M&A in Taiwan
By Jackson Shuai-Sheng Huang
Posted: 22nd May 2013 09:06
The merger and acquisition market in Taiwan has been in a growing trend during the recent years. The growing trend should continue for the years to come because of the untapped potentials in the Taiwan market. Majority of the deals in Taiwan are cross-border deals or deals with cross-border elements. Furthermore, because of the special relationship between Taiwan and China, there are unique issues and challenges related to these deals.
The merger and acquisition market in Taiwan will continue to grow for the years to come because of the following two primary reasons. First, there are a large number of very strong and healthy mid and small size businesses and a good number of the business owners are looking to sell their businesses for various reasons. For example, generally speaking, a lot of these businesses in Taiwan are family owned businesses, the current owners are close to retirement age, and next generation is either disinterested in or unable to manage the family business; this leaves the current owners with only the option to sell the business.
Second, attitude of the policy makers in Taiwan towards private equity should be changing. Traditionally, the policy makers in Taiwan are hostile against private equity. Even though the policy today remains the same, the lobbying force supporting private equity is becoming stronger. Furthermore, Taiwan is going through a recession right now and the government is exploring various options to boost its economy; therefore, it is foreseeable that the policy makers may change its attitude to favour private equity, which would create a stronger capital market and boost the economy of Taiwan. In addition, opening up the private equity market is essential for Taiwan to be connected and on par with the rest of the world.
With more owners looking to sell their businesses and possible change in the attitude of the policy makers towards private equity in Taiwan, the growing trend in the merger and acquisition market in Taiwan is likely to continue.
Issues for a Chinese Entity to Invest in Taiwan
Majority of the merger and acquisition deals in Taiwan are cross-border deals or have cross-border elements. This is because either the purchaser is a foreign entity or the target company has foreign subsidiaries or affiliates. Furthermore, because of the special relationship between Taiwan and China, there are additional issues to consider in a merger and acquisition deal involving a Chinese element.
There are a lot of Chinese entities looking to acquire or invest in Taiwanese company; however, there are limitation on how much of a Taiwanese company can be funded by Chinese entities. By law, a Taiwanese company may only have a certain percentage of its ownership funded by Chinese entities; furthermore, the percentage of ownership allowed varies is dependent on the industry that the Taiwanese company is in. For example, for food processing companies, only up to 50% of the company may be funded by Chinese entities. Because of this requirement, every transaction involving a Chinese purchaser or investor of a Taiwanese company must be reviewed and approved by the investment commission of the Ministry of Economic Affairs.
Unique Issues when Acquiring a Taiwanese Company
A large proportion of the Taiwan businesses, especially those in the manufacturing business, operate in a triangular business structure. Generally speaking, under the triangular business structure, the brand and expertise are in a company in Taiwan, the manufacturing is done by a company in China, and the profits would accumulate in a company that is registered in a tax heaven such as the British Virgin Islands. As the result, there are a few unique issues to consider.
First issue is the valuation of the company. Because of the way Chinese tax law is structured, each company in China keeps two sets of accounting records. One accounting record is for the purpose of the tax filing (“external record”) and the other is for the purpose of the company financial audit report (“internal record”). It is likely that the value of the company differs drastically in the two books.
Furthermore, Chinese government has a very strict law and regulations on transferring money offshore. When combined with the triangular business structure sated above, it creates a very unique situation where the inter company account receivables and payables can be easily written off in the internal record while they cannot be dealt with as easily in the external record. To cope with the Chinese laws and regulations, it may take years to clear up the discrepancy in the external record without incurring additional tax liabilities in China. The companies generally just leave this issue alone and unsolved because it does not affect the day to day operation or the profitability of the company. The issue only becomes problematic during a merger and acquisition deal.
Another related issue is the tax issue in China. In addition to the two sets of accounting records and transferring funds outside of Taiwan, frankly speaking, Chinese tax code is extremely complicated and there are very little case law, precedent, or guidance. Therefore, no one really understands the Chinese tax code in full, which includes the business owners, tax practitioners, or the enforcement agencies.
The environmental issue is becoming a growing concern in China. On one hand, the laws and regulations written with strict requirements; on the other hand, no one really enforces or follows the laws and regulations. When the purchaser is a domestic buyer or a buyer with extensive operations in China, this is not much of an issue. However, when the purchaser is a foreign purchaser with no other operation in China and the purchaser brings the same mentality as purchasing a company in a country where environmental laws and regulations are strictly complied with and enforced, there will be significant gaps in understanding and expectations with the seller.
On one hand, the purchaser would expect and require the real properties the target company owns must comply with all environment laws and regulations. There are even cases where the purchaser would not only expect compliance with the Chinese law, but also with the international standard. On the other hand, the seller would only be operating in accordance with the Chinese customs and standard, which is barely following the laws and the regulations, and would find the purchaser’s above requests unrealistic and impractical.
The merger and acquisition market in Taiwan should continue to grow during the next few years. However, because of the special relationships between China and Taiwan, there are special and unique issues in related merger and acquisition deals. For both the purchaser and the seller, it is recommended to have an experienced local team of experts to assist with the relevant transactions.