Regulations on When a Taiwan IPO by a Foreign Corporation Is to Be Deemed “Inappropriate”

View this page in: 中文
Written By: Eric Wu and Christy LC Lin

In contrast to domestic companies applying for IPO, foreign issuers applying for a primary stock listing must go beyond meeting the formal criteria and take note of certain conditions that could make a listing be deemed “inappropriate” if they are violated, and which firms should do their best to resolve. In the main, these supplemental conditions have been drafted as a way to reasonably safeguard the interests of the investing public by (a) establishing whether the entity applying for the listing is managerially capable of conducting independent operations, including business sales, R&D, procurement, and financial operations, and (b) examining the good faith of the applying company, its board of directors and supervisors, and those with de facto control of the company. In what follows, we discuss each of the conditions under which a listing could be deemed inappropriate, as set out in Article 28-8 of “Taiwan Stock Exchange Corporation Criteria for Review of Securities Listings” and elsewhere.

1. “The applicant company or any controlled company thereof, or any incumbent director, supervisor, general manager or de facto responsible person of any of those companies, has acted in violation of the principle of good faith in the most recent three years.”

For examination purposes, the main point of this condition pertains to two kinds of parties: companies and individuals. The companies include those in the country of registration and the primary country or countries of operation. The individuals include the sitting directors, supervisors, general managers, shareholders with stakes of 10% or more, and the company’s de facto “responsible persons” (those with substantive control or decision-making power). Since most entities applying for a primary listing are offshore holding companies, the underwriters may be asked to engage attorneys to issue their legal opinion on the following matters concerning the above two groups over the past three years:
  (1) Whether the foreign issuer has violated pertinent laws and regulations. This includes rules on worker health and safety, pollution prevention and labor-management disputes in the country of registration or primary country of operation.
  (2) Protection of shareholder interests:
    a. Whether restrictions in the laws of country of registration on the location where shareholders meetings are convened, the voting system or other exercise of shareholders rights, impact the interests of shareholders of the foreign issuing company. If so, it is necessary to explain the measures that will guarantee the exercise of rights on the part of Taiwan shareholders.
    b. Whether there is specific language in the company’s articles of association or organization documents safeguarding the exercise of shareholders’ rights and interests.
  (3) Whether any contract has been signed with another party that materially restricts the company’s operations or that appears unreasonable.
  (4) Whether relevant personnel, such as directors, supervisors, general managers, shareholders with stakes of at least 10%, or the company’s de facto responsible persons, have violated pertinent laws and regulations, thereby violating the principle of good faith or affecting the exercise of their professional duties.
  (5) Whether there have been violations of copyrights, patents, trademarks or other intellectual property rights.
  (6) Whether there are material litigious or non-litigious cases or other legal disputes pending.
     
2. “Any circumstance having a serious impact on the company's financial or business status, or sufficient to cause its dissolution or changes to its organization or capital, or where the company has acted deceptively or illegally such that the post-listing price of its securities would be affected, with a likelihood of affecting market order or harming the public interest.”

The main point for examination refers primarily to any foreign issuing company applying for a primary listing, or its subsidiaries, having one of the following circumstances:
  (1) Where legal cases (litigious or non-litigious) are pending whose outcome may be sufficient to cause the company to dissolve or change its organization, capital, business plan or financial condition, or cause it to halt production.
  (2) Where the company has suffered material damage or disaster, signed significant contracts, experienced particular accidents, or made material changes to, or cancelled, its business plan, the results of which are sufficient to cause clearly significant alteration of its financial condition.
     
3. “Material non-arm’s length transactions have occurred and have not been corrected.”

Whether or not there are non-arm’s length transactions has long been a major focus of investigation for regulators overseeing the market listing application process. It refers to where one of the following circumstances exists at a foreign applicant, or the applicant’s subsidiary:
  (1) The aims, prices, conditions or handling procedures used in the trading of goods do not correspond to those in ordinary transactions, or appear unreasonable.
  (2)

The firm is unable to prove the necessity of various related-party transactions, or the legality of the decision-making process, or the reasonableness of prices and amounts involved in receipts and payments (including comparisons with non-related parties or others within the same industry). “Have not been corrected” means that the foregoing circumstances persist after the date on which the market listing application was submitted.

The stock exchanges of many countries rank related-party transactions high among their priorities for investigation, and they do so in order to prevent applying companies from using arrangements with related parties to manipulate business revenues or profits. An important reminder is in order, though: Not all related party transactions are prohibited—it is just that one needs to be able to explain why they are necessary and reasonable.
     
4. “The finances or business affairs of the foreign issuer are not independently separable from those of another party.”

This refers to where one of the following circumstances exists at a foreign issuer applying for a primary listing, or its subsidiary:
  (1) Sources of funding are excessively concentrated among non-financial institutions;
  (2) A contract has been entered into by the applying company with another party, and such contract materially restricts its operations or appears unreasonable, giving rise to concerns that it is contrary to the company’s interests;
  (3) Loan funds are used jointly with another party and cannot be clearly separated. However, loan funds used jointly by a parent company and its subsidiaries are not subject to this restriction.
  The principle aim of this section is to examine whether the applying company has normal funding channels, and to prevent companies from using excessively high interest charges to erode profits, or excessively low interest charges to fictitiously increase profits. In terms of business affairs, it examines whether an applying company has entered any unreasonable contracts that aim to boost its performance or acquire technology but which harm shareholders’ interests.
     
5. The applicant is deemed by the TWSE to be inappropriate for a listing due to any other reason related to the scope or nature of the enterprise or any other special circumstance.

In addition to the “inappropriate” circumstances listed above, a FAQ put out by the TWSE (“Q & A for Listing in Taiwan by Foreign Issuers”) adds a sixth set of circumstances specifically for any company organized as a conglomerate or consortium:
     
6. A consortium must comply with the following rules:
  (1) The principal business or products of the foreign issuer applying for listing do not mutually compete with that of any other company within the same consortium. The products that the applicant company sells to other members of the same consortium must have independent sales development potential. (Whether products “mutually compete” is an overall judgment taking into account general factors such as product substitutability, the forms of the companies and their respective target clientele.)
  (2) Where there are businesses relationships between the applying foreign issuer and other members of the same consortium, written operational guidelines governing the financial and business affairs among them must be formulated and approved by the board of directors of each such foreign issuer.
  (3) The financial and business conditions of the foreign issuer and the abovementioned operational guidelines must not be materially abnormal as compared with those of other enterprises in the same industry.
  (4) The amount of purchases and operating revenue from companies in the consortium in the fiscal year in which the company applies for a listing, and in the most recent two fiscal years, does not exceed 50 percent. (This clause may be waved if the circumstance has resulted from the nature of the business, market demand conditions or other reasonable conditions.)

Where a foreign issuer that is a member of a consortium applies for a primary share listing, the TWSE will consider a listing inappropriate if it fails to comply with any of the above rules.

These six areas for judging the appropriateness of listing applications are like steps in a routine health checkup: Even if each one checks out, it does not mean that you are in perfect health. On the other hand, finding a problem does not mean the individual is critically ill, either. However, you do need to follow the advice of your doctor (or in this case, your accountant and underwriter), and after a time you can anticipate that your condition will improve. It is worth noting that while there are fewer requirements to be met by foreign applicants compared to domestic ones for initial public offerings, local underwriters are likely to adopt just as rigorous an attitude in either case when it comes to producing their assessment reports, since underwriters are required to vouch for their clients for two fiscal years after staging their market listings. Therefore, finding the right CPA and underwriter can help the foreign issuer get the most out of the listing application process.