World Law Group member firms recently collaborated on a Global Venture Capital Guide that covers more than 30 jurisdictions on investment approval processes, typical investment sectors and investment structures on Venture Capital deals (and more!).
The guide does not claim to be comprehensive, and laws in this area are quickly evolving. In particular, it does not replace professional and detailed legal advice, as facts and circumstances vary on a case-by-case basis and country-specific regulations may change.
This chapter covers Taiwan. View the full guide.
1) In your jurisdiction, which sectors do venture capital funds typically invest in?
In Taiwan, key sectors attracting venture capital (VC) investment include TMT (Technology, Media, Telecom), e-commerce, consumer goods, AI-based solutions, financial services (including mobile wallets and digital payment solutions), travel agencies, and education.
2) Do venture capital funds require any approvals before investing in your jurisdiction?
For offshore venture capital funds, Foreign Investment Approval (FIA) must be obtained before investing in Taiwan. The investment may require a prior permit depending on the sector in which the investment is being made, e.g., insurance industry and financial industry.
3) Are there any legal limitations to an offshore venture capital fund acquiring control or influencing the business, operations, or governance of an investee entity?
If offshore VC funds are determined as originating from “Chinese (PRC) Investors”, because the funds are established with funds from China, or are under the control of Chinese citizens, the VC funds must obtain investment approval through a strict review procedure. In addition, investment from Chinese (PRC) Investors is limited or prohibited in sectors having significant influence on politics, society, culture, the economy, or Taiwan’s national security.
In the case of a listed target, if the investor intends to acquire 20% shares or more of the outstanding shares of a listed company within 50 days, a mandatory tender offer requirement will be triggered.
4) Would an investor be required to undertake an antitrust analysis prior to investment? When would such a requirement be triggered?
A “Merger” under Taiwan Fair Trade Act includes (i) merger; (ii) acquisition of more than one-third of the total voting shares of a company; (iii) acquisition of the whole or a major part of the business or assets of a company; (iv) the establishment of a Joint Venture (JV) company with another company; or (v) directly or indirectly controlling the business operations or the appointment or discharge of personnel of a company.
The investor must file with the authority, i.e., the Fair Trade Commission, for merger clearance if (i) the investment will result in holding one-third of the market share; (ii) the target has held one-quarter of the market share; or (iii) sales for the preceding fiscal year of the enterprises in the merger exceed the threshold, e.g., the sales of one of the enterprises in Taiwan exceed NTD 2 billion (approximately USD 66 million) and the sales of the other enterprise in Taiwan exceed NTD 15 billion (approximately USD 495 million), or the aggregate sales of all of the group companies of the parties to the merger worldwide exceed NTD 40 billion (approximately USD 1.3 billion), and the respective sales of at least two of which in Taiwan exceed NTD 2 billion (approximately USD 66 million).
5) What are the preferred structures for investment in venture capital deals? What are the primary drivers for each of these structures?
Typically, VC funds invest by acquiring shares, including ordinary shares or preferred shares. VC funds mainly participate in fundraising deals in the stage of Series-A or Series-B rounds. Some VC funds have workshops to
help the founders build start-ups and to find a founder. Where the investment is made without controlling the business operations of the target, the preferred shares on dividend distribution and repayment of capital on liquidation without voting rights are used. In order to not trigger a required merger filing, VC funds acquire less than one-third of the total shares of a target.
Before August 2018, a private company was unable to issue convertible bonds. A start-up was thus unable to raise funds by issuing convertible bonds. However, after the amendment of Taiwan’s Company Act in 2018, VC funds have an additional choice of the manner in which they invest in start-ups, but, so far, this has not been a popular investment in Taiwan.
6) Is there any restriction on rights available to venture capital investors in public companies?
No. According to Taiwan’s Securities and Exchange Act and the relevant securities regulations, there is no restriction on rights available to VC investors in public companies. If an offshore VC fund desires to acquire no more than 10% of the shares of a public company, it is not necessary to obtain FIA approval.
In addition, if the investor intends to acquire 20% or more of the shares of a listed company within 50 days, a mandatory tender offer requirement will be triggered. An investor holding more than 10% of the total shares of a public company is defined as an “Insider” and such investor bears some obligations under the Securities and Exchange Act, such as restrictions on transfers and a disclosure obligation before a transfer.
7) What protections are generally available to venture capital investors in your jurisdiction?
