Legal Complications for Overseas Firms Listing in Taiwan – The Case of Companies Registered in the Cayman Islands

In recent years, Taiwan’s Financial Supervisory Commission (FSC) – the local securities regulator – and the Taiwan Stock Exchange (TWSE), have been aggressively encouraging companies abroad to apply for primary or secondary listings in Taiwan, with the aim of promoting the internationalization and growth of Taiwan’s securities market. The principal government agencies have been working to clarify the market listing and post-listing regulatory standards for foreign institutions, and they have opened up potential TWSE listing opportunities to Taiwanese-owned companies (especially those in mainland China) which over the years had tended to choose other global exchanges for their market listings.

Among overseas companies registered in traditional tax havens, the TWSE is most familiar with those registered in the Cayman Islands, to the extent that if an overseas enterprise chooses a company registered in a jurisdiction other than the Cayman Islands as the main entity to apply for a Taiwan listing, the enterprise may find itself having to explain the legal and regulatory specifics there to the TWSE, which would mean that its application would require more time to process. Using an offshore company as a holding company for subsidiaries with diversified operations or as a special purpose vehicle for trading is an operating model long favored by multinational corporations. In fact, the “Cayman Islands exempted company” is the most commonly used type of offshore company on the NYSE, NASDAQ, London, Hong Kong and Shanghai exchanges. This type of company operates exclusively outside of the Cayman Islands, and enjoys somewhat simpler company maintenance standards compared to other local Cayman companies. For this reason, such Cayman-registered listed companies are frequently involved in M&A transactions, and are often the acquisition targets of private equity funds seeking growth opportunities in emerging markets or other growth-oriented companies looking for acquisitions.

For the sake of assessing Cayman-registered offshore companies seeking listings on the TWSE or GreTai Securities (OTC) markets, such offshore companies should perform their own self-assessments to see of they comply with the audit standards established by the TWSE and GreTai Securities. In addition, these companies should evaluate their holding company framework, capital structure and organizational makeup to see if they are in need of restructuring to achieve legal compliance as well as a more flexible corporate architecture, greater tax privileges and lower legal risk.

In terms of the more common offshore listing jurisdictions, the Cayman Islands is a favored choice because of the ease of setting up a company, the flexible legal regime (see the discussion below), relatively low maintenance costs and significant tax advantages. The corporate framework in the Caymans is based on English common law supported by a frequently updated legal and judicial system. As a result, this provides the Caymans a head start, legally, in jurisdictions like the U.S., the UK, Hong Kong and Singapore, and helps Cayman-registered companies gain recognition and acceptance in the major financial markets in those jurisdictions.

Cayman Islands companies have no direct tax burden. That is to say, there is no personal or corporate income tax, capital gains tax, gift/estate tax or value added tax, and one can apply for a specific exemption from tax for a minimum of 20 years. In addition, there are no restrictions on remitting funds from the Caymans, so money and enter and exit freely, and there are also no restrictions on the amounts or currencies involved in such transfers.

Cayman Islands exempted companies are almost always set up as limited liability companies, in which shareholders’ liability is limited by the amounts of their respective paid-in or pledged (i.e., promised but not yet paid) share capital. Those holding the same class of shares in the same company are alike in terms of their rights and dividend criteria. However, the Company Law of the Cayman Islands (amended in 2007) gives shareholders a certain degree of freedom to organize their rights, when stipulated in the company’s articles of association and related memoranda, and issue different classes of stock. These classes of stock may differ in terms of their voting rights, dividends, redemption rights, and ranking of claims in the event of liquidation and distribution of residual assets. For example, companies may stipulate in their charters that given classes of shares are to be differentiated into stock types and stock series. Moreover, Cayman Islands law does not require exempted companies to meet standards for the minimum or maximum amount of authorized capital or paid-up capital, nor does it impose a specific par value per share or a particular currency. As soon as they are established, most Cayman companies use part of their authorized capital to issue new shares with a certain par value, and the proceeds do not need to be entirely paid in.

Taiwan’s regulator has now completed all of the specific regulations in Taiwan for governing offshore companies that plan a primary listing of shares on the TWSE or GreTai Securities, including laws and regulations on shares and capital. According to the public pronouncements of the regulator, generally speaking, offshore companies may continue to operate under the company laws of the jurisdictions in which they are registered rather than Taiwan’s Company Act. However, to some degree, offshore companies will still be regulated by Taiwan’s Securities and Exchange Act, and where the regulator believes it is necessary, it may require in the market listing agreement that an offshore company’s articles of association include specific clauses on the protection of shareholders’ rights.

