TAIWAN Law and Practice Contributed by: Lihuei Mao (Grace), Dennis Yu and Christina Chiang, Lee and Li, Attorneys-at-Law
shares upon the occurrence of an event that would dilute the shareholding/value of the preferred shares, such as the target com - pany’s issuance of additional securities at a price lower than the preferred shareholders’ original subscription price; • board reserved matters, for which the con - sent of a certain number of directors must be obtained before the company can execute such matters; • preferred shareholders’ reserved matters, for which the consent of a certain percentage of the preferred shareholders must be obtained before the company can execute such mat - ters; • right of first refusal, which gives preferred shareholders and/or founders the priority right to purchase shares that are offered to be sold by other shareholders on a pro rata basis; • right of co-sale/tag-along, which allows preferred shareholders to sell the preferred shares together with the shares offered to be sold by other shareholders, usually the major common shareholders/founders/key employ - ees; and • liquidation preference, which gives the pre - ferred shareholders the right to be paid before the common shareholders, typically 100– 200% of the preferred shareholders’ original subscription price, upon the target company’s liquidation. The redemption right may be negotiated on a case-by-case basis, while the valuation adjust - ment mechanism is not commonly used in Tai - wan venture capital investment. 3.4 Documentation The typical key documents for a financing in a growth company are a share subscription agreement, a shareholders’ agreement and the
amended constitutional documents of the target company reflecting the investment terms. For international VC funds or for investments in the offshore holding entity of a Taiwan-based company, the commonly used forms are the Cayman Islands or the British Virgin Islands model forms. For local VC funds’ or CVCs’ investments in a locally incorporated entity, it is common that investors and the target company would prefer using a relatively concise form of investment agreement that is comprised of the provisions relating to share subscription and shareholder rights. 3.5 Investor Safeguards The preferred shares subscribed by the VC investors are usually attached to the liquidation preference right that allows the preferred share - holders to be paid, typically between 100%– 200% of the subscription price they originally paid, before the common shareholders, during the target company’s liquidation process or deemed liquidation events. Preferred shares conversion mechanisms and anti-dilution provisions are popular provisions to protect VC investors’ rights. An anti-dilution provision is an adjustment to applicable conver - sion price for the conversion of preferred shares into common shares when the target company issues new shares at a price lower than the pre - ferred shareholders’ original subscription price. Under the Company Act, existing shareholders are entitled to the mandatory pre-emption right over new shares; nevertheless, it is still common for transaction documents to stipulate the inves - tor’s pre-emption right over new shares. These safeguard mechanisms have been quite standard for VC investment in Taiwan and there
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