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In-depth treatment of selected topics in Taiwan law for legal professionals

Successor liability in asset purchases in Taiwan

This article briefly explores under what circumstances a Buyer involved in a corporate asset purchase might be subject to successor liability in Taiwan. This question would obviously be relevant to any foreign Buyer purchasing Taiwan corporate assets, whether in a one-off transaction or as part of a larger global acquisition.

Anyone that has been involved in an asset purchase in the United States has likely heard of successor liability. The doctrine of successor liability in the US derives generally from common law (both state and federal) and in a few specific areas from statute. For the more adventuresome soul, there are academic articles of over one hundred pages in length devoted to the myriad variations of successor liability. However, stated simply, successor liability refers to the body of judge-made law and statutes that creates exceptions to the general rule of no successor liability in the context of asset acquisitions. This simple definition will suffice for the purposes of this short article.

As a threshold matter, it is important to note that Taiwan is a civil law jurisdiction. Therefore, most law related to successor liability is derived from statute. Apart from this distinction, the analysis in Taiwan begins, as it does in the US, with the general doctrine that no liability is transferred to Buyer in an asset acquisition.

Again, as in the US, there is the obvious exception that liabilities may be transferred to Buyer if Buyer has assumed such liabilities. Although Taiwan courts have decided cases on the express assumption of liabilities, the courts offer little guidance on the exact contractual language which would specifically disclaim the transfer of such liabilities.

Theoretically, Taiwan also has successor liability based on a de facto merger rule. Taiwan’s Civil Code provides that a court may re-characterize an asset purchase transaction as a merger if the court determines that despite taking the form of an asset purchase, the substantive result of such transaction is a merger of Buyer’s and Seller’s businesses. If a de facto merger is deemed to have occurred, Buyer would inherit all liabilities of Seller. However, to date Taiwan courts have not heard a related case.  It is unclear what factors would be instructive as to whether an ostensible asset purchase rose to the level of a de facto merger.

In addition to rules related to express assumption of liabilities and de facto mergers, Taiwan has a number of statutory provisions in its Civil Code designed to provide relief to any person (“Creditor”) (i) originally owed an obligation (financial or otherwise) by Seller and (ii) who has been denied the ability to enforce such obligation due to a spurious or disingenuous asset sale, i.e. a fraudulent transfer. It is important to note that the definition of Creditors for the purposes of Taiwan law in this area is very broad. It is not limited to financial creditors, but would include a wide range of persons who have valid claims to enforce monetary or performance obligations against Seller, e.g., employees who are owed back pay or pension amounts, product liability claimants, etc.

In addition to the general anti-fraud provisions of Taiwan’s Civil Code, Taiwan’s Business Mergers and Acquisitions Act (“BMAA”) contains a procedural mechanism to inhibit fraudulent transfers. Pursuant to the BMAA, any Seller intending to transfer all or substantially all of its assets must notify its Creditors of such transfer. Seller must then allow Creditors thirty days to object to the transfer. If Seller fails to provide notice and allow sufficient time for Creditors’ response or does not otherwise provide for the settlement of obligations owed to its Creditors, the asset sale would be invalid with respect to later objecting Creditors. Such Creditors could theoretically enforce their rights against the purchased assets, even after such assets were transferred to Buyer. Any such enforcement action would likely encounter a considerable number of substantive and procedural difficulties but is theoretically possible. Again, there exist no Taiwan judicial opinions on point in this area.

In short, Taiwan statutes provide a theoretical basis for successor liability in Taiwan. However, there is limited judicial guidance as to specific application. Under these circumstances, Buyers would do well to foreclose the possibility of inadvertently acquiring unwanted liabilities by (i) conducting thorough legal diligence to identify potential unwanted liabilities; (ii) entering into well-drafted purchase agreements pursuant to which (A) Seller makes adequate representations and warranties with respect to, and (B) Buyer expressly excludes the assumption of, any such liabilities; (iii) refraining from conduct that would indicate Buyer’s assumption of any excluded liabilities; (iv) ensuring that Seller properly notifies all of its Creditors of any proposed sale of all or substantially all of its assets; (v) having Seller make adequate indemnifications; and (vi) if possible, providing for an escrow fund against which indemnification obligations may be claimed.

For more information on mergers, acquisitions, and foreign investment matters in Taiwan, please contact Gregory Buxton at gbuxton@winklerpartners.com or +886 223112345 ext. 548.

