Taiwan’s Proposed New Rules Seen Making M&A Easier; Some Firms Have Struggled to Get Deals Approved

Taiwan’s Proposed New Rules Seen Making M&A Easier

Some Firms Have Struggled to Get Deals Approved

ISABELLA STEGER

Dec. 18, 2013 6:07 a.m. ET

Private-equity investment in Taiwan has plunged since the global financial crisis, this year totaling less than 1% of that seen in 2007, but proposed new rules may help revive interest in the country.Investors have found successful exits from Taiwan difficult, which has deterred new investments, but they have also struggled with what they consider to be an opaque, erratic regulator that sometimes imposes unnecessarily strict demands.

Now they are welcoming new rules, approved last month by Taiwan’s cabinet, that are intended to speed up and simplify the process of completing mergers and acquisitions and could alter the country’s investment landscape. The new rules still require the approval of the legislature, where the ruling Kuomintang enjoys a majority.

 

One of the most significant changes would be the requirement that an acquiring investor seeking to take a listed company private will need the approval of shareholders representing at least two-thirds of shares. Currently, the law requires that a majority of shareholders attend the vote, and that two-thirds of them approve.

William Bryson, a Taipei-based U.S. lawyer, said that while the new requirement would actually be more stringent, it would be welcomed by private-equity investors because the added protection for minority shareholders would in theory mean that regulators will feel less inclined to take additional steps to protect them.

“Now there is a standard for what the government deems as minority shareholder protection. The problem in the past was that regulators hadn’t been terribly transparent as to why they denied or delayed an approval,” said Mr. Bryson, who serves as chairman of the private-equity committee of the American Chamber of Commerce in Taipei, and frequently meets with Taiwanese regulators.

“Even though [the approval threshold] that had been written into the law was theoretically protective of minority shareholders, in the context of private-equity transactions, this was not deemed [by regulators] to be sufficient protection for minority shareholders,” he said.

The introduction of the new rule comes as private-equity investment in Taiwan has just about dried up. This year it has totaled a mere US$42.5 million, according to the Centre for Asia Private Equity Research. That’s around 0.1% of all private-equity deals in Asia this year, for an economy that ranks as the region’s sixth-largest, and less than the amount received by much smaller economies such as Vietnam and Malaysia, according to the center.

Private-equity investment in Taiwan reached a record US$6.16 billion in 2007, according to the center, but a couple of failed big deals have since damped investor enthusiasm toward the country.

In 2007, U.S. private-equity firm Carlyle Group LP dropped a US$5.5 billion bid for Advanced Semiconductor Engineering Inc., a listed chip-packaging and testing company, that would have been the biggest-ever takeover of a Taiwanese company. Carlyle and ASE said the deal fell through, citing a disagreement on price, but people with knowledge of the matter have also said the regulatory process was difficult and cumbersome.

In 2011, Taiwan’s Investment Commission rejected U.S. firm KKR KKR -0.73% & Co.’s US$1.6 billion bid for Yageo Corp., a maker of electronic components, citing concerns about leverage and the protection of minority shareholders, even though the deal had received at least 60% shareholder approval. The proposed new rule on minority shareholder approval has been dubbed the “Yageo clause.”

KKR remains invested in Yageo through a 2007 minority investment.

It is unclear whether, under the proposed rules, the regulator could still cite concerns about the rights of minority shareholders in rejecting deals.

Taiwan’s government is “very, very sensitive” about de-listings affecting the stock market’s image, said Rupert Hammond-Chambers, president of the U.S.-Taiwan Business Council and managing director for Taiwan for consultancy Bower Group Asia.

“The concern would be that Taiwan would be less attractive if its stock market was smaller,” he said. “Taiwan’s citizens are voracious savers, and many have money invested in the stock market, so that becomes a political issue.”

Reed Yu, director-general at the Ministry of Economic Affairs’ Department of Commerce, denied that the government is concerned about political fallout from de-listings. Taiwan’s government is now more open to foreign investors, and the regulatory revisions were intended to simplify the mergers and acquisitions as well as protect the interests of minority shareholders, he said.

In any case, the government may be under pressure to be more welcoming toward foreign investment and private equity, especially as its technology sector faces challenges. HTCCorp. 2498.TW 0.00% and Acer Corp., for example, have been posting losses as they find it more difficult to compete in the global market.

“The IT industry really needs new thinking…we really need private-equity funds if they have the expertise and the connections,” said C.Y. Huang, a senior partner specializing in M&A at Taiwanese law firm Tsar & Tsai.