Christine Chen contributes to Taylor Vinters International Employment Law Update

Christine Chen, head of our employment and immigration practice, has contributed to the June edition of International Employment Law Update published by Taylor Vinters, a Cambridge, UK based law firm with offices in London and Singapore. The update includes employment law news from jurisdictions around the world and is targeted at human resources managers.

In the Taiwan section, Christine summarizes key changes in the provision of additional paid parental leave under the Employment Insurance Act (Article 19.2); as well as an increase in paternity leave from three days to five, provided for under an amendment in March of this year to the Gender Equality in Employment Act (Article 7).

Christine notes that the government is likely to continue updating and strengthening support for parents to help combat Taiwan’s rapidly aging society, making it easier for people to raise children, and that human resources managers in Taiwan should make note of the changes. You can read the section on Taiwan here.

Three of the top five smartest companies in the world are represented by Winkler Partners

Massachusetts Institute of Technology (MIT) have released their list of the world’s 50 smartest companies for 2014. Ranked for their innovation and leading position in their respective industries, some of the companies are household brands, while others are known for their pioneering research in genome sequencing, clean energy and biotech. Of the fifty selected by MIT, Winkler Partners represents eleven, including three of the top five companies.

MIT Technology Review Deputy Editor Brian Bergstein notes that companies were chosen for their ability to commercialize innovative technology, or their disruptive effect on markets. Our clients on the list include front runners in the automotive and transport sectors, providers of Internet and software services, as well as consumer electronics brands. Our work for them includes many IP matters, Taiwan litigation, and corporate matters.

In MIT’s 2013 list (named 50 Disruptive Companies), a total of thirteen Winkler Partner clients were named. Bergstein notes that many of the companies on the 2014 list are not necessarily known by a wide audience, but rather operate in sectors where important innovations are taking place.

You can read about all the companies on MIT’s 2014 list here.

Headstart Taiwan: Required documents to hire foreign employees

Taiwan’s Workforce Development Agency has released a list of documents it will accept from employers to show they qualify under the new Headstart Taiwan program to hire foreign employees without being subject to minimum experience or capital/revenue requirements. To qualify, companies that are registered less than five years must meet one of the following criteria and provide documentation in order to qualify:

1. Received NT$2 million or more in venture capital
Required documents:

  • Venture Capital Enterprise (Update) Registration Form  (or evidence of lawful incorporation) or,
  • Statement of Shareholders’ Capital Contributions in Cash, issued by the competent authority for company registration within 2 months of application date (XX Venture Capital Inc. should appear in the Shareholder Roster) or,
  • Foreign investment approval from the competent authority or its agent (the approved lines of business should include venture capital investments)

2. Registered on the Go Incubation Board for Startup and Acceleration Firms (GISA) with the Taipei Exchange
Required documents:

  • Approval to list on the Go Incubation Board for Startup and Acceleration Firms (GISA), issued by the Taipei Exchange

3. Granted an invention patent in Taiwan, or had a patent assigned or licensed to exploit by a Taiwanese invention patent holder that is registered with the Taiwan Intellectual Property Office (TIPO)
Required documents:

  • Taiwan Invention Patent Certificate or,
  • Approval letter to record invention patent assignment or license issued by the Taiwan Intellectual Property Office, Ministry of Economic Affairs

4. Joined an incubator
Required documents:

  • Lease agreement with qualifying incubator programs (for a list of qualifying incubators click here)

5. Won awards in recognized entrepreneurial or design competitions
Required documents:

  • Certificate from qualifying entrepreneurial or design competitions (for a list of qualifying competitions click here)

In addition to meeting one of the above criteria, all qualified Headstart Taiwan employers must also provide either a Company Registration Certificate or a Business Registration Transcript when applying for employee work permits.

Employees and managers are treated differently for work permit purposes. An ordinary foreign-invested business can obtain a single work permit for a foreign national manager if the business has at least NT$500,000 in capital at registration and NT$3 million in revenue after its first year of operation. These capital/revenue requirements are lower than those for foreign employees (NT$5 million/NT$10 million). Taiwan’s National Development Council has announced that Taiwan will grant up to 2,000 entrepreneur visas starting in July 2015. While the requirements for obtaining and extending an entrepreneur visa have not been announced, the program is intended to allow startups to have multiple foreign managers or executives in addition to foreign national employees.

Winkler Partners welcomes Roxana Cheng

Winkler Partners welcomes Roxana Cheng.

Roxana joins our corporate team from Moreno Baldivieso Estudio de Abogados, one of Bolivia’s leading law firms, where she worked on international investments, government infrastructure projects and general commercial transactions with a range of clients from Korea, Latin America, the United States and Europe. At Winkler Partners, she will continue to focus on cross-border transactions and advise clients from Spanish-speaking countries.