Amendments to Taiwan data protection law take effect

Amendments to Articles 6-8, 11, 15, 16, 19, 20, 41, 45, 53, and 54 of Taiwan’s Personal Information Protection Act (“PIPA“) took force on 15 March 2016. The most important change is that Taiwan now has enhanced protection for special categories of sensitive data. At the same time, compliance with Taiwan’s data protection rules has been made easier by relaxing the consent requirement for ordinary personal data and reducing the risk of criminal liability for violations of the PIPA.

Sensitive Personal Data

The legislative rationale for enhanced protection of sensitive personal data is that “unregulated collection, processing, and use of certain types of personal data…[is likely to]… give rise to social disquiet and cause irreparable harm to the data subject.” PIPA §6 Legislative Comment (1). For purposes of this overview, processing will be used as a collective shorthand for the collection, processing, and using personal data although it should be kept in mind that the PIPA defines each of these acts separately. A data subject simply means the natural person who is identified by the personal data. PIPA §2.

Categories of Sensitive Data

Article 6 enumerates the following special categories of sensitive data:

  1. medical records,
  2. medical treatment [data],
  3. genetic data
  4. sexuality,
  5. health examination results, and
  6. criminal records.

Precise definitions of these terms are given in the Enforcement Rules of the Personal Information Protection Act (the “Enforcement Rules“). For example, ‘sexuality’ means sexual orientation and practices. Enforcement Rules §4.

Processing these six categories of sensitive data is prohibited and subject to criminal and civil liability unless an exception applies.

Permitted Exceptions

The PIPA permits the following exceptions to the general prohibition on the processing of sensitive personal data:

  1. another law expressly permits processing,
  2. there is a statutory duty or obligation to process sensitive personal data,
  3. voluntary disclosure by the data subject or other lawful disclosure, or
  4. for purposes of medical, public health, and criminology research by government agencies or academic institutions
  5. assisting in a statutory duty or obligation to collect, process, or use the sensitive personal data, and
  6. valid written consent by the data subject. PIPA §§6(1)(1)-(6).

PIPA §6(1)(5) and §6(1)(6) are new exceptions. PIPA §6(1)(5) is best understood as complementing §6(1)(2). Under §6(1)(2), a public agency’s statutory authority and duties may make it necessary for the agency to process sensitive personal data. For example, municipal health authorities have a duty to assess the risk of domestic violence under §8(9) of the Domestic Violence Prevention Act. To carry out this duty, a municipal health authority may collect and process medical treatment records obtained from a hospital pursuant §6(1)(2). The hospital may assist the municipal health authority in carrying out this duty by providing the medical treatment records under §6(1)(5).

Sensitive data may now be processed with written consent from the data subject. Consent is not valid if the processing of the sensitive data exceeds the scope of the consented purpose or if obtained under duress. §6(1)(6) Written consent may be in the form of an electronic record. Enforcement Rules §14. With the addition of a consent exception for the processing of sensitive data, Taiwan’s rules for sensitive data are more consistent with those found in leading European jurisdictions such as Germany.

Ordinary Personal Data

Previously written consent was required to collect ordinary personal data. As of 15 March 2016, any “declaration of assent” to an initial processing of data is valid so long as the data subject has been informed of the purpose of the data processing and their rights under the PIPA. In other words, written, oral, or even implied consent to the initial processing of data is valid. PIPA §7(1).

Similarly, written consent is no longer required for processing data for a new purpose beyond the original purpose so long as the data subject has been informed of the new purpose and the possible consequences of not consenting. This consent must however be given in an independent declaration. PIPA §7(2).

Presumption of Consent

One of the most important new changes to the PIPA is the creation of a presumption of consent to an initial processing of data where:

  1. the data controller has informed the data subject of the purpose of the data processing and their rights under the PIPA
  2. the data subject does not reject the request to process the data subject’s personal data
  3. the data subject nonetheless provides their personal data to the data controller. PIPA §7(3).

No such presumption arises to extended processing of ordinary personal data beyond the scope of the initial purpose.

