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

How the Company Act amendments will affect your Taiwan business

On 6 July, 2018, Taiwan’s legislature enacted 148 amendments to the Company Act (the “Act”). The effective date of the amended Act, although not confirmed, is likely to be 1 January, 2019.

In this article, we highlight certain amendments which we expect to have a significant impact on our clients’ operations in Taiwan. We have organized these amendments into the following categories:

  1. Increased Flexibility in Equity Fundraising and Related Shareholder Arrangements;
  2. Relaxed Corporate Governance Formalities;
  3. Enhanced Substantive Shareholder Protections;
  4. More Appropriate Treatment of Foreign Companies;
  5. Increased Corporate Transparency;
  6. More Flexible Employee Equity Incentive Arrangements; and
  7. Increased Dividend Distribution Options.

1. Increased Flexibility in Equity Fundraising and Related Shareholder Arrangements

Prior to recent amendments, the Act posed a number of difficulties for companies engaged in equity financing. The Act previously contained a rule requiring a company to issue all of its existing authorized shares before it could authorize and issue new shares. This rule has been eliminated making it procedurally easier for companies to issue new equity capital.

The amended Act has also expanded the types of equity shares that may be issued. Private companies may now issue preferred shares with special voting, veto, and other control rights. A private company will now also be able to issue shares without par value, provided that all of the company’s shares are issued without par value.

In a related amendment, the new Act allows for further individual tailoring of corporate control by permitting voting agreements and voting trusts among shareholders. It is important to note that the amended Act clearly permits restrictive voting arrangements with respect to the election of directors and supervisors as well as voting arrangements concerning certain other company matters. This amendment was a direct legislative response to the majority view in Taiwan’s courts that voting agreements among shareholders regarding elections of directors and supervisors were unenforceable except in the limited case of a closed company.

2. Relaxed Corporate Governance Formalities

The amended Act eliminates a number of cumbersome corporate governance formalities and simplifies others. As amended, the Act does not require wholly owned, incorporated subsidiaries to appoint a minimum of three directors. Now, one director will suffice. Additionally, wholly owned subsidiaries are no longer required to have supervisors.

Corporate governance meetings have also been simplified. Shareholder meetings of a private company may be held by video conference in lieu of a physical meeting, provided that the company’s articles of incorporation expressly permit such video conference meetings. Private company boards may also pass written resolutions in lieu of holding meetings, provided that (i) written board resolutions are expressly permitted by the company’s articles of incorporation and (ii) all directors have agreed to the use of such written resolutions. We expect these meeting-related changes to be particularly welcomed by the many international businesses with wholly owned, incorporated subsidiaries in Taiwan.

3. Enhanced Substantive Shareholder Protections

While reducing some of the more ineffectual corporate formalities, the new Act introduces improvements in substantive shareholder protection. The amended Act permits a majority of shareholders to call a shareholders meeting with three months’ advance notice. Previously, shareholder meetings had to be called by the board unless the shareholders had received approval from the company’s relevant regulator to call a shareholders meeting directly.

Rules for shareholder meeting notices have also changed. The types of matters which must be explicitly set forth and explained in a shareholder meeting notice in order to be properly brought before shareholders for discussion or resolution at a meeting was expanded in the revised Act to include matters relating to (i) capital reductions; (ii) going private transactions; (iii) waiver of certain director non-compete obligations; and (iv) capitalization of profits and capital surpluses. Such measures are intended to prevent management from introducing unexpected meeting agenda items and otherwise concealing the nature of the business to be transacted at shareholder meetings.

4. More Appropriate Treatment of Foreign Companies

One of the more important features of the amended Act is the elimination of the recognition system for foreign companies. So long as a foreign company has been duly established in its home jurisdiction, such company now automatically has legal personhood in Taiwan without the need to make a special application for recognition from the Taiwan government. This amendment has the very practical and beneficial result that all properly established foreign companies will be recognized in Taiwan, thus eliminating the personal risk and liability that a representative of an unrecognized foreign company would incur if he or she were to act on behalf of an unrecognized foreign company.

The amended Act creates another benefit specifically for foreign companies. While foreign companies are still required to register Chinese names, they may now also register a name in a foreign language and enjoy certain exclusive rights to the use of that name in Taiwan. We strongly encourage all foreign companies operating in Taiwan to register their foreign language name after the amendments come into force.

5. Increased Corporate Transparency

In an effort to increase corporate transparency, the revised Act prohibits the issuance of bearer shares. Existing bearer shares may remain in circulation; however, when any holder of bearer shares exercises its rights with respect thereto, the issuing corporation must exchange such shares for registered shares. In addition, the amended Act requires corporations to make annual reports of major shareholders (defined as a shareholder holding 10% or more of a corporation’s outstanding shares), directors, and officers. Corporations must also file to update such reports within 15 days of any change.

