Jennifer Wang and Doris Lu
Chen & Lin Attorneys-at-Law
jenniferwang@chenandlin.com; dorislu@chenandlin.com

It’s “mission possible” for mainland-based enterprises to source funds from Taiwan IPOs.

Despite decades of intense relations between Mainland China and Taiwan, and restrictions on investment in Mainland China set by Taiwan authorities, numerous Taiwanese businessmen have developed and established successful mainland-based business empires in order to seize immense business opportunities in the emerging market. They accomplished this either by themselves or through joint ventures with other domestic or overseas partners. However, it was difficult for these Taiwanese businessmen to either share their success with their homeland people or to raise funds from the Taiwan market for further growth since the door for foreign companies (including mainland-based companies) to list their shares on the Taiwan Stock Exchange (TSE) or Taiwan GreTai Securities Market (GreTai Market) was not open. The situation was changed in 2008. From that year, Taiwan authorities opened the door and welcomed foreign companies to apply for Taiwan initial public offerings (IPOs). The bourses warmly welcome the abovementioned Taiwanese businessmen. Those mainland-based enterprises may also have the chance to source funds from Taiwan IPOs as long as proper restructurings are made and certain criteria set by the TSE and/or GreTai Market are satisfied.

Finding possibilities

Establishing an offshore holding company

According to current unwritten law, an enterprise incorporated under the laws of China is not eligible to be listed in Taiwan. However, the TSE and GreTai Market provide a hint that mainland enterprises may first establish an offshore holding company and use such offshore holding company as the vehicle to apply for a Taiwan IPO (Listing Entity). Due to this, it is general practice that a restructuring is conducted before applying for a Taiwan IPO. The most commonly used Listing Entity is the Cayman Islands company.

Avoiding Mainland Chinese companies and enterprises holding more than 30% shares or having controlling power over the Listing Entity

Although mainland-based companies may apply for a Taiwan IPO through restructuring as mentioned above, Taiwan authorities currently take the position that such Listing Entity cannot be “controlled by” mainland Chinese, legal entities, organisations and/or any institute of mainland China (Mainland Chinese and Enterprises). According to current unwritten law, the shares of the Listing Entity directly or indirectly held by the Mainland Chinese and Enterprises shall not exceed 30%.

Also, whenever the Mainland Chinese and Enterprises have “controlling power” over the Listing Entity, the listing application will be rejected. Having any of the following events, among others, shall be deemed as having “controlling power” over the Listing Entity: (1) controlling over the majority of the votes of the company pursuant to contracts among investors; (2) controlling over the majority of the votes of the directors; (3) having the right to appoint or discharge the majority of directors; (4) having other controls over the financial, operational, and/or human resources policies of the company pursuant to law or regulations or contracts.

Therefore, at the current stage, it is suggested to carefully inspect the actual shareholding structure behind and make proper arrangements before filing the listing application. In view of the cross-straits openness for economic cooperation, the Gre-Tai Market has even indicated in its promotional materials that if Mainland Chinese and Enterprises do control the Listing Entity, special approvals for their listing applications may be considered. Further, it has been heard that Taiwan authorities are considering passing a general rule to open a “special approval” route to allow Mainland Chinese and Enterprises-controlled entity to be listed in Taiwan. It is believed that with the gradual lifting of bans on cross-strait economic activities, Taiwan authorities will further deregulate certain restrictions on Taiwan IPOs.

Other criteria

Except for those special criteria set for Mainland China-related issues, other criteria for Taiwan IPOs are similar with those for IPOs in other countries, such as duration, cap size, profitability, and shareholding dispersion requirements. It is suggested that interested parties seek underwriter’s and legal counsel’s advice before making a move.

Advantage of a Taiwan IPO

There are quite a few advantages to choosing the Taiwan market for an IPO. To name a few, the total cost for an IPO is relatively low, the success of Secondary Public Offerings is relatively high, and the cluster of vertical industries rank almost at the top over the world. Especially, Taiwan provides mainland-based enterprises and Taiwanese businessmen with an environment that shares the same or similar culture, language and legal system. Therefore, since 2008, listing an IPO in Taiwan has been a continuous hot topic. For example, as of March 17 2011, there are almost 120 foreign companies under the advisory period provided by underwriters for TSE and Gre-Tai Market listings. Although the road to Taiwan IPOs may be challenging as it is a new market, we strongly believe that, with the assistances of underwriters, legal counsels and accountants, an increasing number of foreign companies will successfully list in Taiwan and prosper.