Roxana is admitted to practice in the Commonwealth of Massachusetts. She holds a B.A. from the University of Massachusetts, and a J.D. from Northeastern University School of Law. Roxana is fluent in English, Spanish, and Mandarin Chinese. You can read Roxana’s full profile here.

1st quarter trends in IP released

Taiwan’s Intellectual Property Office (TIPO) has released IP registration figures and trends for the first quarter of 2015.

A total of 17,221 new patent applications were made, an increase over the first quarter of 2014 of 11.88%. There were a total of 3,967 invention patent applications originating in Taiwan and 6,558 originating abroad, a decrease of 12% year on year. The top foreign patent applicants were Intel (173 applications), Toshiba (158) and Tokyo Electron Taiwan (120). The TIPO also notes that while overall applications by Hon Hai Precision Industry Co. (the single largest patent applicant in the country) have decreased, Hon Hai’s applications for Internet of Things and cloud technologies have increased.

In addition, the TIPO received 17,379 trademark applications, and while applications originating in Taiwan decreased by 3.23%, foreign applications increased by 6.62% over the same period last year. The largest number of foreign applications came from the United States (888), China (847) and Japan (801). Applications from China increased 50.71% over the same period last year, a trend the TIPO notes has continued for the last four quarters.

The full report is available on the TIPO’s website in Chinese here.

Taiwan to begin issuing entrepreneur visas from July

According to reports in the Chinese language media, National Development Council (NDC) Minister Woody Duh has announced that Taiwan will begin issuing entrepreneurial visas to foreign nationals from July, in a bid to attract talent, strengthen Taiwan’s startup ecosystem and create jobs.

2,000 visas a year will be available to foreign nationals (including nationals of Hong Kong and Macau), which come with one year of residence. Extensions of a further two years are available to those entrepreneurs who can provide evidence of operating a bona fide business, such as registering a business or generating revenue. Entrepreneurs who lawfully reside in Taiwan for five years are then eligible for permanent residency.

The report notes that other countries such as Chile, South Korea, Canada, Singapore and the UK have issued similar plans. The NDC has been charged with developing Taiwan’s startup ecosystem under the Headstart Taiwan project, with the aim to assist entrepreneurs through deregulation, attracting investment and developing startup clusters, most notably Taiwan Startup Stadium. For more on the Headstart Taiwan project please visit the NDC’s website.

Enforcement of Chinese judgments and arbitral awards in Taiwan: the res judicata problem

Taiwan’s Supreme Court recently affirmed in Shending Law Firm v. Tien Chin Yu Machinery Mfg. Co., Ltd. Chinese judgments and arbitral awards do not have res judicata effect even if they are recognized by the Taiwanese courts. 104 Taishang Zi No. 33. In contrast, foreign judgments and arbitral awards (including those from Hong Kong and Macau) are routinely recognized and enforced.

Tien Chin Yu (“TCY”) is a Taiwanese manufacturer of flexographic printing and corrugator machinery. In 2003, it retained a law firm in Guangdong, China to act for it in litigation against a printing company in Dongguan.

The law firm’s engagement agreement provided that if TCY terminated the representation for any reason other than the law firm’s malfeasance or a breach of the agreement, TCY would have to return any funds advanced by the law firm plus 20% of the amount of TCY’s claim. According to TCY, the law firm failed to keep it informed during the course of the litigation. Although TCY eventually prevailed on some claims but not on others, it decided not to appeal and terminated the representation.

The law firm demanded its fees under the agreement’s 20% termination penalty and submitted the dispute to CIETAC’s South China Sub-Commission pursuant to the agreement’s arbitration clause. The law firm prevailed in the CIETAC proceedings and was awarded about US$110,000 in damages.

The Taoyuan District Court in northern Taiwan duly recognized the CIETAC award in 2009, rejecting TCY’s contentions that the award violated public policy in Taiwan.  After the Taiwan High Court upheld the District Court’s recognition of the Chinese arbitral award the law firm applied for compulsory enforcement of the award in the Taoyuan District Court’s enforcement division. In response, TCY filed an action asserting objections concerning the claim itself as established by the judgment (zhaiwuren yiyi zhi su) in the Taoyuan District Court’s civil division (this statutory cause of action has its roots in German law).

