Taiwan’s New Rules On Foreign Issuers’ Repurchase Of Listed Securities

Against a backdrop of deepening turmoil in the global economy and volatile stock markets during 2011, the uncertain outlook has led to a significant correction in the share prices of many technology companies. To maintain their stock prices, those companies repurchased their shares as treasury stock.

For foreign companies that conducted initial public offerings (“IPOs”) in Taiwan and are not listed on any other exchange (“Primary Listed Companies”), given that the draft amendment to the Securities and Exchange Act (the “SEA”), which dedicated a special chapter with regard to foreign issuers, has not yet been passed by the Legislative Yuan (see report by Ching-Hua Lu and Charlotte Liu, of Lee and Li, Taipei, at WSLR, January 2011, page 16), it raises the issue of whether foreign issuers are subject to the SEA when they buy back their shares, in particular, how to apply the SEA to foreign issuers incorporated in the Cayman Islands where there is a discrepancy between the Cayman Islands law and the SEA.

In the past, the Taiwan Stock Exchange Corporation (the “TWSE”) granted approval for foreign issuers’ repurchase of shares through the listing contract on a case-by-case basis. However, considering the increasing number of foreign issuers and their need for repurchase of shares, in order for Primary Listed Companies to repurchase their shares and to make the legal basis clear, the TWSE promulgated the Taiwan Stock Exchange Corporation Rules Governing Foreign Issuers’ Repurchase of Listed Securities (the “Repurchase Rules”) on October 27, 2011. The Repurchase Rules also incorporate provisions regarding repurchase of Taiwan Depositary Receipts (“TDRs”) for the purpose of regulatory integration, and the TWSE’s rules governing the repurchase of TDRs no longer apply.

The Repurchase Rules were drafted with reference to the regulations governing share buy-backs applicable to local listed companies. Thus, matters regarding the repurchase procedure, limitations on price and volume of repurchase, the repurchase method, restrictions on repurchase, and public announcements are similar to those concerning local companies.

The Repurchase Rules took effect immediately upon their announcement, and the Taiwan Stock Exchange Corporation Rules Governing the Secondary Listed Company’s Repurchase of Taiwan Depositary Receipts were abolished.

The key points of the Repurchase Rules are summarized below:

Common Regulations (Applicable to Both Primary Listed Companies and Secondary Listed Companies)

Scope of Listed Securities

The securities that can be repurchased on the TWSE include the listed shares of Primary Listed Companies listed in the Republic of China and the listed TDRs of foreign companies whose shares are listed on a foreign country’s stock exchange (“Secondary Listed Companies”).

Board Approval

A foreign issuer repurchasing its listed securities on the TWSE should obtain approval from a majority of the directors at a meeting attended by at least two-thirds of the total number of the directors, subject to laws and regulations of the country where it is incorporated and the country where it is listed. However, for those Primary Listed Companies whose articles of incorporation provide that repurchase of shares should be further approved by the shareholders’ meeting, such companies will be required to obtain shareholders’ approval before conducting the share repurchase. The board of the foreign issuer shall report the repurchase of listed securities, status of the execution of repurchase as well as situations where the foreign issuer fails to repurchase its listed securities for any reasons at the next shareholders’ meeting.

Registration Requirement

A foreign issuer is unable to repurchase its listed securities on the TWSE without registration with the TWSE pursuant to the Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals and the TWSE’s business regulations. In other words, a foreign issuer must open a foreign institutional investor account with the TWSE before repurchasing its securities on the TWSE.

Prohibition of Disposal of Listed Securities by the Foreign Issuer’s Insiders and Related Parties during the Repurchase Period

During the period when a foreign issuer repurchases its listed securities on the TWSE, its affiliates (defined under the laws and regulations of the country where it is incorporated and the country where it is listed), its directors, supervisors, managers and their spouses, minor children or nominees should not dispose of their shares or TDR holdings in the foreign issuer.

Restriction on Repurchase Method of Listed Securities

A foreign issuer should execute the repurchase of its listed securities during trading hours via the TWSE’s automated computer trading system, and should not execute the repurchase by means of block trading, odd-lot trading, tender offer, auction, or after-market fixed-price trading.

Limitations on Volume and Total Monetary Amount of Securities to be Repurchased

The aggregate volume of shares repurchased by a Primary Listed Company and TDRs repurchased by a Secondary Listed Company should not exceed 10 percent of the total issued shares or the total TDR units of such company. Primary Listed Companies are also subject to an additional cap on total monetary amount of repurchase (as described below).

