TAIWAN Law and Practice Contributed by: Lihuei Mao (Grace), Derrick Yang, Yu-Ting Su and Rose Huang, Lee and Li Attorneys-at-Law
• Supervisor appointment rights for the shareholder to appoint a supervisor for the portfolio companies. • Information rights relating to the periodical financial information of the portfolio companies and any other specific operational information on a case- by-case basis. • Shareholder reserved matters, such as any change to the preferred shareholders’ rights, redemption of preferred shares, change to the capital or board seats of any portfolio companies, or liquidation of any portfolio company, among others. The share - holders may also set a higher voting threshold on the reserved matters. However, if the shareholders intend to stipulate higher quorum/voting require - ments in the company’s AOI, the MOEA’s latest view is that this is only allowed for reserved mat- ters that are explicitly permitted under the Com - pany Act. Hence, when formulating the reserved matters to be incorporated in the AOI, shareholders should ensure compliance with the Company Act. 9.2 Shareholder Liability A shareholder of a company limited by shares is gen - erally liable for the company up to the amount of share capital it has subscribed to. Nonetheless, the corpo - rate veil will be pierced if the shareholder abuses the limited liability protection and causes the company to incur debts it cannot repay. In the event that a private equity-backed major shareholder causes a portfolio company to engage in abnormal business operations, the controlling company will be liable to compensate the portfolio company for such losses. A private equity fund backing the majority shareholder would gener - ally not be held liable for the actions of its portfolio company unless the corporate veil is pierced under exceptional circumstances.
While multiple exit plans will be evaluated at the out - set, a single process will be implemented as multiple tracks running in parallel may lead to a longer deal timeline, involve different levels of regulatory reviews (competing with each other), incur additional expens - es and weaken deal certainty. It is rare for private equity sellers to roll over or rein - vest upon exit; nevertheless, private equity sellers may sometimes reinvest through private investment in public equity to provide funding to the portfolio and to subsequently sell the shares on the market. 10.2 Drag and Tag Rights Drag rights and tag rights are common features in pri - vate equity deals. However, such rights are not often enforced in practice because the investors normally prefer to act in concert when there is an opportunity to exit. The exercise of drag rights is usually conditional on the sale of a controlling stake or even 100% of the target’s share, sometimes with a valuation floor. When the private equity fund only holds a minority stake, the drag right is still heavily negotiated, aiming to allow the private equity to drag other founder/management shareholders or co-investors to better its chances of exit. The common threshold for tag rights is the disposal of more than 50% of the target’s shares by the con - trolling shareholders. Minority financial investors often request tag rights to protect themselves against a change of control that could result in a change in man - agement. As for founder/management shareholders, the tag right may be limited by their incentive schemes as tag rights go against the purpose of the incentive scheme. 10.3 IPO According to the IPO-related rules, major sharehold - ers (ie, those holding more than 10% of the company’s total issued shares) are subject to a lock-up period of at least six months, which may be extended to up to two years. Post-IPO relationship agreements between private equity sellers and the target are rare. In recent years, overseas IPO via de-SPAC has become a pop - ular way of private equity exit due to the reduced time and cost compared to traditional IPOs.
10. Exits 10.1 Types of Exit
Private sales, auction sales and IPOs remain the most common ways for private equity funds to exit. The exit strategies vary depending on the milestones achieved, the expected financial return, the stakes owned by the private equity investor, maturity of the target company and its industry, and the inclination of other shareholders.
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