We note that a controversial requirement to report ultimate beneficial owners was not included in the revised Act. We continue to watch this particular issue with interest.

6. More Flexible Employee Equity Incentive Arrangements

The new Act improves the ability of companies to create and manage an employee equity incentive plan. The amendments allow companies to repurchase previously issued shares and use the resulting treasury shares as employee equity compensation. Private companies may also now directly issue new restricted shares to employees.

The amended Act introduces further flexibility with respect to which employees can be included in equity incentive plans. Under the new Act, a company’s articles of incorporation may provide that existing incentives such as warrants and subscription rights can be issued to the employees of affiliated companies, including holding companies, subsidiaries, and other affiliates.

7. Increased Dividend Distribution Options

Another positive change found in the amended Act is the flexibility for a company to provide for annual, semi-annual, or quarterly dividend distributions in its articles of incorporation.

Overall, the changes made to the Company Act have reduced unnecessary corporate formalities while enhancing flexibility around shareholder and financing arrangements. While no date has been given, we expect most amendments will go into effect in early 2019. The new major shareholder reporting requirements may be implemented even earlier in light of an upcoming international anti-money laundering review scheduled for this fall.

If you have any questions as to how the amendments may affect your business in Taiwan, please contact Daniel Chen at dchen@winklerpartners.com and Christine Chen at cchen@winklerpartners.com.

Associates Michael Fahey, Brian Yang and trainee lawyer Pei-hsu Wu contributed to this article.

Could Taiwan’s new regulatory sandbox spur innovation in its financial services industry?

The Financial Technology Development and Innovative Experimentation Act, passed by Taiwan’s Legislative Yuan in January of this year, aims to foster a positive environment for new and untested forms of financial technology, also known as “fintech.” The Act provides for the creation of a regulatory sandbox, following in the footsteps of the UK, Singapore, Australia, and Hong Kong. The sandbox would allow fintech startups a period of up to three years to develop and test out their products or services, while avoiding the risks associated with such development or endangering the rights and interests of financial consumers.

Thus far, two companies have submitted a complete application package to participate in the sandbox, but around 40 potential applicants have approached the competent authority designated by the Act, the Financial Supervisory Commission (FSC), with queries regarding the sandbox. Most of these are simply inquiring about the application requirements and process; however, over ten have received guidance from the FSC and will likely apply in the future. Applicants include companies engaging in a wide range of financial technology development, such as blockchain cross-border remittance technologies, P2P online lending platforms, investment robo-advisors, online insurance, cryptocurrency platforms, and others.

In this article, we provide a general overview on the Act, highlighting key provisions related to participation in the regulatory sandbox.

As mentioned above, the competent authority designated in the Act is the FSC, which is responsible for the creation of a unit dedicated to reviewing all applications, determining the effectiveness and feasibility of each innovative experimentation plan being applied for, and overseeing the progress of each plan once it has been approved.

Chapter II of the Act indicates the required documentation for applying to take part in the sandbox. This includes an application form, information regarding the individual, sole proprietorship or partnership, or legal person applying for the sandbox, and an innovative experimentation plan, which should illustrate the innovativeness of the technology, indicate the source of funds for the project, and potential risks and risk management mechanisms, among others. Supplemental documentation may also be requested by the FSC.

The FSC, in its review of an applicant’s filing package, will determine whether 1) the project involves financial businesses that require its permission, approval, or concession; 2) the project is innovative; 3) the project can increase the efficiency of financial services, reduce costs, or enhance the interests of financial consumers or enterprises; 4) potential risks have been assessed and response mechanisms have been prepared; and 5) protection measures and compensation for participants (those consumers that have chosen to take part in the experimentation) have been prepared. The review process may take up to 60 days, and may include adjusting the content of the plan being applied for, limiting the eligibility of participants, adding requirements, and exempting the plan from certain regulations. Any application that is approved by the FSC will be disclosed on its website, and this disclosure will include the applicant’s name, the duration and scope of the experimentation, the regulations that the project is exempted from, and other relevant information.

Once the experimentation by an approved applicant is underway, the FSC will continue to play a supervisory role, and maintains the right to periodically check the progress of any project. Furthermore, it has full discretion in revoking its approval of a project that it determines could be adverse to the market or to the interests of the participants, goes beyond the scope approved of by the FSC, or violates any additional requirements or obligations established by the FSC or any of the provisions of the Act. The length of the experimentation is limited to one year, but a six month extension may be applied for. In cases in which the experimentation involves amending existing laws, the duration may be extended up to three years, longer than that of other countries’ sandboxes.

