February 2022
Teresa Huang and Julian Lai
On November 30, 2018, the Council of Grand Justices of the Judicial Yuan issued Judicial No. 770, which explicitly indicated in its Statement of Reasons that when a company engages in a merger or acquisition, the current Business Mergers and Acquisition Act (“Act”) neither allows the shareholders to timely obtain information related to the interest relationship of the directors or shareholders within a certain reasonable period prior to the shareholders meeting nor grants the right to request the buyback of the shares to the shareholders opposed to the merger or acquisition so that they can enjoy an effective rights protection mechanism. Therefore, this Act should be reviewed. Under such circumstance and by considering incessant recommendations from all walks of life on enhanced flexibility and efficiency of enterprise mergers and acquisition in recent years, the Executive Yuan has passed the draft partial amendment to the Act (“Draft Amendment”) on December 30, 2021 and referred it to the Legislative Yuan for deliberation. The Draft Amendment has three major highlights: “protection of shareholders’ rights and interests,” the “relaxation of the scope of whale-minnow mergers,” and the “creation of friendly tax environment for mergers or acquisitions,” as discussed below one by one:
1. Protection of shareholders’ rights and interests
(1) To strengthen the disclosure of information on a merger or acquisition so that the shareholders can obtain information in a timely manner before the meeting, it is additionally required that the company shall disclose the important content about the directors’ interest relationship and the reasons for or against the merger or acquisition resolution in the reasons for convening the shareholders’ meeting, and the content may be posted on the website designated by the competent securities authority or the company, and the website address shall be specified in the notice (Article 5, Paragraph 4 of the Draft Amendment).
(2) Under the current Act, the shareholders who may request the company to purchase shares are required to dissent and abstain from voting in writing or orally prior to or during a shareholders’ meeting. To wit, shareholders who wish to exercise their right to request the buyback of shares are required to abstain from voting as a precondition, which may result in a situation where the shareholders may not have sufficient bargaining power with respect to the buyback price in practice. Therefore, the provision that allows shareholders opposed to the merger or acquisition also to exercise their right to request the buyback of their shares is added to provide them with a proper exit mechanism and to expedite the company to propose a reasonable buyback price for the shares as soon as possible (Article 12, Paragraph 1, Subparagraph 2 of the Draft Amendment).
2. Relaxation of a whale-minnow merger
A whale-minnow merger under the current Act refers to the circumstances where the new shares issued by a company for the purpose of the merger does not exceed twenty percent (20%) of the total outstanding voting shares of the company, “and” the total cash or property value delivered to the shareholders of the merged company does not exceed two percent (2%) of the net worth of the merging company. Both conditions shall be met for a summary whale-minnow merger procedure. Therefore, in order to promote the flexibility and efficiency of a merger, it is additionally stipulated that if the total consideration paid by the merging company does not exceed twenty percent (20%) of its net worth, the provisions on a whale-minnow merger also apply, and only a resolution adopted by the board of directors is required to accelerate the merger process (Articles 18, 29, and 36 of the Draft Amendment).
3. Creation of Friendly tax environment for mergers and acquisitions
(1) Since the acquisition of intangible assets is often an important reason for mergers and acquisitions as companies seek to strengthen their competitiveness and expand their markets, it is additionally stipulated that intangible assets so acquired may be amortized over a period of time based on the actual cost of acquisition (Article 40-1 of the Draft Amendment).
(2) To promote a friendly environment for mergers and acquisitions of start-up companies, it is additional stipulated that the dividend considerations received by individual shareholders of merged or acquired start-up companies with the dividend income calculated in accordance with the provisions of the Income Tax Act may be deferred in full until the third year following the year of acquisition and taxed in equal installments over three years (Article 44-1 of the Draft Amendment).