Dear Friends,

The Legislative Yuan passed its three readings of the amendment ("Amendment") to the Enterprise Mergers and Acquisitions Act ("M&A Act") on June 15, 2015, which is subject to announcement by the President.  The Amendment aims at simplifying M&A procedures, protecting rights of shareholders and creditors, and re-visiting the tax incentives.  We summarize below:

1. Simplified M&A procedures:  The Amendment adds additional types of M&A that only require board approval with super majority votes (with no need to seek shareholders' approval), which include short-form merger between brother companies and share exchange/demerger between a parent and its subsidiary. (Articles 19, 30 and 37).  It also adds small-scale (or whale-minnow) share exchange/de-merger, which only require a board approval if the consideration is below certain thresholds (mainly 20% of the voting shares and 2% of the NAV).  (Articles 29 and 36)  For any M&A not requiring shareholders' prior approval, the board shall report the transaction in the next shareholders' meeting. 

2. Consideration of M&As:  The considerations for share exchange and de-merger may be in cash and/or any other assets in addition to new shares. (Article 4)

3. Votes for M&As:  Subject to a further clarification, a shareholder/director of a company participating in M&As (in which the shareholder's or director's other company is involved) may vote for the M&As. (Articles 27 to 30 and 35)  

4. Duty of the board:  The board shall handle M&A activities for the best interest of the company, but not shareholders.  In addition, any director having interests in the transaction shall report the interest and reasons of voting for or against the transaction in the board and shareholders' meetings.  (Article 5)

5. Special committee:  For any public reporting company engaging in M&A activities, it shall establish a special committee to review fairness and reasonableness of the M&A, and report a review result to the board meeting and shareholders' meeting, provided that if the company has an audit committee, the function of which shall be performed by the audit committee.  An independent expert shall be retained to provide a fairness opinion on share exchange ratio or consideration to shareholders. (Article 6)

6. Shareholders' information rights:  The required items to be included in merger agreement, share exchange agreement or de-merger plan must be delivered to all shareholders together with shareholders' meeting notice; a public reporting company shall also deliver a review result of the special committee or audit committee and the opinion of an independent expert to all shareholders. (Articles 22, 31 and 38)  A public reporting company may be deemed to have fulfilled the obligations if the documents are published on a designated website and available at the shareholders' meeting. (Article 7)

7. Appraisal right of dissenting shareholders:  To avoid lengthy appraisal process, the dissenting shareholders shall submit their appraisal request within 20 days after the shareholders' meeting (or the time limit required by the board, as applicable) with the documents/information required.  The company needs to file with the court for appraisal of the price within 30 days after the elapse of 60 days since the shareholders' meeting if both sides fail to reach an agreement on the price and the Company shall pay the believed fair price to the shareholders within 90 days after the shareholders' meeting.  If the company fails to file or to pay as required above, agreement to the dissenting shareholders' price shall be deemed given. (Articles 12, 19, 30, 31 and 37)

8. De-listing subject to 2/3 shareholding consent:  Any de-listing post the closing is subject to the consent by shareholders representing 2/3 of total outstanding and issued shares of a company.  (Articles 18, 27, 28, 29 and 35)

9. Transfer of pension reserves:  For a merger or a transaction with all employees transferred, the pension reserve under the old pension scheme can be 100% transferred.  For a partial transfer or de-merger, the pension reserve can be transfer on a pro-rata basis if it has reached the minimum requirement in the applicable labor laws. (Article 15)

10. Severance payment:  Employees who agree to be retained but withdraw before the closing date of the M&A may still claim for severance.  (Articles 16 and 17)

11. Position building before M&A:  The Amendment permits an acquirer to build up position before any M&A if the position is not more than 10%, and the acquired shares can be transferred on the exchange or the trading mechanisms after market.  It is unclear at this stage if the provision can serve as a safe harbor for any insider trading or market manipulation allegation in several court cases in connection with the position building.  Any acquisition of shares for more than 10% shall be reported to the securities competent authority.  (Article 27).

12. Additional tax incentives:  Exemption of stamp duty, deed tax, securities transaction tax, and other tax benefits are available if the considerations for assets acquisition, de-merger or share exchange in the form of voting shares reaches 65% of the total consideration.  In addition, income tax can be exempted in case of a de-merger if voting shares so acquired as a result of the de-merger reach 80% of the total consideration and all of the voting shares so acquired are allocated to the shareholders of the de-merged company (i.e. a “horizontal de-merger”).  (Articles 39 and 44)

13. Extension of loss carry-forward period:  To cope with the amendment to Article 39 of the Income Tax Act, the loss carry-forward period of a company participating in a merger are extended from five (5) years to ten (10) years. (Article 43)

14. Grace period:  The Amendment will take effect after six (6) months of the announcement.  (Article 54)

Echo Yeh / Mike Lu