Taiwan had a thriving M&A market in 2018, with more transactions and bigger deals, as well as high-profile transactions in various fields, compared to 2017. However, at the end of 2018, the Justices of the Constitutional Court issued guidance deemed ambiguous and unclear, even to the regulator and the practitioner
A case was filed by a minority shareholder (the applicant) in relation to a cash-out merger in 2007. The merger was between a Taiwanese company (target company) and its major shareholder (the parent), which held 84% of the target company shares. After the merger, the target company was merged into the parent, and so all minority shareholders were squeezed out.
Under the current M&A Act and other applicable laws and regulations of Taiwan, the parent is allowed to vote for the merger, so it used its majority vote to approve the merger in the target company’s shareholders’ meeting.
The only remedy available to a shareholder of a target company who objects to the merger is the appraisal right, i.e., asking the court to determine a fair price of target company shares and claiming the difference (if any) between the price offered by the parent and the fair price determined by the court, provided that the appraisal right is not available to an objecting shareholder who has exercised its voting rights in the target company’s shareholders’ meeting. In other words, waiver of voting right is a condition precedent to the appraisal right.
The applicant did not realize it was squeezed out until the merger was completed; it filed a claim to the court to ask for its shares to be returned by alleging that: (1) it did not obtain sufficient information before the target company’s shareholders’ meeting; and (2) the parent should act in the target company’s best interest and not breach its fiduciary duty.
After the final judgment by the regular courts was affirmed, the applicant filed a Constitutional Interpretation to question the constitutionality of the relevant provisions of the M&A Act. On 30 November 2018, the Constitutional Court finally granted Interpretation No. 770, which is favourable to minority shareholders in a cash-out merger.
According to No. 770, the critical issue is not whether the interested shareholders or directors should not exercise their voting right, or on behalf of the interested party, but whether the protection of the dissenting shareholders’ interest is sufficient or not. The Constitutional Court indicated that the law should let the minority shareholders have sufficient information about the interested party in the transactions, and the reason why the merger should be approved or voted against.
Furthermore, the current laws were only designed for one scenario: The dissenting shareholders actively waive their voting rights and exercise their appraisal right, but provide no remedy to those shareholders who voted against the merger. So, the Constitutional Court held that the relevant laws did not provide sufficient protection to minority shareholders, and thus announced that they are unconstitutional.
In short, it is generally understood that the Constitutional Court’s view is that: (1) more information about the major shareholder’s conflicts of interest should be made available to the shareholders before the shareholders’ meeting; and (2) minority shareholders who have voted against a cash-out merger in the shareholders’ meeting shall also be entitled to have the appraisal right.
The validity of the current M&A Act is not immediately affected, but we believe that, based on No. 770, it is very likely that the competent authority will consider how to provide more thorough shareholder protection in cash-out merger (and other similar squeeze-out transactions) as suggested by No. 770.
James Huang is a partner and Maggie Huang is an associate partner at Lee and Li in Taiwan. They can be contacted at email@example.com and firstname.lastname@example.org
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