Although the relaxed consent requirements and the presumption of consent should make it easier for data controllers to comply with the PIPA, it should be noted that the burden of proof with respect to consent remains with the data controller at all times. §7(4)

Criminal Liability

Finally, criminal liability no longer attaches for processing personal data in violation of the PIPA where the data controller or processor merely has general intent with respect to the prohibited conduct. Previously, a data controller or processor who generally intended to collect, process, or use personal data in violation of the PIPA could face up to two years in prison. Now the data controller or processor must have a specific intent in the form of an unlawful purpose or to harm the rights and interests of another to trigger criminal liability (up to five years’ imprisonment).

Constitución de empresas en Taiwán: Introducción

This is a Spanish translation of our English article “Setting up a business in Taiwan: the basics”, which you can find here.
Esta es la traducción al español de nuestro artículo en inglés “Setting up a business in Taiwan: the basics”, el cuál se encuentra disponible aquí.

Taiwán se encuentra altamente calificada en la Lista de Competitividad Global del Foro Económico Mundial y en la Lista de Facilidad de Hacer Negocios del Banco Mundial. Con fuertes lazos comerciales, aéreos, y de transporte con China, Japón, el Sudeste Asiático y Silicon Valley, Taiwán es un núcleo conveniente para hacer negocios con el resto de Asia y otros países. Internamente, Taiwán también cuenta con un sistema sofisticado de transporte doméstico. Taiwán alberga un sector de investigación y desarrollo robusto, una infraestructura avanzada, un clima político estable con libertad de prensa, un marco legal sólido y un personal dinámico y altamente preparado. Estos factores hacen que el número de empresas internacionales que prefieren constituir su matriz regional en Taiwán vaya incrementando considerablemente.

Las empresas que desean establecer operaciones comerciales en Taiwán por lo general optan por uno de los siguientes tipos societarios: una oficina de representación, una sucursal, una sociedad de responsabilidad limitada, o una sociedad anónima. A continuación presentamos una breve introducción de estos tipos societarios y las circunstancias en las que cada uno es generalmente aplicable.

Oficina de Representación

Muchas entidades extranjeras prefieren establecer una Oficina de Representación en Taiwán como primer paso antes de tomar el compromiso más grande de establecer una sucursal o subsidiaria. El establecimiento de una Oficina de Representación es una de las formas más sencillas de instaurar una presencia comercial en Taiwán. Sin embargo, una Oficina de Representación se encuentra muy limitada en las actividades que puede desarrollar. Una Oficina de Representación solo puede operar como el agente de su empresa matriz extranjera y no posee personalidad jurídica independiente. La Oficina de Representación no puede ejercer actividades comerciales de lucro ni actuar como principal en cualquier transacción comercial doméstica. Tampoco se encuentra permitida de vender o proporcionar servicios en Taiwán. Por lo general, una Oficina de Representación funciona como agente de ventas o compras para empresas internacionales que no tienen presencia en Taiwán. Las Oficinas de Representación también son utilizadas en Taiwán para proporcionar soporte técnico, capacitación, como también supervisión de controles de calidad.

Sucursal

Una empresa extranjera también puede optar por constituir una Sucursal para el manejo de sus negocios en Taiwán. Así como una Oficina de Representación, una Sucursal no tiene personería jurídica independiente, por lo que no tiene accionistas, directores ni supervisores, características que son propias de una subsidiaria. Por tanto, los costos de mantenimiento de una Sucursal son más bajos que los de una subsidiaria. La mayor ventaja de establecer una Sucursal en lugar de una subsidiaria es que todas las utilidades después de impuestos pueden ser legalmente remitidos a la matriz extranjera sin incurrir en impuestos adicionales en Taiwán. Asimismo, la mayor desventaja de una Sucursal es que es una extensión de su matriz extranjera, y por tanto, la matriz queda legalmente responsable por todos los actos de la Sucursal. El establecimiento de una Sucursal es más apropiado en situaciones donde considerables montos de dinero van a ser expatriados al país de la matriz desde Taiwán. Las Sucursales también son utilizadas en proyectos infraestructurales de gran escala ya que el gobierno Taiwanés y la mayoría de las contrapartes comerciales precisan tener acceso a los bienes de la matriz extranjera en caso de que la Sucursal taiwanesa incurra en incumplimiento de contrato.

