TAIWAN Law and Practice Contributed by: Sarah Wu, Lee & Li Attorneys-at-Law
an acquisition. In general, the purchaser would set up a special purpose vehicle (SPV or “Bid - co” ) for the acquisition, and sponsor it through capital injections and/or shareholder loans. In addition to obtaining a pledge of the shares of the SPV, the lenders of a senior loan will require the sponsors/shareholders to sign a subordina- tion agreement and also assign the rights under the shareholder loans to the lenders as security under the senior loan. 3.2 Mezzanine/Payment-in-Kind (PIK) Loans A mezzanine loan combines debt and equity financing, under which the lender may charge interest and fees and set terms to convert all or a portion of the loan into equity after a cer- tain period. The financing method may also be recognised as a form of financing with stock options. However, the current laws and regulations in Tai- wan are not friendly to commercial banks under- taking mezzanine financing due to the strict con- trols over investments by commercial banks. For instance, Article 74 of the Taiwan Banking Act clearly states that: • the authority must approve investment by a commercial bank on a case-by-case basis; • the total investment in non-financial related industries cannot exceed 10% of the net worth; • the shareholding ratio in such an enterprise should not exceed 5%; and • no participation in the operation of the invested enterprises is allowed. The above being said, the Taiwan Financial Supervisory Commission has been considering amending the relevant regulations to allow for mezzanine financing to facilitate the financing
of micro-enterprises and start-ups, although no further progress or amendments to the Taiwan Banking Act have been made to date. 3.3 Bridge Loans A bridge loan is commonly used for acquisition financing, for flexibility and the swift provision of funds. In Taiwan, bridge loans are structured as short-term funding (with a tenor of less than 365 days – mostly around a few months) prior to a senior loan. In terms of documentation, the structure of bridge loans is similar to that of syn- dicated loans, except that, due to the short-term feature, the availability period is relatively short, and it is structured to encourage swift refinanc- ing. 3.4 Bonds/High-Yield Bonds Bonds are one of the common tools for acqui- sition financing. In particular, listed companies may raise funds by issuing bonds to meet all or part of the costs in an acquisition in accordance with Taiwanese law after the announcement of the acquisition deal. On the other hand, the issuance of high-yield bonds for acquisition financing by corporates is rarely seen in Taiwan. Since the issuers of high- yield bonds are usually highly leveraged compa- nies or smaller or emerging companies with risky financial plans, they are not typical acquirers in the local M&A market. 3.5 Private Placements/Loan Notes Private placements and loan notes are not com- monly used for acquisition financing in Taiwan due to the strict regulations on private place- ment and local banks’ unfamiliarity with accept- ing loan notes.
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