The repurchase volume per day by a foreign issuer during the repurchase period should not exceed one-third of the total number of units scheduled for the repurchase, but the above limitation does not apply if the repurchase volume of shares or TDRs is not more than 200,000 shares (applicable to Primary Listed Companies) or 200,000 units (applicable to Secondary Listed Companies) per day. The foreign issuer should not provide price quotes before regular trading hours begin, and should appoint not more than two securities brokers to execute the repurchase.

Restriction on Repurchase Purpose

Primary Listed Companies

Primary Listed Companies may repurchase their shares for any of the following purposes:

• where the repurchase is for transferring shares to their employees;

• where the repurchase is for the repurchased securities to be transferred for conversion from exercise of corporate bonds with warrants, preferred shares with warrants, convertible corporate bonds, convertible preferred shares, or share subscription warrants; or

• where the repurchase is for maintaining the company’s credit and protecting shareholders’ rights and the shares so purchased will be cancelled.

The shares repurchased in accordance with the third bulleted point above shall be cancelled within six months from the date of repurchase, and the shares repurchased for the purposes of the first and second bulleted points above shall be transferred within three years from the date of repurchase. The shares not transferred within the three-year period shall be deemed as not issued by the company. The shares repurchased by a Primary Listed Company shall not be pledged, and the Primary Listed Company is not entitled to any shareholders rights with respect to the repurchased shares.

A Primary Listed Company may, after obtaining the board’s approval, which shall be approved by a majority of the directors at a meeting attended by at least two-thirds of the total number of the directors, report the amended purpose of share repurchase within two months upon expiration of the repurchase period, and report such change to the Financial Supervisory Commission of the Executive Yuan (“FSC”).

Secondary Listed Companies

For Secondary Listed Companies, all of the shares underlying the repurchased TDRs should be withdrawn from the TDR facility, and be cancelled, within six months after repurchase, in accordance with the laws and regulations of the country where the Secondary Listed Company is incorporated.

Restriction on Repurchase Period

Primary Listed Companies

For Primary Listed Companies, share repurchase should be completed within two months of the Reporting Date (as defined below), and, upon expiration of said two-month period or within five days of completion of the repurchase (whichever is earlier), the Primary Listed Company should submit a report to the FSC together with the transaction statement and relevant information, and announce the status of the execution of the repurchase. If the repurchase has not been completed upon expiration of said two-month period and the issuer wishes to conduct another repurchase, another repurchase proposal shall be approved by the board of directors.

Secondary Listed Companies

For Secondary Listed Companies, TDR repurchase should be completed within two months of the Public Announcement Date of TDR Repurchase (as defined below), and, upon expiration of said period or within five days of completion of the repurchase (whichever is earlier), the Secondary Listed Company should submit a report to the TWSE together with the downloaded information and relevant documents, and announce the status of the execution of the repurchase. If the repurchase has not been completed upon expiration of said period and the issuer wishes to conduct another repurchase, another repurchase proposal should be approved by the board of directors.

Information Disclosure

Primary Listed Companies

A Primary Listed Company repurchasing its shares should, within two days of the day on which the board of directors approves the share repurchase, announce the repurchase, and report the following items to the FSC (“Reporting Date”); share repurchase should not proceed prior to public announcement and reporting:

• purpose of the repurchase;

• types of shares to be repurchased;

• ceiling on total monetary amount of the repurchase;

• scheduled period for the repurchase, and number of shares to be repurchased;

• repurchase price range;

• repurchase method;

• number of shares held at the time of reporting;

• any repurchases within three years prior to the time of reporting;

• any repurchases that have been reported but not completed;

• board meeting resolution to repurchase shares;

• rules for transfer of shares to employees (as described below);

• rules for conversion of shares or rules for subscription of shares;

• declaration that the financial condition of the company was considered at a meeting of the board of directors and that the capital maintenance of the company would not be affected by the repurchase;

• appraisal by a certified public accountant or securities firm of the reasonableness of the repurchase price; and

• other items prescribed by the FSC.

In addition to the information and documents prescribed above, the Primary Listed Company should also submit a compilation of share repurchase regulations of the country where it is incorporated and its articles of incorporation to the FSC and explain the ground(s) for share repurchase, transfer and cancellation, and subsequent handling after expiration of the period for share repurchase or completion of repurchase.

Secondary Listed Companies

A Secondary Listed Company should, within two days of the day on which the board of directors approves the repurchase of TDRs, announce the following items via the Market Post Observation System maintained by the TWSE (“Public Announcement Date of TDRs Repurchase”), and submit the downloaded information and relevant documents to the TWSE:

• date of board resolution and the manner of resolution;

• purpose of the repurchase (withdrawal and cancellation of the underlying shares);

• ceiling on total monetary amount of the repurchase;

• scheduled period for the repurchase, and volume of TDRs to be repurchased;

• repurchase price range of the TDRs;

• repurchase method;

• ratio of TDR units to be repurchased to the total units of issued TDRs;

• any repurchases within three years prior to the board resolution date;

• scheduled or actual date for cancellation of underlying shares; and

• other items prescribed by the TWSE.

