Delisting and Management Buyouts
Recently, there has been a spate foreign investor private equity funds making tender offers for the equity of public companies in Taiwan, and then taking those companies private. Under current law, if the tender offer is carried out by a private equity fund which (a) is not construed to be a related party of the acquired firm, (b) is not assisting a related party of the acquired company, and (c) is not an insider with respect to the acquired company, then all the fund needs to do is abide by the rules regarding tender offers and delisting. Naturally, if there is insider trading, there will be suspicions. However, if the person behind the tender offer deal "in effect" has a controlling interest (in which case it is called "going private") or is in senior management (where it is called a management buyout, or MBO), then such tender offer arrangements give rise to legitimate questions about the law, because of the information asymmetry between those who are "in essence" insiders (large shareholders) and outsiders (small shareholders).
Actually, cases in which private equity funds are used to go private originate from the decision-making of large shareholders with regard to their forecasts of their companies' prospects or those of the market, and the motive for such a transaction is not necessarily bad. Nevertheless, whether or not the motive for an insider's transaction comes from self-interest, the considerations that went into it are not known to small shareholders. If an exhaustive disclosure system is lacking, it is difficult to ensure the validity of an insider's involvement in the transaction. From the point of view of protecting shareholder equity, what is needed, in addition to the existing regulations on tender offer and delisting procedures, are requirements on a tender offer maker's declaration and disclosure obligations, thereby making full use of senior management's fiduciary duty and duty of care.
Concerning management buyouts and going private, section 13e-3 of the U.S.'s Securities Exchange Act, in addition to prohibiting fraud, also has comprehensive requirements for information openness. In concrete terms, the rules require than anyone applying for a delisting must complete a form disclosing such things as: the gains and losses that delisting will bring to both related parties and unrelated parties; an outside valuation opinion; post-transaction plans for mergers and acquisitions, reorganization and asset sales, etc.; funding sources; an assessment of anticipated expenses; a summary of financial agreements; a repayment plan; and a statement that the maker of the tender offer is reasonably assured that the delisting is fair to non-related parties, along with factors for reference with respect to that assurance.
From all appearances, and in accordance with Article 145 of Taiwan's Securities and Exchange Law, a delisting is in principle based on the company's public listing contract with the exchange on which it is listed, and is handled using procedures established by that exchange. Generally speaking, Taiwan's regulations relating to delisting have two mechanisms for protecting investors. One is the requirement for agreement by boards of directors or stockholders' meetings; the other is a requirement for a resolution that the board members jointly bear responsibility for the tender offer. As for the price in the tender offer, in principle, it is the simple average of the closing prices in the month prior to the date of the resolution, though it may not be lower than the book value per share. However, Taiwan's standards relating to tender offers really have nothing comparable to the above U.S. disclosure rules when it comes to MBO and delisting.
Considering the laws and regulations discussed above, both those of Taiwan and the U.S., it is apparent that Taiwan's legal system has not yet turned its attention to the information asymmetry issue in management buyouts and delistings, instead relying on better enforcement of regulations on majority-rule resolutions, insiders' joint tender offer liability and formularized tender offer prices. But in these kinds of transactions, if outsiders (that is, small shareholders) are not given ample information, it is difficult to expect them to exercise their vote appropriately, and it is equally difficult to expect them to make reasonable judgments about tender offer prices, so perhaps we can borrow a thing or two from the U.S. legal system.