, the amendment is still under review by Congress, and the prospects of legislation are difficult to predict.

Another expected change relates to foreign investments from Hong Kong. Under the current regulations, investors from Hong Kong are treated as foreign investors instead of PRC investors. However, the political changes in Hong Kong in recent years have incentivised discussions on whether Hong Kong investors should be treated as PRC investors and whether restrictions on Hong Kong investors should be tightened. Nevertheless, as of today, no formal legislative proposal has been made and the Ministry of Economic Affairs (MOEA) has not given any explicit answer on whether it is planning to amend any relevant regulations.

Regulations on PRC investors

Recent developments

Taiwan generally offers an open and welcoming environment for foreign investors but investors from the People's Republic of China (PRC) face a different set of regulations to others. Although some economic and cultural interactions and relationships have been established between Taiwan and the PRC in the last few decades, the confrontation between the governments of Taiwan and the PRC has reached a new record high in the past few years due to the international situation. Due in large part to these tensions, and for a variety of strategic reasons, Taiwan has imposed strict restrictions on PRC investors.

Generally, PRC investors are required to apply for approval before engaging in investment activities in Taiwan. PRC investors are only allowed to invest in a Taiwanese company if the investment is consistent with the restrictions and limitations on Taiwan’s “positive list” for investment from the PRC. In addition, the Investment Commission may put restrictions on PRC investors who have a military background, hold political positions or are part of the Chinese Communist Party. The Investment Commission may even ban PRC investors from investing in Taiwan if their background is deemed to have significant influence on national security. The consequences in connection with any non-compliance with the above-mentioned laws would lead to Taiwanese authorities taking a range of actions, including imposing fines, requesting violators to divest part or all of their Taiwanese investments, suspending shareholders' rights, and revoking corporate registration of the invested companies in Taiwan. 

In addition, the term “PRC investors” has been broadly defined to include any PRC entities and "PRC-invested companies from other jurisdictions". The latter refers to those entities incorporated outside of the PRC and invested in by PRC entities or individuals that (i) directly or indirectly hold more than 30% of the shares of such entities; or (ii) have the ability to control such entities. Detailed guidelines from the Investment Commission explain what counts as “the ability to control” and to “directly or indirectly hold more than 30% of the shares”. 

On 30 December 2020, a stricter regulation and several new administrative rules on PRC investors were released which further tighten the restrictions on PRC investors in every respect, including explicit regulation on the variable interest entity (VIE) structure and a broader definition of the above “PRC-invested companies from other jurisdictions”.

Anticipated material changes in the near future

Several new legislations were proposed by the Executive Yuan in 2021, including amendments to the National Securities Act and amendments to the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, which are expected to further tighten the regulations on commercial activities between Taiwan and the PRC. The proposed amendments aim to prevent the so-called “Critical Technologies” from being usurped by any PRC entities, and criminal punishments are imposed on any violation of the relevant regulations. The motivation of such new legislation behind the scene is generally believed to be to protect the integrated circuit industries in Taiwan, which are among the few industries in which Taiwan holds a predominant place in the world.

To sum up, PRC investment into Taiwan has become more strictly regulated. Even unambiguous cases may face higher scrutiny and a longer review period from the Investment Commission. Due to the current policies of the Taiwanese government, it is foreseeable that in the near future it may keep on tightening up on investment from PRC entities.

Merger control

Recent developments

Taiwan established a set of comprehensive antitrust and unfair competition activities regulations with the enactment of the Fair Trade Act in 1992. There have been several amendments since, with the amendment in 2015 that modified over 70% of the provisions set forth in the original Fair Trade Act constituting the most significant amendment. Under the 2015 amendment, the revenue numbers of entities that are controlled by, controlling or affiliated with the entities in the merger, as well as other entities under common control, will now be included in the threshold amount for merger filings, which makes it easier to reach the filing threshold. Under the 2017 amendment, the review period was extended to 30 working days from 30 calendar days (with an extension of no longer than 60 working days). Furthermore, in the event of a hostile takeover, the competent authorities will provide the reasons for filing to the target company and ask for comments from the target company.

From the enactment of the Fair Trade Act in 1992 to January 2022, 7,158 applications were submitted for merger approval (for filings made before the amendments to the Fair Trade Act in February 2002) or merger notification (for filings made since February 2002, subsequent to the amendments to the Fair Trade Act). Of those filings, only 12 of the proposed transactions have been refused or prohibited by the Fair Trade Commission (TFTC), representing a 0.17% rejection rate. From 2019 to 2021, 191 merger notifications were filed with the TFTC, only one of which was prohibited. No statistics are, however, provided with respect to those mergers that are approved or cleared subject to specific conditions. Such conditions are not uncommon, particularly in cases requiring more complex analysis and a detailed balance between overall economic benefits and restraints on competitiveness. Some conditions may be very cumbersome for the parties, and, in effect, prohibit the completion of the deal. 

