How Overseas Firms Can List Successfully in Taiwan

Capital markets are like the economic windows of countries, and Taiwan’s government has recently opened its widows a lot wider so that it may one day become an international financial centre. Beginning in 2008, when Taiwan opened its market to IPOs by overseas corporations, and the local exchanges – Taiwan Stock Exchange (TWSE) and the over-the-counter GreTai Securities Market (GTSM) – brought securities firms and CPA firms together for a joint briefing on the changes, the results have materialised gradually. Now, more and more foreign firms and Taiwanese-owned firms registered abroad are contemplating a Taiwan listing.

The first time overseas firms broach the subject of listing shares in Taiwan, the first questions are often, “Does our company meet the listing criteria? What is the best way to plan for one? and How long will it take?” This article will highlight areas worth focusing on in a Taiwan IPO, breaking the process into six stages from the planning stage through to a glitch-free trading debut.

1. The evaluation and planning stage

The first question potential foreign issuers are often concerned about is what kind of companies meet the criteria for an initial, or “primary”, market listing.  First of all, the entity applying for the listing must be organised and registered as a company limited by shares in accordance with the laws of its country, and must not be in violation of the applicable provisions of the Act Governing Relations between Peoples of the Taiwan Area and the Mainland Area. The criteria to meet before applying for a primary listing include:

• Profitability – at least NT$250 million in cumulative pre-tax profit over the latest 3 fiscal years, and at least NT$120 million in pre-tax profit in the most recent fiscal year, with no cumulative losses.
• Size – Share capital or shareholder equity of at least NT$600 million; or market value of at least NT$1.6 billion
• Period of operation – at least 3 years of business records
• Shareholding dispersion – at least 1000 shareholders of record, and at least 500 shareholders (excluding insiders of the company) own at least 20% of the shareholding or 5 million or more shares.

It is now possible for foreign firms to apply for an IPO along the lines of a domestic firm listing as a “technology-based enterprise,” for which listing requirements are more relaxed compared to ordinary listings. To apply for such a listing, it is first necessary to obtain an unequivocal opinion from the Industrial Development Bureau (Ministry of Economic Affairs) certifying that the prospective issuing company is a technology-based enterprise.

Once the formal listing criteria are understood, enterprises can make an initial assessment of whether they meet the requirements. If most conditions are met, one may continue on to the next phase. (Before planning for a listing, companies typically have less than 1000 shareholders of record, but the application may proceed as long as this condition is satisfied prior to the actual listing.) If the profitability standard has not yet been reached, but is possible to reach it within the next 1-2 years, one ought to proceed with the second phase because planning and execution in this phase can be the most time-consuming and complex.

2. Group investment structure reorganisation and business process planning

This phase can be further broken down into several steps:

(1) Deciding upon the entity to apply for the listing

An overseas enterprise applying for a primary listing in Taiwan can do so by means of an offshore holding company. One could say that deciding on the entity to apply for the listing is the first step towards an investment structure reorganisation. For a company registered in mainland China, for example, the scope of business in Taiwan is usually small by comparison, as the main base would be in the China market. If an offshore holding company is to be used as the listing entity, the shares of operating units in Taiwan or mainland China or Taiwan would have to be transferred to the holding company, so the reorganisation process may involve assessments of capital gains tax and require transfers of funds, all of which requires careful planning.

In deciding where the listing entity is to be registered, one must take into consideration corporate governance and transparency, as well as the establishment and maintenance costs. In addition, it is best if the chosen jurisdiction safeguards shareholder interests, is stable politically and has very low tax rates.

(2) Financial accounting and tax check-up

In terms of financial report preparation, firms must follow Taiwan’s financial accounting standards, U.S. GAAP or International Accounting Standards; where Taiwan accounting standards have not been followed, the material differences must be disclosed together with the amount of their impact. Taiwanese-owned firms registered in China tend to prepare their financial statements primarily with tax considerations in mind, so an important planning indicator is whether a sound accounting system is in place; whether, for example, the firm has properly integrated its various accounts – internal accounting books, managerial bookkeeping, tax accounts and customs ledgers.  A quality inspection aimed at taxes should include contingent liabilities and risk assessments regarding transfer pricing, corporate income tax, VAT, customs duties, and personal income tax on both sides of the Taiwan Strait, and whether tax privileges can continue to be enjoyed after the reorganisation.  Corporations are advised to engage professional institutions early on to carry out financial and tax evaluations inspections and establish systems.

(3) Internal control system establishment

As indicated in the Application Form for a Primary Listing by a Foreign Issuer, the CPA-issued internal control system recommendations for the most recent 3 years since the establishment of the holding company should be submitted as an attachment (which requirement is “waived if there are no such documents”). In practice, one must still ask a CPA to perform a special internal control system audit, and have sound internal control systems to provide reasonable assurance of meeting standards for (1) business operation efficiency and results; (2) financial reporting reliability; and (3) compliance with applicable laws and regulations.
In cases where CPAs audit a foreign enterprise’s internal control system for a Taiwan listing, the fact that subsidiaries may be scattered around the world makes it that much more necessary in practice to strengthen oversight of subsidiaries and make the most of internal audit systems.

(4) Planning for director and supervisor seats

When a foreign issuer applies for a primary listing, its board of directors must have at least five members, at least two of whom must be independent directors. Of those two independent directors, at least one must be domiciled in Taiwan.

3. Filing for market listing guidance or registering as an emerging stock

Having decided on the listing entity, completed the group organisation, and done the planning for the internal control system, financial statements, and seats on the board of directors and supervisors, a firm may then file for counselling with an underwriter or register as an emerging stock on the GTSM. At present, the choice is between these two alternatives, and if one is to apply for an OTC listing, it is mandatory to first register as an emerging stock. Six months after filing for guidance or registering as an emerging stock, one may then submit a market listing application for review.

4. Review of market listing application

Once a company submits its application, a review of the written documentation commences. When the written document review has begun, a meeting of the applicable review committee will be convened, and the board of the exchange in question will consider giving its approval. If all the criteria are met, the process takes about six weeks to complete.

5. Underwriting and listing process

A foreign issuer applying for an IPO must retain a securities underwriter to offer 10% of the total number of shares (as stated in its listing application form) for sale to the public, before the shares are listed, by means of a cash capital increase through a new share issue. The overall underwriting and share listing process takes two to three months, including the investor conference, the public sale of new shares, consulting with the TWSE or GTSM on the listing date, and the formal beginning of market trading.

6. Post-listing sponsorship

The year of the listing and for two fiscal years thereafter, the newly listed firm must retain a securities firm as its advisor to help it comply with Taiwan’s securities regulations, stock exchange rules and official pronouncements, as well as the foreign issuer stock listing agreement.

Of the six stages described above, the most time-consuming is likely to be the second stage involving group investment structure reorganisation, business process planning and the establishment of an internal control system—from one to two years, depending on a company’s particular circumstances. Also, firms should enlist the assistance of outside professionals to do proper examination and planning of the investment structure reorganization, internal control system establishment, and application of adjustments in financial statement expression. Doing sound planning for a market listing is like having a solid foundation on which to build a house. With a firm foundation, it is not hard to construct a safe and reliable home.

[This article appeared in the Economic Daily in July, 2009.]

Eric Wu is a partner at PricewaterhouseCoopers Taiwan. Please send your comments and questions to:  eric.wu@tw.pwc.com.