TAIWAN Law and Practice Contributed by: Lihuei Mao (Grace), Dennis Yu and Christina Chiang, Lee and Li, Attorneys-at-Law
• other industry-specific areas such as data protection policies for companies that collect and process user data to provide data-driven, personalised healthcare management ser - vices. The focus of VC funds’ legal due diligence is the following: • identify pre-emptive rights, warrants or any other right to subscribe/convert into equity of the company that would result in the dilution of the VC funds’ investment; • identify any preferential right of existing shareholders, such as dividend preference, voting arrangement, etc; • identify related-party transactions, especially outstanding shareholder loans; • confirm whether proper proprietary rights arrangements, non-disclosure and non- compete arrangements are in place with the founders and key-employees, especially for technology-based companies; • identify irregularities in the material contracts; • identify non-compliance that would expose the target company to material risks; and • identify industry-specific risks such as per - sonal data protection risks. 3.2 Process The time required for new anchor investors and a growth company to initiate the next round of financing depends on the industry that the tar - get company is in and the life cycle of the prod - uct/service of the target company. It could take six months to a year to complete one round of financing. In practice, after seed round financing, entre - preneurs would seek financing from institutional investors, including venture capital funds. A proper shareholders’ agreement in a customary
form would be in place when VCs invest. In a single round of financing, for cost-efficiency pur - poses, the anchor investor will usually engage legal counsel, on behalf of all co-investors, to conduct legal due diligence and to draft/review
the transaction documents. 3.3 Investment Structure
The commonly seen investment approach by VC funds in Taiwan is the subscription of pre - ferred shares with preference rights that com - mon shares do not have. Due to the relatively strict regulations of the Company Act, many foreign VC funds prefer that start-ups adopt an “offshore holding structure” . This involves establishing a holding vehicle in locations such as the Cayman Islands, British Virgin Islands, Singapore or elsewhere, which holds a 100% shareholding in Taiwanese start-ups. Investing in offshore holding companies provides more flexibility in negotiating shareholders’ agree - ments, and foreign VC funds (other than PRC investors as defined under Taiwan law) need not obtain prior foreign investment approval from the Department of Investment Review (DIR) of the Ministry of Economic Affairs, previously known as the Investment Commission. The customary preference rights of preferred shares in the Taiwan venture capital market include the following: • information and inspection right; • guaranteed board seat or board observer seat; • pre-emptive right, which allows preferred shareholders to participate in the company’s new rounds of security offerings on a pro rata basis; • anti-dilution protection, which entails adjust - ment to applicable conversion price for the conversion of preferred shares into common
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