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John Eastwood
Eiger, Taipei
john.eastwood@eiger.law

Wendy Chu
Eiger, Taipei
wendy.chu@eiger.law

Holly Chu
Eiger, Taipei
holly.chu@eiger.law

 

Introduction

Mergers take place in both good economic times and bad. In the good times, larger companies flush with cash can go shopping for complementary startups and SMEs that need investment; in bad times, the lower stock prices of certain companies may make them attractive targets for rescue or acquisition.

In the past couple of years, Taiwan has updated its antitrust laws and guidelines in some key ways as part of an effort to keep up with the times. Many multinational companies get caught unaware of Taiwan’s rules on merger-control notifications, the process by which companies entering into a merger may be required to let the Taiwan Fair Trade Commission (FTC) know about an upcoming transaction and pause for their approval before proceeding. Merger control is often carried out in a rush with lawyers around the world trying either to confirm that the transaction is exempted, or to obtain clearance quickly.

The penalties for failing to comply are considerable, but given the reasonableness of the FTC in their practices, there really is no reason to miss this crucial step. The FTC has the ability to ban the merger, unwind a merger, and issue fines in increasing amounts.

Definitions of ‘merger’

Mergers are defined quite broadly under the Fair Trade Act (FTA), with Article 10 covering everything from traditional mergers to joint-venture activities and even more creative ways of handing over the control of a business from one entity to another through assignments and leases. The FTA covers the notions of direct and indirect control, so there’s no point in being derisive of it by pretending a significant minority stake is not enough to handpick the board in many companies.

Thresholds for merger notification

Taiwan’s laws also look to how much of an effect the merger would have on the local market, having thresholds based on market share and the amount of turnover. Under FTA Article 11, Taiwan’s merger-control system requires filing a merger notification (for approval) prior to a merger, provided that the merger hits the following thresholds:

• as a result of the merger the enterprise(s) will have one-third of the market share;
• one of the enterprises in the merger has a quarter of the market share; or
• sales for the preceding fiscal year of one of the enterprises in the merger exceed the threshold amount publicly announced by the relevant authority:
• non-financial institutions – more than TWD15bn (approximately US$510m) sales in Taiwan by one party, more than TWD2bn sales in Taiwan by the other party;
• financial institutions – TWD30bn sales in Taiwan by one party, TWD2bn sales in Taiwan by the other; or
• if the combined global sales volume of the immediately preceding fiscal year of all parties to a combination exceeds TWD40bn and at least two of the parties each had Taiwan sales volume for the same year of at least TWD2bn.

Normal filings versus simplified filings

Under the FTC Disposal Directions (Guidelines) on Handling Merger Filings, there are both simplified filings and regular-procedure filings.

The simplified filings can be used where:

• the aggregate market share of the parties to a horizontal merger is less than 20 per cent of the total market;
• the aggregate market share of the parties to a horizontal merger is less than 25 per cent of the total market and the market share of one of the parties to the merger is less than five per cent of the total market;
• the aggregate market share of the parties to a vertical merger in each relevant market is less than 25 per cent of the total market;
• after examining the considerations specified in Paragraph 1 of Point 12, the FTC concludes that potential competition between the parties to a conglomerate merger is insignificant; or
• one of the merging parties directly holds more than one-third but less than half of the voting shares or capital contributions of another business and merges with the said business.

Simplified filings cannot be used where:

• the market shares of the top two businesses account for two-thirds of the relevant market, or the market shares of the top three businesses accounts for three-quarters of the relevant market that a horizontal merger involves. However, this regulation does not apply if the aggregate market share of the merging parties is less than ten per cent of the total market;
• the merger in question involves significant public interest;
• one of the merging parties is a holding company as defined in the Financial Holding Company Act or the Taiwan Stock Exchange Corporation Rules Governing Securities Listings;
• it is difficult to define the relevant market the merger involves or to calculate the market shares of the merging parties; or
• high-level market entry barriers or high market concentration exists in the relevant market the merger involves or there are other conditions likely to lead to disadvantages as a result of the incurred significant competition restrictions.

Who shall file with the FTC?

The following parties are required to file with the FTC based on the merger conditions and the type of merging party:

• where an enterprise is merged into another, assigned by or leases from another enterprise(s) the operations or assets of another, jointly operates on a regular basis with another, or is commissioned by another enterprise to run operations, the FTC filing shall be performed by the enterprise who participates the merger;
• when an enterprise holds or acquires the shares or capital contributions of another enterprise, the FTC filing shall be performed by the enterprise who conducts the acquiring. However, if there are control or affiliation relations between the holding or acquiring enterprises, or the holding or acquiring enterprises are controlled by the same enterprise or a group of enterprises, the FTC filing shall be performed by the enterprise with ultimate control of the hold;
• a controlling enterprise, where an enterprise directly or indirectly controls the business operations or the appointment or discharge of personnel of another enterprise; or
• financial holding companies shall file with the competent authority if the companies or any subsidiaries in which the companies have a controlling interest as specified in the Financial Holding Company Act participate in the merger.

However, if an enterprise required to file a merger has not yet been established, the existing enterprises participating in the merger shall file with the FTC.

Informal letter practice

In practice, the FTC will often decline jurisdiction if a merger that would hit one of the Article 11 thresholds but will not substantially change the relevant market shares. This can be handled by sending a letter to the FTC with an explanation of the merger and explaining the situation and why it will not have a significant effect. Lawyers can often hear back really quickly if the FTC does not want a merger to go through a full filing.

For example, in a case involving a company that controlled about two-thirds of a key automotive-part market sector in Taiwan, it was possible to explain that it was being acquired by a group of ‘white-knight investors’ who had nothing to do with the transmission business. The company was being rescued from bankruptcy, and the end result of the deal would have no effect on relevant market shares.

Punishments for failing to file

The FTC has several options under FTA Article 39 to take action where parties disregard Article 11’s requirements. It can ban the merger, prescribe a period for the splitting of the merged companies, order disposal of all or part of the shares, to transfer part of their operations, to remove certain persons from their positions, or make other relevant orders. Administrative penalties from TWD200,000 to TWD50m can be imposed on the company.

If false or misleading information is submitted as part of a merger notification, then the FTC can undo the merger and enforce many of the listed orders, as above with fines ranging from TWD100,000 to TWD1m.

Companies that further defy the FTC can be ordered to dissolve, be suspended or have their business operations terminated.

Exemptions from filing

FTA Article 12 provides that a filing does not need to be made:

• where any of the enterprises participating in a merger, or its 100 per cent held subsidiary, already holds no less than 50 per cent of the voting shares or capital contribution of another enterprise in the merger and merges such other enterprise;
• where enterprises of which 50 per cent or more of the voting shares or capital contribution are held by the same enterprise merge;
• where an enterprise assigns all or a principal part of its business or assets, or all or part of any part of its business that could be separately operated, to another enterprise newly established by the former enterprise solely;
• where an enterprise, pursuant to the proviso of Article 167, Paragraph 1 of the Company Act or Article 28-2 of the Securities and Exchange Act, redeems its shares held by shareholders so that its original shareholders’ shareholding falls within the circumstances provided for in Article 10, Paragraph 1, Sub paragraph 2;
• where a single enterprise reinvests to establish a subsidiary and holds 100 per cent shares or capital contribution of such a subsidiary; or
• any other designated type of merger promulgated by the competent authority.

Conclusion

With merger-control compliance quite easy and reasonable in Taiwan, companies working with skilled counsel can negotiate these issues relatively smoothly and efficiently. In our experience, it is normal to be able to resolve most FTC queries without delay.