Recent decision by the TFTC to prohibit an M&A deal

The only decision prohibited by the TFTC since 2019 was the acquisition contemplated by Cashbox Partyworld Co, Ltd of 100% of the shares in Holiday Entertainment Co, Ltd. Cashbox Partyworld and Holiday Entertainment were the top two market-share leaders offering audio-visual and singing services by providing customers with the equipment and venue for karaoke in Taiwan. The main issue was how to define the relevant market. The parties asserted a broader definition of the relevant “market” that included the markets of live platform, online karaoke, apps used for singing and portable mini karaoke booths. However, TFTC concluded that the relevant market should only cover the provision of audio-visual and singing services. As such, the TFTC determined that the actual market shares of the parties after the proposed acquisition would reach 45.35% in the aggregate. Even if the parties agreed to commit to various post-merger commitments including, among others, price maintenance for five years, none of these commitments was sufficient to allay the TFTC’s concerns about the potential anti-competitive conduct of the parties.

Anticipated material changes in the near future

Since the enactment of the Fair Trade Act, Taiwan has actively and conscientiously developed a full body of competition law to ensure that the basic principles of fair trade are followed. On 22 October 2018, the TFTC proposed a draft amendment so that, if an enterprise fails to comply with the TFTC's order to rectify acts violating the merger control regulations, the TFTC may have the discretion to order an administrative fine from a minimum of TWD200,000 up to a maximum of TWD50 million. Additionally, in the same draft amendment, the TFTC proposed to suspend the current five-year statute of limitations once it commences its investigation into such enterprise, to determine the violation of the merger control regulations. Whether such amendments will come into force is worth monitoring.

On 2 March 2022, the TFTC released a consultation draft of its White Paper for the Competition Policy on the Digital Economy. The white paper will include the TFTC’s latest guideline toward “killer acquisition”, “the role that personal data plays in merger control” and other competition law topics. The consultation draft was released for the purpose of seeking the views of people and organisations with an interest in the digital economy, and the final white paper will be announced at a later date.

Corporate governance

Recent developments

In 2021, in reaction to the public health crisis posed by the COVID-19 pandemic, an amendment to Taiwan’s Company Act (the “Company Act”) was approved which prescribes that a shareholders’ meeting of a private company may be convened via video conference and a public company may have a shareholders’ meeting via video conference, subject to the specific rules imposed by the securities authority. Before this amendment was approved, a private company could only hold a shareholders’ meeting if its Articles of Incorporation allowed a shareholders’ meeting to be held via video conference, and a public company was not permitted to hold a shareholders’ meeting via video conference under the previous Company Act.

Before the outbreak of the COVID-19 pandemic, there were several amendments to the Company Act , which in general tried to keep pace with the modern trends of corporate governance and investment practice. In July 2015, the Company Act was amended to include a special chapter on close companies and, in general, to provide more freedom for the arrangement of shareholder rights and duties through variations of preferred shares, voting agreements and voting trusts. In 2018, the Company Act underwent a huge renovation. As part of the amendments, certain measures to facilitate M&A transactions have been built in. For example, companies are allowed to offer multiple voting rights or veto rights to preferred shareholders and the shareholders’ voting trust is also recognised. Moreover, companies with one single corporate shareholder are allowed to name just one director. Furthermore, shares with no par values are also allowed and companies may distribute dividends each quarter or every six months, offering flexibility that was not previously afforded.

In addition, a new provision in the Company Act provides that shareholders’ meetings can be called not only by the board of directors, but also by the shareholders that have held the majority of a company’s shares for at least three consecutive months, enabling major shareholders to replace the current management of a company. Furthermore, foreign companies are no longer required to apply for recognition (but will still need to register for a branch office or a subsidiary in Taiwan) in order to carry on businesses within Taiwan. It is expected that these measures will foster the development of M&A transactions in Taiwan. 

The constitutional decision on minority shareholder protections

A recent decision related to M&A transactions came from Taiwan’s Constitutional Court, making it the first M&A-related constitutional court decision and worth monitoring in terms of its impact on the lower court’s decision regarding relevant M&A litigations in the future. On 30 November 2018, Taiwan’s Constitutional Court released its interpretation No 770 regarding a controversy over the Business Mergers and Acquisitions Act (the “M&A Act”). Based on the M&A Act, the major shareholders and their nominated directors in the target company may still participate and vote for a merger deal at the shareholders' meeting or board meeting, despite any self-interest that the major shareholders might have. In addition, when a company attempts to merge with another company using cash as consideration, the shareholders of the target company cannot request buy-back of their shares at the fair price or request any other legal remedies unless they express their objection and waive their voting rights at the shareholders’ meeting. Some people believe that the aforementioned regulations fail to protect minority shareholders’ interests, especially in a cash-out merger deal, since the minority shareholders may not have a chance to negotiate for better cash consideration before being pushed into cashing out by majority shareholders. Nevertheless, the Constitutional Court held that the self-interested shareholders and directors do not need to abstain from voting with respect to the M&A deal at the relevant shareholders' meeting or board meeting. The Constitutional Court pointed out that, to protect their rights, shareholders can apply to the court for appraisal of the fair price even if they did not express their objections at the shareholders’ meeting in accordance with the law, so the dissenting shareholders may argue for a fair price through their exercise of appraisal rights. However, the disclosure requirements regarding whether any conflict of interest is involved, and the protection of dissenting shareholders in the M&A Act should be enhanced. The MOEA announced an amendment to the M&A Act on 7 October 2020, which includes certain disclosure requirements by the directors and shareholders regarding whether any conflict of interest is involved.