Sociedad Limitada

Además de las Oficinas de Representación y Sucursales, las cuales son meramente extensiones de la empresa matriz extranjera, las empresas extranjeras también pueden optar por establecer una subsidiaria en Taiwán. El vehículo societario más simple para el establecimiento de una subsidiaria es la Sociedad Limitada. Las Sociedades Limitadas en Taiwán tienen una estructura similar a las sociedades de responsabilidad limitada de los Estados Unidos. Las Sociedades Limitadas taiwanesas están compuestas por uno o más socios, donde cada socio es responsable hasta el monto de su aporte al capital de la empresa. La Sociedad Limitada, a diferencia de la Sociedad Anónima (descrita a continuación), provee más flexibilidad en la estructura de su gobierno corporativo. El costo de esta flexibilidad, sin embargo, son las limitaciones que existen en la transferencia de los intereses sobre la Sociedad Limitada. Si un director desea transferir sus intereses en la compañía, dicha transferencia debe ser aprobada por todos los demás socios de la compañía. Cualquier otro socio que desee transferir sus intereses en la compañía debe obtener la aprobación de la mayoría de los demás socios. Por lo general las empresas extranjeras optan por establecer una subsidiaria en Taiwán por medio de una Sociedad Limitada cuando la subsidiaria va a estar bajo el control total de la empresa extranjera.

Sociedad Limitada por Acciones

Inversores internacionales y empresarios optan por establecer una subsidiaria mediante una Sociedad Limitada por Acciones cuando existe la posibilidad de vender parte de sus intereses en la subsidiaria taiwanesa. Una Sociedad Limitada por Acciones tiene una estructura similar a la de una corporación en Estados Unidos. La responsabilidad de los accionistas queda limitada al aporte de cada accionista al capital de la sociedad, donde dicho aporte es representado por acciones. Una Sociedad Limitada por Acciones está sujeta a ciertos requisitos corporativos: debe tener accionistas (por lo menos dos personas naturales o una persona jurídica), directores (por lo menos tres) y un supervisor (por lo menos uno). Una Sociedad Limitada por Acciones, a diferencia de una Sociedad Limitada, está habilitada para convertirse en pública y cotizar en bolsa.

Effects of Taiwan’s foreign investment regulations on acquisitions

We strongly encourage any foreign individual, company or corporation (a “Foreign Buyer”) that is contemplating the acquisition of either (i) a Taiwan company Target (a “Taiwan Target”) or (ii) an offshore Target (an “Offshore Target”) that has a Taiwan subsidiary, to consider the effects of Taiwan’s foreign investment regulations on the planned transaction. While Taiwan’s foreign investment regulations can directly impact the structure of such an acquisition, an equally important, but often overlooked, issue is the effect these regulations may have on post-acquisition reorganization and operation of the Target.

Pursuant to Taiwan’s Statute for Investment by Foreign Nationals, any direct acquisition of a Taiwan Target by a Foreign Buyer requires Foreign Investment Approval (“FIA”). In addition to the obvious effect that obtaining the FIA would have on the timing of the acquisition, the related FIA regulations may also affect the transaction structure. For instance, the FIA regulations make it practically impossible to structure a direct acquisition of a Taiwan Target with any type of holdback, earn out or other form of deferred payment mechanism. (See our article here for more information on the effects of the FIA process on deferred payment mechanisms as well as a convenient workaround.)

In a large global acquisition, Foreign Buyer may be transacting with an offshore Seller to purchase an Offshore Target that has subsidiaries worldwide, including in Taiwan. Under these circumstances, FIA is typically not required in Taiwan. A common exception to this general rule arises when (i) Offshore Target’s Taiwan subsidiary has minority shareholders and (ii) these minority shareholders will have their shares purchased by either the Offshore Target or the Foreign Buyer as part of the transaction. FIA is required under these circumstances as there is a direct transfer of Taiwan assets (i.e., the shares in the Taiwan subsidiary) to a foreign purchaser.

Whether FIA is required for Foreign Buyer’s initial acquisition, Foreign Buyer should always consider the impact of the FIA regulations on any expected post-acquisition transactions in Taiwan. Common post-acquisition transactions that require prior FIA include:

(a) injecting equity capital into the Taiwanese subsidiary;

(b) providing a loan to the Taiwanese subsidiary for a term exceeding one year;

(c) investing in another company through the Taiwanese subsidiary;

(d) transferring some or all of the shares in the Taiwanese subsidiary to another person, including any post-acquisition restructuring of Foreign Buyer and related companies which results in the transfer of shares of the Taiwan subsidiary; and

(e) reducing the capital of, or winding down, the Taiwanese subsidiary.