In general, an action objecting to the claim itself as established by the judgment is precluded from raising claims germane to the underlying action by Taiwan’s version of res judicata. This res judicata effect is well established for not only Taiwanese final judgments, but also recognized final foreign judgments and arbitral awards as well as. It bars the claimant from raising any claim that was or should have been raised by the time of final oral arguments. As a result, the judgment debtor in these circumstances is normally limited to raising objections based on new facts that arose after final oral arguments such as a post-judgment satisfaction.

However, TCY’s action attempted to raise defenses such as the illegality of the 20% penalty clause under Taiwan law and the unreasonableness of the legal fees. While the Taoyuan District Court and the Taiwan High Court dismissed TCY’s action on grounds that a Chinese arbitral award should have res judicata effect once it has been recognized by the Taiwanese courts, the Supreme Court held for TCY and remanded the case back the lower courts for a decision on the merits of TCY’s defenses to the underlying claim.

The Supreme Court reasoned that when the Taiwan Legislature enacted Article 74 of the the Act Governing Relations between the People of the Taiwan Area and the Mainland Area, it intended that a judgment or arbitral award from China could serve as a writ of execution if recognized by a Taiwanese court but not as a  final judgment. In other words, a judgment or arbitral award from China is enforceable through the compulsory execution process but it does not have the same res judicata effect as a final Taiwanese judgment or arbitral award.

The Supreme Court based this distinction on a close reading of the statutory language used in Article 74 of the Act Governing Relations between the People of the Taiwan Area and the Mainland Area. This language differs from the language in the Civil Code and the Compulsory Execution Act applicable to from judgments and arbitral awards jurisdictions other than PRC that recognize Taiwanese judgments. Civil Code §402; Compulsory Execution Act §4-1. The Supreme Court inferred that Taiwan’s legislature intended the PRC’s legal system to be treated sui generis to protect the rights and interests of Taiwanese citizens in view of the special relationship with China and the differences between the two legal systems.

While the Supreme Court previously issued three judgments nearly a decade ago with similar holdings(96 Taishang Zi No. 2531, 97 Taishang Zi No. 2258, and 97 Taishang 2376), a number of lower courts including the Taiwan High Court have reached different conclusions in the interim. Shending Law Firm unequivocally rejects the theories of the lower courts and reaffirms that Taiwan does not recognize Chinese judgments and awards as having the same res judicata effect as those from other foreign jurisdictions including Hong Kong and Macau. Consequently, while enforcement of a Chinese judgment or arbitral award is still ultimately possible in Taiwan, the underlying claims are likely to be relitigated on the merits.

The result for the foreseeable future is that when faced with the increasingly common situation of a potential dispute with Taiwanese business partners in China whose assets are in Taiwan, practitioners should choose dispute resolution in an appropriate third jurisdiction or possibly in Taiwan itself if there is any possibility that the judgment or arbitral award must be enforced here. For the same reasons, it is also very important to realize that one is dealing with an entity whose principals or parent are based in Taiwan.

One caveat is that the third jurisdiction must always be checked to see if Taiwan will recognize judgments and arbitral awards from that jurisdiction. In the case of most (but by no means all) leading jurisdictions, Taiwan will recognize and enforce judgments and arbitral awards without excessive scrutiny on public policy grounds as was initially the case with the CIETAC award.

Taiwan and the right to be forgotten

A case of first impression involving the right to be forgotten recently came before the Taipei District Court. Despite an inconclusive District Court decision, Taiwan’s history of adopting European data protection standards and shifting public opinion in Taiwan suggest that the right to be forgotten could be created in the future.

Shi v. Google International LLC (Taiwan)

The facts of Shi v. Google International LLC (Taiwan) were similar to Google Spain SL, Google Inc. v Agencia Española de Protección de Datos, Mario Costeja González, the Spanish case decided by the Court of Justice of the European Union in 2014. In Costeja, the Court of Justice held that Google Inc. was a data controller and that a search operator had a duty to remove links that are “inadequate, irrelevant or no longer irrelevant, or excessive in relation to the purposes of the processing at issue carried out by the operator of the search engine, not kept up to date, or that they are kept for longer than is necessary unless they are required to be kept for historical, statistical, or scientific purposes…”

Mr. Shi was an owner of a Taiwanese baseball team that was accused of throwing games a number of years ago. Mr. Shi was indicted on fraud charges but ultimately found not guilty. Nonetheless, information about his alleged involvement in throwing baseball games still appears in Google search results.

In 2014 Mr. Shi brought legal proceedings against Google International LLC, Taiwan Branch (“Google Taiwan“) asking that Google Taiwan be ordered to remove its links leading to information about Mr. Shi’s alleged involvement in the scandal. In January of this year, the Taipei District Court issued a judgment against Mr. Shi. 103 Su Zi No. 2976.