The Act also contains a number of articles protecting participants in the sandbox, including ensuring that the financial product or service contract entered into by the applicant and participant is fair and drafted in good faith, and providing for a dispute resolution channel, in accordance with the Financial Consumer Protection Act.

The final section of the Act lists the specific regulations that experimentation approved by the FSC is exempt from. This includes provisions of the Banking Act, the Trust Enterprise Act, the Act Governing Electronic Payment Institutions, and the Securities and Exchange Act, among others. Nevertheless, sandbox applicants will not be exempt from the provisions of the Money Laundering Control Act, the Terrorism Financing Suppression Act, and other related laws and regulations.

Based on the success of other fintech sandbox schemes worldwide (90 percent of applicants participating in the first round of the UK’s version have gone on to market, for example), there are high hopes that such a system can foster much-needed innovation in Taiwan’s finance industry as well. As with similar regulations, knowledge of the application process, as well as of the relevant restrictions and exemptions once an application is approved, are essential to ensuring an applicant’s successful navigation of the sandbox.

For more information on Taiwan’s fintech regulations, please contact Christine Chen at cchen@winklerpartners.com.

Key points to know when engaging in civil disputes in Taiwan

Litigation in Taiwan can be costly and complex. Before filing a claim, potential foreign plaintiffs need to understand pre-filing steps such as attachment, demand letters, and payment orders as well as the formalities and evidentiary considerations involved after a decision to litigate has been made. Strategically, it is important to understand that filing a case and presenting one’s evidence is usually necessary before there is any possibility of settlement.

Attachment

An attachment order may be applied for before filing litigation to ensure that the defendant’s assets are not improperly transferred, hidden, or disposed of. In order to obtain an attachment order, the plaintiff must prove to the court that there is a strong likelihood that the defendant would engage in such behavior. They must also post a bond of one-third of the attachment claim.

Demand letter

In Taiwan, as elsewhere, a potential litigant may send the counterparty a demand letter. This letter states the legal claim(s), demands restitution or compensation, and lists out the consequences of noncompliance. This letter is generally drafted by an attorney and sent as a ‘legal attest letter’. When a legal attest letter is sent, the post office will retain a certified original copy of the letter and record the date and time of delivery to the recipient.

The demand letter in the form of a legal attest letter is a key item of evidence for future litigation in cases where the remedy sought is rescission of a contract and a refund of the payment.

Payment order

If the counterparty has not paid or refuses to pay an outstanding debt, a creditor may move to have the court issue a payment order. Once the counterparty receives this official document, she has 20 days to object. An objection does not need to state any grounds, and once it has been made, the creditor’s motion for a payment order will automatically become a civil complaint. However, if the recipient of a payment order does not lawfully raise an objection within 20 days, the creditor may file a motion with the court to enforce the payment order as a final judgment against the counterparty’s assets. The official fee for issuance of a payment order is NT$500. Payment orders can be a faster and cheaper way to enforce the plaintiff’s monetary claims against the debtor’s assets.

Civil action

If an amicable settlement does not appear to be a possibility, the aggrieved party can move forward with filing a civil complaint. Key issues for a foreign litigant to be aware of include:

1) Document authentication

A Power of Attorney designating a foreign litigant’s legal counsel is frequently required to be notarized and legalized (authenticated) before being submitted to the court. Civil litigation in Taiwan requires a specific POA for each proceeding. Since there can be multiple proceedings, we recommend notarizing and legalizing (authenticating) these documents as soon as possible.

2) Security bond

A defendant may move the court to order a foreign litigant who does not have a domicile, residence, or office in Taiwan to put up a bond of roughly 4% of the total claim unless the foreign litigant possesses sufficient assets in Taiwan to cover court costs. This bond may be paid in the form of cash, bank guarantee, or a cash equivalent. The purpose of the bond is to ensure that the defendant can recover the court fees it pays during the civil action (especially in appellate proceedings) from the foreign plaintiff if the defendant ultimately prevails in the final judgment.

3) Translation

As Chinese is the official language of the courts in Taiwan, all documentation, such as agreements, correspondence, reports, and any other documentary evidence in a foreign language must be translated into Chinese for the court’s review. Given that the first instance for a civil action in Taiwan can take six months to two years to conclude, include several hearings, and require submission of many documents from the plaintiff, this could entail a significant amount of work and time if the wrong translator or translation house is chosen.