As stated above, any foreign corporation or individual that is contemplating the purchase of a Taiwan Target or an Offshore Target that holds a Taiwan subsidiary should first evaluate Taiwan’s foreign investment regulations, with respect to not only the structuring of the initial acquisition, but also the post-acquisition operations and reorganization of the Target.

For more information on mergers, acquisitions, and foreign investment matters in Taiwan, please contact Gregory Buxton at gbuxton@winklerpartners.com or +886 223112345 ext. 548.

Ten tips for Taiwan employment contracts

Employment in Taiwan has increasingly become a prominent issue, with the number of employment law disputes brought by employees rising significantly in recent years. Below is a list of ten useful tips for Taiwan employers to keep in mind when negotiating and drafting their written employment agreements. While not exhaustive, the following list is aimed at providing some guidance to Taiwan employers in using their employment agreements to address some key issues we regularly come across in our employment law practice.

1. Use a written employment contract

Taiwan has no specific laws or regulations that specifically govern employment contracts, and as such, a degree of flexibility is granted to employers with regard to the format of their employment agreements. While there is no express law that mandates written employment contracts, to ensure clarity and to avoid potential future disputes with employees, in Taiwan it is advisable for employers to use written employment contracts.

2. Use an employee handbook/work rules

Employers who hire 30 or more employees must have an employee handbook or work rules. Even if the threshold of 30 employees has not been met, many companies choose to have separate work rules or an employee handbook, which also forms part of the employment contract. Having a separate (but binding) document which details elements of the employment relationship such as IP rights, discipline and restrictive covenants, affords employers greater security with regard to the mutual rights and obligations arising under the employment contract.

3. Clarify the term of the contract

Employment contracts in Taiwan are indefinite-term contracts unless otherwise specified as fixed-term, and statutory employment rights are enjoyed upon commencement of employment. While probationary periods can form part of employment contracts in Taiwan, as termination in Taiwan is not at-will, but rather must comply with specific requirements under the Labor Standards Act (the “LSA”). Probationary periods which provide for termination are of limited practical use in Taiwan.

4. Protect your intellectual property

It is best practice for employment contracts to clearly define both ownership and creation rights in relation to all existing and potential intellectual property that is within the particular employee’s scope of work. Protection can be enhanced by referring in the contract to the employee handbook or some other written agreement, which in turn details relevant IP rights with greater specificity.

5. Clearly define restrictive covenants

Similar to IP rights, clearly describing the employee’s rights and obligations both during and post-employment with respect to trade secrets, competition, solicitation and confidential information is a crucial aspect of any employment contract in Taiwan. The scope of the restrictions or covenants relating to competition and solicitation must be reasonable, the length of the non-compete clause must be no longer than two years, the employer must have a legitimate interest to be protected, the departed employee’s job duties and position must be sufficient to grant the employee access to the legitimate interest the employer seeks to protect, and the employee must receive reasonable compensation for any loss caused by agreeing to the non-compete clause. If the clause does not conform to the above principles, a Taiwan court will most likely find it to be unenforceable in Taiwan.

6. Comply with relevant laws relating to transfer/severance of employees

When a business entity undergoes restructuring or changes ownership, any employees terminated as a result must be given the requisite advance notice as well as severance payment under the LSA. The LSA lists specific circumstances where an employee can be legally terminated in Taiwan with notice and severance pay, such as where the business transfers ownership or there is a suspension of operations. There are very limited circumstances where an employer may terminate an employee without notice or severance, such as where there is a serious breach of the employment contract or disclosure of business secrets by the employee.

7. Choose the right language

Taiwan courts will enforce both Chinese and English employment contracts, however it is best practice for employers to specifically state that if there is a conflict between the two, which version prevails. In most instances the prevailing version is Chinese.

8. Define jurisdiction and dispute resolution avenues

Employees may apply for mediation, with each local government in Taiwan having an employment center that offers mediation and free legal support to employees involved in disputes with their employers. Taiwan courts have specialized divisions to handle labor-related cases. It is common practice for many employment contracts, particularly for those involving foreign entities or foreign workers, to contain a provision stating that the governing law in the event of a dispute is that of the Republic of China (Taiwan) and that the parties must first use reasonable efforts to come to a negotiated solution through consultation or mediation before resorting to litigation.