Now that these market listing regulations have all been written into the law, companies should adjust their capital and corporate charters accordingly. For example, Taiwan’s current market listing rules require that each stock have a par value of ten NT dollars per share, and that all of a company’s shares be listed. Consequently, companies applying for IPO must make corresponding revisions in their articles of association, and they should examine their capital structure to determine if they need to adjust their capital in a capital increase, or decrease the share capital in circulation, or carry out a share combination or split, exchange of shares, dividend issue or share buyback. Also, for the sake of an IPO, companies may wish to consider combining the different types of shares they have issued into a single variety of common stock. Any of these changes would be a major act on the part of the company, so under Cayman Islands law and corporate charters alike they require proper internal approval by the board of directors, and depending on the circumstances they may also require approval by the shareholders or affected holders of specific classes of shares, by a majority vote. In certain circumstances, some actions—in particular a reduction of authorized capital—may require the approval of a court in the Cayman Islands following a public hearing before such court.

When carrying out a capital adjustment, one must take note of where Company Law the Caymans is stricter than Taiwan’s Company Act. For example, a Caymans company, in addition to distributing dividends out of its profits, may also distribute the proceeds from issuing shares at a premium, but only after distributing the ordinary dividends, and provided that it is able, given normal business activity, to discharge its debt obligations as they come due. Furthermore, in order to comply the above rule on the ability to discharge debts, a Caymans company may use profits, legal reserves, newly issued shares, proceeds from shares issued at a premium, and even share capital, to buy back previously issued shares. However, if a company’s charter has stricter rules, those are to be followed. Shareholder agreements typically also have provisions governing capital adjustments.

When considering possible changes in a corporate charter that concern the interests of shareholders and limits of corporate governance, one should be aware that Cayman Islands law gives shareholders substantive freedom to change the internal governance mechanisms among the shareholders, and this is subject to but only legal restrictions. As a result, given the contrast with Taiwan’s Company Act and considering the fundamentals in each case, there will be instances where investor protection is inadequate and needs to be augmented by revising the articles of incorporation. For this reason, the TWSE has developed “Important Matters for Protecting Shareholders’ Interests” that must be incorporated in company charters prior to market listings.

By way of an example of company actions that constitute a potential conflict with Taiwan law, suppose a Caymans company’s shareholders are able to use the articles of association to restrict share transfers, or restrict the selection or removal of directors (for example, by requiring that only a portion of the directors may be elected each year). Additional legal requirements as to attendance, voting rights and proxy statements in the context of specific actions by a company may not be accepted under Taiwan’s laws. In some other aspects, however, Caymans law may be stricter than Taiwan’s, such as with requirements on attendance and voting rights within M&A legislation. As in the case of a capital decrease, these may require the involvement of a Caymans court.

There are other areas of inconsistency between the Cayman Islands and Taiwan, and which require adjustments to accommodate Taiwan. Under Cayman Islands law, for instance, it is not necessary to establish board positions for chairperson or supervisors, but overseas issuers must all establish such positions properly before applying for an IPO in Taiwan. The issuer must specify clearly in its articles of association the rights and responsibilities of such positions. Similarly, because in Taiwan the rights and obligations of the chief executive officer, president and general manager positions are conceived differently than in other countries, they must be clearly stipulated in the articles of incorporation.

Other discrepancies between Taiwan law and Caymans law that issuers must pay special attention to prior to their public listings include:

• Inclusion of rules on halting share transfers, extempore motions, exclusion from benefits, and other procedures in connection with the shareholders’ meeting
• Rules on the how corporate seals are to be used
• Rules on the language and text to be used in convening shareholders’ meetings
• Inclusion of Taiwan’s independent director requirements
• Inclusion of shareholders’ right of inspection
• Adoption of internal control principles currently applied by public companies in Taiwan, and which govern, for example, procedures by which a company extends loans and loan guarantees, acquires or disposes of assets, and buys back the company’s shares.

To put it simply, if they seek to list shares in Taiwan, overseas companies registered in places like the Cayman Islands and Bermuda must revise their corporate charters and internal rules before completing their market listing preparations. However, because it is not yet appropriate to apply the legal provisions that foreign issuers are accustomed to, a relatively conservative attitude should be adopted towards applying such laws and regulations in the future.