4) Evidence preservation order and absence of discovery

Taiwan does not have a full-fledged system of discovery as is the case in the US. However, preservation orders can function as a basic discovery device. A party that believes that the counter party is likely to spoliate evidence may move the court for an evidence preservation order. The motion for preservation order may be made before the civil action. Motions for evidence preservation orders are not frequently granted. In the absence of an evidence preservation order, a party may choose not to produce evidence detrimental to its interests. As a result, a plaintiff in Taiwan litigation is often in the position of having to produce all the evidence necessary to prove his or her case while the defendant can win even if he or she produces very little evidence. It is therefore very important to review the plaintiff’s evidence in advance before deciding whether or not to file litigation.

Settlement

Settlement may be carried out through the courts, or through alternative dispute resolution such as mediation.

In the absence of discovery, a Taiwan defendant is unlikely to settle simply with receipt of a demand letter. Before deciding whether to settle a dispute, a local defendant would usually wait until the plaintiff produces its evidence to assess how much of a threat the plaintiff’s case poses to the defense. As a result, filing a civil action is usually necessary to create the proper conditions for a settlement. Settlement also becomes more likely after the judge discloses his or her preliminary evaluation of the evidence and arguments.

To learn more about civil litigation in Taiwan, please contact Christine Chen at cchen@winklerpartners.com and Daniel Chen at dchen@winklerpartners.com.

To inquire about legal translation services, please contact translation@winklerpartners.com.

Taiwan enacts Cyber Security Management Act

Taiwan’s legislature enacted the Cyber Security Management Act (the “Act”) in early May 2018. The Act was published by the Presidential Office in June and will take force on a date to be announced by the Executive Yuan.

This introduction to the Act begins with a discussion of the background, policies and definitions in the general principles chapter of the Act. That discussion is followed by a brief look at the Act’s chapter on public agencies and a more detailed look at the chapter on the private sector focusing on critical infrastructure operators.

The objectives of the Act are to implement a national information security policy and to build a secure information environment to protect national security and the public’s welfare. Act §1. According to the Executive Yuan, there were 360 security incidents at Taiwanese public agencies in 2017. While most were less serious Level 1 and Level 2 incidents, 12 were Level 3 incidents.

The Act’s competent authority or regulator is the Executive Yuan. Act §2. The designation of a single regulator was made relatively late in the legislative process due to concerns that dispersed regulation of different sectors by sectorial authorities would be ineffective.[1] In practice, the Executive Yuan’s Department of Cyber Security will lead the Executive Yuan’s regulatory effort.

The Act’s key definitions include definitions of information systems, information security, information security incidents, and critical infrastructure. Act §3. These definitions closely track similar definitions in relevant U.S. law. For example, the Act defines information security as “protecting information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction in order to ensure the confidentiality, integrity, and usability of information systems.” Act §(3)(1). This definition is a slightly simplified version of the definition of information security given in 44 U.S. Code §3542.

The Act defines critical infrastructure as “…a physical or virtual asset, system, or network in sectors to be periodically reviewed and announced by the competent authority where there is a likelihood that the cessation or diminishment of the asset, system, or network would have a serious impact on national security, the public interest, or the life and economic activities of citizens .”[2] Act §3(7). There have been concerns that this very broad definition of critical infrastructure might subject internet services such as social media or widely used messaging platforms to regulation under the Act.

Public Sector Information Security

Chapter II of the Act sets out the duties of public agencies to maintain the security of their information systems. Public agencies must put in place information security policies and appoint chief information security officers. Act §§10-11. They are also required to report information security incidents to any superior agency, if any, and the Executive Yuan. Act §14.

Private Sector Information Security

Regulation of the private sector is generally limited to designated critical infrastructure operators.[3] Act Chapter III §§16-18. To designate a private entity as a critical infrastructure operator subject to regulation under the Act, the operator’s sectorial regulator will consult with personnel from public agencies, private sector representatives, and experts. For example, the Ministry of Economic Affairs will designate which power plants are critical infrastructure in consultation with the public agencies, the private sector, and experts because the Ministry of Economic Affairs is the sectorial regulator for energy producers. Act §16(1).

Like public agencies, designated critical infrastructure operators will be required to implement information security policies. Act §16(2). Implementation of information security policies must be reported to the critical infrastructure operator’s sectorial regulator. Act §16(3). For example, a designated power plant would be required to report its information security policy to the Ministry of Economic Affairs.

A designated critical infrastructure operator’s sectorial regulator is required to audit the critical infrastructure operator’s implementation of its information security policy. Act §16(4). This audit requirement was introduced during the legislative process in response to the Executive Yuan’s original draft that controversially gave government agencies the power to conduct on-site inspections.