9. Detail statutory benefits

Taiwan law mandates that employers who have established a legal entity in Taiwan must contribute to each employee’s National Health Insurance as well as Labor Insurance schemes. These and other benefits (such as labor insurance, parental leave, pension contributions, etc.), which must be paid for by the employer, cannot be unfavorably altered in an employment agreement by the employer.

10. Avoid making changes in working conditions

Restrictions are placed on employers who attempt to change working conditions (such as the place of work) in an employment contract. For example, many international companies wish to be able to dictate their employees’ place of work arbitrarily; however recent amendments to the LSA now provide that employers seeking to do so must abide with some general principles or else be found to have breached both the employment contract and the LSA. These include: (a) the change must be based on the needs of the business and be for a proper purpose, (b) no unfavorable changes can be made to salary or other working conditions, (c) changes must be suited to the specific employee’s skills and abilities, (d) employers must provide assistance to employees if the place of work is inconvenient, and (e) employers must consider the interests of employee’s families and lives.

Keeping in mind the above ten points when drafting your employment agreements can help to avoid potential employment disputes arising in the first place. For more information on employment law matters in Taiwan, please contact Christine Chen cchen@winklerpartners.com or +886 (0) 223112345 extension 307.

What’s in a name? Protection of famous names in Taiwan

In Taiwan, trademark protection is obtained through registration. The well-known name of an individual can, of course, be registered as a trademark and used as such in connection with the designated goods and services and preclude the unauthorized use of the same or similar famous name by another party. But what about the famous names of individuals that have not been registered as trademarks in Taiwan? Explicit protection is provided to famous names under Article 30 (1)(13) of Taiwan’s Trademark Act (the “Act”), which provides:

A trademark may not be registered in any of the following circumstances:

13. The trademark contains another person’s image or well-known name, stage name, pen name or pseudonym. This restriction shall not apply, however, if the other person has consented to the application for registration.

In determining whether a trademark is prevented from being registered under the Act on the basis of its similarity to a famous name, the Taiwan Intellectual Property Office (“the TIPO”) decides on a case-by-case basis whether

(a) the name is sufficiently well-known to the relevant consumers, and

(b) whether there is a likelihood of a mental association or confusion by the relevant consumers between the unauthorized mark and the famous name.

While the name must be well-known in Taiwan to be entitled to such protection, evidence to prove the name is famous from other jurisdictions can be provided to the TIPO to aid it in making its decision. Historically, the TIPO has required that the full name of the well-known person be used in order for Article 30 (1)(13) to apply. In some recent decisions, however, the TIPO has held that a mark that incorporates parts of well-known names can be denied registration on this basis, provided sufficient evidence can be produced to establish the two criteria above.

Is a Partial Name Sufficient for Protection under Article 30 (1)(13)?

In reviewing applications for trademark registration and deciding opposition actions, the TIPO will look to the inherent distinctiveness of the well-known name (or part thereof) as well as other factors to determine whether a likelihood of confusion or mental association may arise between the unauthorized registration containing the famous name and the famous name itself by the relevant consumers.  Other provisions of the Act require that the mark for which registration is sought creates a likelihood of confusion or a likelihood of dilution in order for the registration to be denied. Article 30 (1)(13), in contrast, does not mention either of these factors as an explicit requirement. In practice, though, the TIPO requires evidence that there is a likelihood of a mental association being formed by the relevant consumers between the famous name and the unauthorized mark which uses all or part of the famous name.

One of the first instances where the TIPO recognized the ability for an abbreviated famous name to be protected was a trademark opposition case in 2005 relating to the name “Beckham (貝克漢)”.[1] In that case, the TIPO canceled a trademark registration for the name “Beckham” on the basis that the purpose of this provision was to protect an individual’s inherent right to use of his or her own name and image, and to prevent a mental association being formed between the famous name and the unauthorized mark among the relevant consumers should the registration be allowed. The TIPO held that the name “Beckham”, despite being an abbreviation of the name “David Beckham (大衛貝克漢)”, was sufficiently globally-recognized and distinctive on its own so as to be afforded protection under the Act and therefore canceled the unauthorized mark.  A similar case in 2006 by the TIPO involved the cancellation of the registered mark “Tomford” on the basis of its similarity to the name “Tom Ford”, the well-known American fashion designer.[2] The TIPO again based its decision to cancel the registration on the need to protect an individual’s rights to his or her own image and name, and to avoid a mental association being formed between the famous name “Tom Ford” and the unauthorized registered mark “Tomford”.

