Share Capital Plans and Ownership Dispersion for Overseas Firms Considering Taiwan Market Listings

Taiwan’s securities authorities have amended and approved review standards for foreign companies seeking market listings in Taiwan, and now overseas firms can apply for IPO or secondary listings (via depositary receipts) in accordance with those regulations. In addition, the basic rules on the entity of an overseas corporation that applies for a market listing, its years of operation, scale of business, and so on, are given in Article 73 of the Act Governing Relations between Peoples of the Taiwan Area and the Mainland Area and related guidance as follows:

The applying entity

Primary listing (IPO): This refers to where the stock of an overseas share issuer has not been listed for trading on a foreign securities exchange, and is approved for listing and trading by the Taiwan Stock Exchange (TWSE).

• Companies established and registered in mainland China may not apply for a Taiwan IPO;
• Companies with over 30% shareholding by mainland China shareholders exerting a primary influence may apply for special approval;
• The application must be for all issued stock to be listed, and dual listings are restricted.

Secondary listing (depositary receipts): This refers to where the stock of an overseas share issuer is already listed and traded on an approved foreign securities exchange, and the TWSE agrees to its market listing and trading of shares. Companies established and registered in mainland China are not eligible for a secondary listing in Taiwan.

Years in operation

For an IPO, the applying company or its subordinate companies must have logged three years of business records. Subordinate companies are defined as where the foreign company holds more than 50% of the voting shares already issued by a company or has contributed more than 50% of the company’s capital, either directly, indirectly through its subsidiaries, or both. There is no limit on years in operation for a secondary listing.

Scale of business

For an IPO, one of the following is required: paid-in capital of at least NT$600 million; shareholder equity of at least NT$600 million; or market value at the time of listing of no less than NT$1.6 billion. A secondary listing requires at least 20 million shares, making at least 20 million Taiwan depositary receipts, or a market value of no less than NT$300 million. In terms of shareholder equity, the latest CPA-audited and certified financial report must show the equivalent of at least NT$600 million.

We recommend that foreign corporations considering a listing in Taiwan familiarize themselves with the following explanations as they go about preparing to comply with the relevant listing provisions and do the necessary capital planning prior to completing their market listing application:

Issuing new stock

Corporations may arrange new share offerings to meet their funding needs, but before doing so they must consider the financial resources of shareholders and their own profitability, and they may also wish to use employee stock options as a way to retain top talent. In any case, the terms and conditions determined for an offering are an important issue in a corporation’s capital planning. When firms reconsider their plans in light of their actual conditions, they have the following kinds of new stock issues to choose from:

• Common stock – an injection of capital (seasoned equity offering) either for cash or from retained earnings;
• Preferred stock – Firms should consider the preferred stock types and their advantages, such as priority in distributions of dividends and residual property, possible rights as elected and non-elected board members, and possible voting rights;
• Employee stock options

Equity planning

When firms make plans for their equity structure, they are essentially conforming to their market listing requirements, but insofar as they affect the future operating strategy of the firm, tax issues and market performance, such plans also relate to the corporation’s future direction, with systemic effects on the entire corporate body. The following factors require consideration in making capital structure decisions:

1. Correspondence between the forms of capital and the nature of one’s industry
2. Potential for profitability to achieve certain standards
3. Future scale of business and amounts of risk
4. Effect on managerial control
5. Current legal constraints
6. Capital market considerations
7. Cash flow considerations
8. Tax considerations
9. Willingness of shareholders to invest

If a firm resolves to go through with a seasoned equity offering for cash, then arranging the floatation price and giving employees priority in subscribing to shares are important capital structuring issues. The following considerations should be taken into account for a floatation to raise cash:

• Capital structuring should be planned over the long-term;
• When it is preferable to offer shares at different subscription prices to different classes of investors, this should be done through separate floatations
• Employees can be given priority in subscribing for shares;
• Applicability of investor tax credits and other tax incentives;
• Limits on using price premiums for cash injection.

Shareholdings of board members

When firms seek to diversify their share ownership to meet the market listing requirements, insofar as doing so affects control over the firm’s management it will impact the direction of the firm’s future development. In planning the shareholdings of board members, one should bear in mind the selection of board members and their shareholding percentages (with attention to market listing eligibility rules), including the number of board positions and election methods. The current rules require (a) at least 5 board members, at least 2 of whom are independent, and at least one of the latter must have residence in Taiwan; and (b) a choice between an audit committee or independent supervisors. The audit committee must have at least 3 members, all of whom must be independent. Independent supervisors must number at least 3.

The competent authority in Taiwan has additional rules relating to a foreign corporation’s profitability, the securities broker recommending it, its period of guidance under a domestic securities underwriter, corporate governance, binding commitments, financial reporting and CPA certification, and disqualifying circumstances. The following are those restrictions and prohibitions that bear on equity planning and to which firms must pay particular attention:

1. Restriction on mainland China applicants – Neither IPO nor Taiwan depositary receipt listings are currently open to firms incorporated under the laws of the Peoples Republic of China.
2. Restriction on indirect listings by Taiwan firms: Where the main operating entity of a firm is controlled by an overseas enterprise or overseas holding company, and its subsidiary seeks to apply for a Taiwan market listing via an overseas corporation or overseas holding company, whether or not it suspected of being an indirect listing by a Taiwan firm will be determined based on the following points: The timing of its equity reorganization; the market share of the business in Taiwan; and for those that can produce proof of being approved for a listing on an overseas securities exchange, whether or not the given securities exchange is one of those approved by the TWSE.
3. Listings requirements for parent companies and their subsidiaries: To be eligible for a Taiwan listing, the total shareholdings in the applying company held by its parent company, the latter’s subordinate entities and those companies’ directors, representatives, and shareholders with stakes greater than 10%, may not exceed 70%.
4. Restriction on earnings distributions: If a foreign corporation’s country of registration has restrictions on distributions of earnings or remittances making it impossible to distribute dividends to investors in Taiwan, it would then impact the share price, so one should reconsider applying for a listing through a corporation registered in such a country.
5. Limit on the price per share of issued shares: Prior to submitting the market listing application, a share reorganization must be completed to yield a price per share of NT$10 per share.
6. Definition of an insider of a company: For foreign enterprises seeking market listings in Taiwan, current law does not provide an exact definition. For now, firms are advised to follow the provisions of Taiwan’s Securities and Exchange Act.
7. Deposit requirement: the directors, supervisors and large shareholders (that is, those with more than 10% of all outstanding shares) must put up shares as security along the same lines as domestic companies. One half of those shares may be reclaimed after 6 months have past since the first day of trading, and the remainder may be reclaimed after 12 months have elapsed.