To closely monitor whether an insider has sold any TDRs during the period when the company repurchases its TDRs, the Secondary Listed Company should simultaneously report or change information relating to its insiders via the Market Post Observation System when making the public announcement according to the preceding paragraph.

Thresholds Reached

Whenever the cumulative number of shares repurchased by a Primary Listed Company reaches 2 percent of its total issued shares, or the cumulative value of shares repurchased reaches NT$300 million (U.S.$9.9 million), the company should, within two days upon occurrence of either, make an announcement of the date, number and type of shares, and repurchase price.

Whenever the cumulative volume of TDRs repurchased by a Secondary Listed Company reaches 2 percent of the total units of issued TDRs, or when the outstanding TDRs are fewer than 12 million units, the company should, within two days upon occurrence of either, make an announcement of the date, volume, and price of TDRs repurchased via the Market Post Observation System.

Special Rules Applicable to Primary Listed Companies

Limitation on Total Monetary Amount of Share Repurchase

For a Primary Listed Company repurchasing its shares, the total monetary amount of share repurchase should not exceed the balance of the retained earnings deducting earnings distribution approved by the board of directors or shareholders’ meeting plus the following realized capital gains:

• proceeds from the disposal of assets that have not yet been booked as retained earnings; and

• income derived from the issuance of new shares at a premium and income from endowments received by the company, provided, however, that where the endowment received is the company’s own shares, the income shall not be recorded until the shares have been sold.

Calculation of the total monetary amount of share repurchase shall be based on the latest financial report audited or reviewed by a certified public accountant in accordance with law prior to the board resolution. The financial report must include an unreserved audit opinion or standard review opinion. This restriction, however, does not apply to interim financial reports which were issued a reserved opinion by the accountant, as the long-term equity investments and associated gains and losses were measured based on financial reports of the invested company which were not audited or reviewed by a certified public accountant.

Transfer Repurchased Shares to Employees

Rules for Transfer of Shares to Employees Should Be Adopted in Advance

A Primary Listed Company which repurchases its shares for the purpose of transferring them to its employees should first adopt rules for transfer of shares to employees. The rules for transfer of shares to employees should include at least the following items:

• types of shares to be transferred, a description of the rights attaching thereto, and any restrictions on such rights;

• transfer period;

• eligibility requirements for transferees;

• procedures for transfer of shares;

• agreed transfer price per share. The price should not be less than the average actual repurchase price. However, the transfer price can be subject to anti-dilution adjustment. The company is also allowed by a shareholder resolution to transfer shares to its employees at a price below the average actual repurchase price (as described above);

• rights and obligations subsequent to execution of the transfer; and

• other rights and obligations related to the company and its employees.

Transfer Shares to Employees at a Price Below the Average Actual Repurchase Price

To transfer shares to employees at a price below the average actual repurchase price, a Primary Listed Company must have obtained the consent of at least two-thirds of the voting rights present at the most recent shareholders’ meeting attended by shareholders representing a majority of the total issued shares, and must have listed and explained the following matters, which should not be raised by means of an extraordinary motion, in the convention notice of shareholders’ meeting (matters that the company is required to submit to the shareholders’ meeting for approval shall be set out in its articles of incorporation):

• the transfer price, discount percentage, calculation basis and the reasonableness thereof;

• the number of shares to be transferred, the purpose, and the reasonableness thereof;

• eligibility criteria for employees subscribing for shares, and the number of shares they are allowed to subscribe for;

• factors affecting shareholders’ rights:

• the amount which can be charged as expenses, and dilution of the company’s earnings per share; and

• explanation of the financial burden to be imposed on the company by transferring shares to employees at a price below the average actual repurchase price.

The aggregate number of shares of the company which have been transferred to its employees at a price below the average actual repurchase price as approved by shareholders’ meetings should not exceed 5 percent of the total issued shares of the company, and the aggregate number of shares subscribed by any single employee should not exceed 0.5 percent of the total issued shares of the company.

Special Rules Applicable to Secondary Listed Companies

A Secondary Listed Company and its shareholders should not, within the period for repurchase of TDRs and within one month upon expiration of the period for the repurchase or completion of the repurchase (whichever is earlier), re-issue the TDRs within the amount of withdrawal of the original facility, or within the scheduled issuance period and permitted volume of units for issue under a shelf registration for TDR offering.

Hsin-Lan Hsu and Nelson Wu are Attorneys with Lee and Li, Taipei. The law firm may be contacted at attorneys@leeandli.com.