In its opinion, the District Court did not reach the issue of whether a right to be forgotten should be recognized in Taiwan. The District Court was unwilling to infer from the fact that Google’s search engine may be used in Taiwan that its searches and organization of information take place in Taiwan. Nor was it willing to infer that Google Taiwan had control of the Google search engine. It found that Google Search is operated by Google Inc. and that Google Taiwan was a branch of Google International LLC, another entity in the Google group. As a result, Mr. Shi had no standing to bring his claim against Google Taiwan. This ruling contrasts sharply with Costeja where it was held  that Google Inc. was subject to the European data protection law because despite not having a formal legal presence in Spain, its activities there in combination with its Spanish affiliate amounted to an establishment in Spain.

While Mr. Shi is said to be appealing, the case highlights once again the great importance the Taiwanese courts place on the distinctions between different legal entities even in the same group of companies and the reluctance of the lower courts to squarely address new legal theories such as the right to be forgotten.

Taiwan Looks to Europe

The predecessor of Taiwan’s current Personal Information Protection Act (the “PIPA“) was the 1995 Computer Processed Personal Data Protection Act. This statute was based largely on the 1980 OECD Guidelines on the Protection of Privacy and Transborder Flows of Personal Data and the Council of Europe’s 1981 Convention for the Protection of Individuals with Regard to Automatic Processing of Personal Data.

Even before the PIPA took effect in 2012, a delegation from the Ministry of Justice traveled to Europe to study the draft General Data Protection Regulation (GDPR). At the time, officials from the Ministry of Justice also stated that the Ministry was following the development of the right to be forgotten in Europe with a view toward including it in the next set of amendments to the Personal Information Protection Act. While these amendments have not yet appeared, the Ministry of Justice has also formally requested the Ministry of Foreign Affairs to monitor the progress of data protection legislation in Europe.

Debate on Internet Regulation in Taiwan

Finally, heightened public concerns over internet abuse and the growing perception in some quarters that Taiwan’s freewheeling internet culture needs to be better regulated have lead to renewed calls for a right to be forgotten in the first half of this year. To be sure, suggestions that greater control be exercised over the kinds of speech and information available on the Internet in Taiwan are vigorously opposed by many influential voices. Still, there is noticeably little opposition to the concept of a right to be forgotten to date.

In sum, Taiwan’s courts have thus far declined to recognize a right to be forgotten by sidestepping the issue. Nonetheless, Taiwan’s tendency to follow European developments in data protection and growing concerns about the social cost of an unregulated internet make it foreseeable a version of the right to be forgotten will be proposed by the academic experts who advise the Ministry of Justice on data protection. It is equally foreseeable that any such proposal will engender a public debate similar to the one in Hong Kong on whether the right to be forgotten is in fact a device to protect the wealthy and powerful from what they deem to be excessive public scrutiny.

Deferred purchase price payment in Taiwan acquisitions

Your business team has discovered a company in Taiwan (the “Target”) which has an interesting new technology, a foothold in the China market, or some other asset or relationship which they feel would be a welcome addition to your company.  The business team has recommended that your company (“Foreign Co.”) acquire the Target.  So, now you must consider how best to structure this acquisition.  There are, of course, many and varied issues to consider when structuring any Taiwan acquisition.  This brief note focuses on only one (but an important one) of these issues:  deferred purchase price payment mechanisms (e.g., holdbacks, escrows, earn-outs, etc.).

Without going into detail, any foreign company wishing to acquire a company in Taiwan must apply to the Investment Commission (the “IC”) of the Taiwan Ministry of Economic Affairs for Foreign Investment Approval (“FIA”).  As part of the approval process, the IC needs to confirm that the seller is receiving fair value for its interest in the Target.  In and of itself, this appears to be a rather innocuous provision.  However, in practice the IC will not grant a FIA in a situation where the seller will tender its shares in Target at closing for (a) some amount of consideration at closing, plus (b) a conditional payment of additional consideration some time after closing.  In order to procure a FIA, the IC must find that the amount of consideration paid at closing is equal to the fair value of the Target shares tendered by the seller at closing.

The question then becomes how do you structure any kind of escrow arrangement, holdback or earn-out if the IC is not going to assign any value to conditional payments which may or may not be made post-closing?

The simplest and most common workaround is to set up a local, Taiwan acquisition vehicle.  Rather than purchasing Target directly, Foreign Co. sets up a local Taiwan company (“Taiwan Co.”) to acquire the Target.  When you set up Taiwan Co., you will still need to go through the FIA process.  But, the nature of the FIA review will be different than the review for an acquisition.  The review in connection with establishing Taiwan Co. will focus on whether Foreign Co. has adequately funded Taiwan Co. to carry out its expected business and operations in Taiwan.  This FIA process is relatively straightforward.  And, once the FIA is granted, Foreign Co. can then fund Taiwan Co. with sufficient amounts to acquire the Target.