In a more recent decision of the TIPO in 2014, which related to a well-known Japanese actress with the stage name “波多野結衣” (“Hatano Yui”), the TIPO held that incorporation of the name “波多野Hatano” into a trademark by another registrant who was not the individual or her authorized representative could be canceled.[3] This decision is another instance where the TIPO has recognized that an abbreviated name can attract the protection of Article 30 (1)(13) of the Act. The TIPO expressly stated that Article 30 (1)(13) is aimed at protecting the rights of individuals to his or her own name or image, or the right of another person to register the individual’s name with express consent.

The above decisions show that the TIPO is willing to apply Article 30(1)(13) of the Act to protect well-known names from unauthorized use in trademarks by others even in cases where only part of the well-known name is used.  Evidence will need to be adduced to establish that the name (in its entirety or the distinctive portion of the name), is well-known to the relevant consumers in Taiwan as the name of a famous individual. Evidence will also need to be submitted that shows the trademark creates a likelihood of a mental association being formed between the famous name and the unauthorized registration by the relevant consumers. Assuming that evidence supports these conclusions, the individual or their authorized agent can preclude others from registering a trademark that contains the well-known name under Article 30 (1)(13) of the Act.


[1] Trademark Opposition No. Zhong-Tai-Yi-G00930220: http://tmsearch.tipo.gov.tw/RAVS/wfm30203.jsp?bid=17407

[2] Trademark Opposition No. Zhong-Tai-Yi-G00940476: http://tmsearch.tipo.gov.tw/RAVS/wfm30203.jsp?bid=21673

[3] Trademark Opposition No. Zhong-Tai-Yi-G01020439: http://tmsearch.tipo.gov.tw/RAVS/wfm30203.jsp?bid=152290&rid=&Print=Y

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.

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.

Technical examination officers at Taiwan’s IP Court

Technical Examination Officers ( “TEO“) are officers of the court who assist judges at the Taiwan Intellectual Property Court (“IP Court“) in litigation involving complex technology.

There are currently 13 TEOs at the IP Court with expertise in fields such as electrical engineering, chemistry, and biotechnology. Most are patent examiners on secondment from the Taiwan Intellectual Property Office.

Taiwan’s Legislature authorized the appointment of TEOs when it established the IP Court in 2007. Intellectual Property Court Organization Act §15(1).  Taiwan’s TEOs are modeled on the judicial researchers at the Japan’s Intellectual Property High Court and the technical examiners at the Korean Patent Court.

Acting under instructions from a judge, a TEO “makes judgments about technology, collects technical information, and analyzes and gives opinions about technology.” Organization Act §15(3). In particular, a TEO can analyze and organize the issues in party briefs to clarify the issues in dispute and refer the Court to learned treatises in the field. Intellectual Property Case Adjudication Rules §13(1)(a).

A TEO may also “participate in the litigation.” Organization Act §15. This means that on instructions from a judge, a TEO can appear in court and question parties, their counsel, and witnesses or give opinions for the court’s reference on technical issues. Intellectual Property Case Adjudication Act §4;  Adjudication Rules §13(1)(c).

In more complex cases, a TEO may be ordered  by the IP Court to produce intermediate and final reports on technical issues. Adjudication Rules §16. While the parties do not have access to these reports, the IP Court will disclose opinions it has received on “specialized technical information” to the parties and give an opportunity to respond before using such opinions as the basis for its judgment. Adjudication Rules §16

As fact finders, the IP Court judges are not bound to adopt the views of the TEO and in complex cases, the IP Court will usually also appoint an neutral expert witness to evaluate the technology in dispute. Furthermore, the statements of TEOs may not be offered by the parties as evidence of facts in dispute. Adjudication Rules §18.

Between 2008 and 2012, TEOs were assigned to a total of 1,636 cases. 1,070 of those cases were civil matters, 550 were administrative and sixteen cases were criminal. TEOs provided assistance with mechanical technologies in 48% of these cases, IT in 26%, and chemistry in 8%.

Although the role of TEOs has been controversial in patent litigation and the subject of a number of Supreme Court cases, our experience has been that TEOs serve as able assistants to the judges on the IP Court.

 

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