There are protections available to minority shareholders, but there is no special law or regulation protecting VC investors’ rights. In Taiwan, investors require the founders to sign a Shareholders’ Agreement and include clauses for specified matters that can only be dealt with at a shareholders’ meeting, or with investors’ veto rights.
Statutory protections available to minority shareholders include, (a) the right to initiate a lawsuit to discharge a director who has committed any act resulting in material damages to the company or in serious violation of applicable laws and/or regulations; (b) a right to require the board of directors to call a shareholders’ meeting; and (c) a right to file to the court for inspection of the company’s business and property.
8) Is warranty and indemnity insurance common in your jurisdiction? Are there any legal or practical challenges associated with obtaining such insurance?
In Taiwan, warranty and indemnity insurance is not common. However, in recent years, we have seen some offshore investors, such as Japanese investors, arrange warranty and indemnity insurance when acquiring Taiwan targets. Based on our experience, warranty and indemnity insurance is used in high value transactions where the original shareholders (or founders) are exiting the company and the incoming investor would otherwise have to rely only on the personal guarantees of the original shareholders for performance of conditions under the transaction documents.
However, warranty and indemnity insurance is rare and not provided by some insurance companies in Taiwan. If such insurance is available, there are practical challenges in procuring the same, including the complicated evaluation process, e.g., due diligence and interview by insurance company, before the underwriting, and high premiums.
9) What are common exit mechanisms adopted in venture capital transactions, and what, if any, are the risks or challenges associated with such exits?
This usually includes exit through an initial public offering (IPO), and secondary buyout. In case of short-term investment, investors will request founders to include a put option clause or a drag-along right clause in an investment agreement or shareholders’ agreement in order to ensure that they can exit smoothly.
The difficulties in achieving a successful IPO are discussed in our response below. A secondary buyout is a VC fund exit through the transfer of capital shares to another VC fund. As a VC fund, the buyer is familiar with nature of VC funds and the structure of the investment, which may minimize the time needed for the negotiations. Thus, recently, some VC funds have opted for secondary buyouts as the exit mechanism. However, as Taiwan local VC funds are mainly mid- and small-sized, whether or not secondary buyout is used as an exit mechanism depends on factors such as the transaction terms and the sectors in which the targets operate.
For put option rights or drag-along rights, investors and founders may include clauses in the transaction documents; however, the clauses may not be enforceable in certain circumstances. According to the principle of the free transfer of shares, unless provided otherwise by law, a party cannot be forced to transfer or to not transfer shares by any means, and so the founders only have a contractual obligation under such clauses. While investors can exercise a put option right or drag-along right against the founders, if the founders refuse to buy back the shares or to sell the shares to a third party along with the investor, the investors can only claim damages resulting from the contract breach, but cannot compel the founder to fulfill the obligation.
10) Do investors typically opt for a public market exit via an IPO? Are there any specific public market challenges that need to be addressed?
When making an investment, investors typically negotiate a public market sale via an IPO; however, an IPO is uncertain and depends on the business performance of the target company and on external factors, such as market conditions and the regulatory and political climates. Although investors often opt for public market exits via an IPO, in some cases, investors exit through a transfer of shares to a third party or by putting shares to the founders.
Key market challenges include:
1. Eligibility criteria for applying for a listing on the Taiwan Stock Exchange, including that the duration of corporate existence must be at least 3 years at the time the application for listing is filed; paid-in capital of not less than NT 600 million (approximately USD 19.88 million); profitability; and dispersion of share ownership.
2. Directors and shareholders holding 10% or more of the shares are prohibited from transferring or pledging shares during a lock-in period starting from the listing date (for at least 6 months).
3. Directors, supervisors, managers, and/or shareholders holding 10% or more of the shares (collectively, “Insiders”) are restricted from transferring the shares to designated persons satisfying the qualifications prescribed by the FSC (Taiwan Financial Supervisory Commission).
4. Insiders must report to the FSC the shareholding contemplated for transfer prior to a transfer, the current shareholding upon acting as insiders, and the balance of owned shares to be submitted every month.
E. Wen-Chih Chen
Want to Learn More?
The objective of this publication is to serve as a Q&A-style multi-jurisdictional guide to venture capital law in countries where WLG member firms have offices. The guide intends to provide a high level overview of the venture capital market, including key sectors, preferred investment structures, regulatory approval requirements, limitations on acquisition of control in portfolio companies, restrictions on investment, investor protection, and exits; and hopes to provide readers the benefit of the shared global knowledge and local insights among the WLG member firms.