Taiwan Co.’s acquisition of the Target would be further subject to another FIA review.  But, like the review in connection with Taiwan Co.’s initial funding, the FIA review of a domestic acquisition by a foreign-invested Taiwan enterprise would not include an examination of the consideration to be exchanged for the Target’s shares.  In effect, Taiwan Co. would be free to enter into a purchase agreement for shares of Target including any manner of escrow, holdback or earn-out provisions you felt necessary and advisable under the circumstances.

Benefits of offshore holding companies

A significant portion of Winkler Partners’ corporate practice involves advising international clients on how best to structure their businesses in Taiwan.  One of the first questions each international client typically asks when planning to enter the Taiwan market is:  What type of entity is appropriate for its purposes in Taiwan?  While this is a valid and important question, it may in some cases focus the structuring discussions too narrowly and thereby inadvertently overlook more advantageous structuring alternatives.

Assuming that the client needs a business entity in Taiwan in order to conduct its affairs here in accordance with Taiwan law, it is almost always worth considering establishing an offshore holding company to own and/or control  the Taiwan entity.  Set forth below is a list, although not exhaustive, of some of the key advantages that our clients have gained through the use of offshore vehicles in connection with their Taiwan corporate structures.

  1. Corporate Law Follows International Norms.  There are a number of provisions in Taiwan’s Company Act that restrict the ability of company promoters, directors, and managers to accomplish certain transactions that may seem relatively routine in their home jurisdictions.  For instance, Taiwan’s Company Act generally prohibits a company from repurchasing its own shares.  Taiwan company board meetings must be held in person or by video conference and resolutions must be passed by vote of the attending directors.  Signed written resolutions in lieu of such a meeting will NOT suffice.  Another Company Act provision stipulates that the original company promoter (i.e., the initial shareholder(s)) may not transfer shares of the newly established company for a period of one year following the company’s establishment.

    By establishing an offshore holding vehicle, the shareholders can govern their relationship to each other and to the corporate entity offshore of Taiwan.  Most of the more common offshore jurisdictions (e.g., the British Virgin Islands, the Cayman Islands, etc.) allow:  (i) directors to pass written resolutions without convening a meeting; (ii) original promoters to sell their interests freely; and (iii) the company to repurchase its own shares, subject to reasonable restrictions.

    In addition to being generally more permissive in the types of allowable corporate transactions, many offshore jurisdictions such as the British Virgin Islands and the Cayman Islands allow companies established there to tailor their organizational documents (i.e., Memorandum of Association and Articles of Association).  In most cases, corporate legislation in these jurisdictions is subject to the specific provisions of a company’s organizational documents, meaning that the offshore company has the power to “opt-out” of undesirable or unnecessary statutory default provisions.

  2. Tax and Legal Liability Advantages.  If the client is contemplating expatriating profits from Taiwan back to its home office (or some other affiliate outside of Taiwan), we typically consider establishing a branch office here in Taiwan.  The primary advantage of having a Taiwan branch (instead of a Taiwan subsidiary) is that the Taiwan tax authorities do not require the 20% withholding on amounts transferred by a branch office back to its home office as they do in respect of amounts paid as dividends or otherwise from a Taiwan subsidiary to its offshore parent.  However, as a branch is not a separate juridical person for legal purposes, the home office is considered to be doing business directly in Taiwan, and therefore, it may be directly liable for all debts and liabilities of its branch here.  Having an offshore vehicle interjected between the ultimate home company and the Taiwan branch provides the tax advantages of the branch structure while maintaining the legal liability shield associated with a subsidiary.

  3. More Attractive to Investors.  If a client were considering seeking additional investment for its Taiwan operations, using an offshore holding company can increase the attractiveness of the investment to potential investors.  Some offshore jurisdictions, unlike Taiwan, do not require shares to have a par value.  Being able to issue no par value shares allows the board complete flexibility in setting the share price to prospective new investors.  This flexibility, coupled with the comfort foreign investors typically have with the corporate governance and minority shareholder protections in the more common offshore jurisdictions, increases the client’s ability to raise necessary additional investment.

Again, the items listed above are by no means an exhaustive list of the benefits that an offshore vehicle may provide.  And, the use of an offshore vehicle may not be appropriate in all circumstances.  However, it is an option that in most cases should at least be considered when structuring an organization’s legal presence in Taiwan.