A designated critical infrastructure operator will also be required to file an improvement report in the event that a deficiency or need for improvement in its information security policy is identified. Act §16(5). Sectorial regulators are required to issue regulations governing information security policies as well as related auditing, reporting, and compliance requirements. Act §16(6).

Article 18 of the Act requires designated critical infrastructure operators to set up reporting and response mechanisms for security incidents. Act §18(1). In the event of a security incident, the critical infrastructure operator must first report the incident to its sectorial regulator and then file a separate post-incident improvement report regarding the security incident at a later date.[4] Act §§18(2)-(3). In turn, the sectorial regulator has a duty to report security incidents to the Executive Yuan. In the case of significant security incidents, the sectorial regulator is also required to send the critical infrastructure operator’s improvement report to the Executive Yuan. Act §18(3). The Executive Yuan or sectorial regulator has the power to announce significant security incidents and the response thereto to the public. Act §18(5).

Fines of NT$100,000 to NT$1 million (c. US$3,300 to US$33,000) can be imposed on designated critical infrastructure operators for the following categories of violations:

  1. violation of rules governing information security policies;
  2. failure to implement a reporting and response mechanism for security incidents; or
  3. failure to file reports on the investigation, handling, and remediation of security incidents or the filing of an incomplete security incident report. Act §20(1)(1)-(3).

Failure to report a security incident will result in a fine of NT$300,000 to NT$5 million and an order to report. This fine can be imposed multiple times if the critical infrastructure operator does not comply with the order to report. Act §21.

Like many Taiwanese laws, the Cyber Security Act sets out broad principles and leaves many of the key details to regulations issued by the regulator. As of this writing, the Executive Yuan’s Department of Cyber Security has drafted six regulations under the Act. Of these, four are relevant to designated critical infrastructure operators:

  1. The Cyber Security Act Enforcement Rules,
  2. The Regulations for Classification of Cyber Security Responsibility,
  3. The Regulations for Reporting and Responding to Cyber Security Incidents, and
  4. The Regulations for Inspecting Implementation Status of Special Non-official Agencies’ Cyber Security Maintenance Programs.

These draft regulations have been announced for public comment on the Executive Yuan’s online platform for public policy (in Chinese). The public comment period ends on 23 August 2018. The Department of Cyber Security has already revised the draft regulations once following a series of seminars held in April and May of this year for public agencies, critical infrastructure operators, and experts to provide preliminary commentary. The 7 May seminar in Taipei for potential critical infrastructure operators was of particular interest. A complete transcript (in Chinese) of the seminar may be found here along with transcripts of other seminars for experts and public agencies.

The Department of Cyber Security has indicated in the Taiwanese media that that Act will take effect in two phases. The Department expects that the Act will come into force for public agencies starting around 1 January 2019. It further expects to put the Act into force for private entities including designated critical infrastructure operators in June 2019.


[1] There is perception among experts in Taiwan that Taiwan’s dispersed regulatory model for data protection has hampered effective enforcement of the Personal Information Protection Act.

[2] This definition of critical infrastructure is quite similar to the one given in the US Code of Federal Regulations 31 C.F.R. § 800.208.

[3] The other ‘private sector’ entities subject to regulation under the Act are state enterprises and publicly funded foundations. Act §6.

[4] The reporting requirement is similar to that in Article 14 of the EU’s 2016 NIS Directive.

Merger control FAQ (part 4 – process insights)

This article is the fourth and final in our series on merger control in Taiwan. This installment covers issues related to the primary regulatory agency and other insights into the application and approval process. For the first article on basic questions related to covered transactions and market share filing thresholds, click here. For the second article on relevant market definition, click here. For the third article on procedural issues, click here.

1. What is the nature of the agency which reviews merger transactions?

Taiwan’s Fair Trade Commission (the “FTC”) is an independent commission under the executive branch of the Taiwan government. An important consequence of the FTC’s being an independent commission is that unfavorable FTC rulings may be directly appealed to the administrative courts, and need not be heard first by other bodies under the executive branch.

2. What is the typical or recommended approach in dealing with the reviewing agency?

Generally speaking it is advisable to contact the FTC to discuss matters which are likely to pose competition issues as early as practicable. Confirmation of smaller, more discrete points may often be obtained through anonymous conversations between one of the transaction participant’s Taiwan counsel and the FTC.

It is also worth noting that in global transactions involving foreign merger control authorities, the FTC will often consider interpretations and guidance from such authorities on issues that are the same or similar to those faced in Taiwan.

3. What level of confidentiality does a merger control filing enjoy?

Merger control filings are confidential until the time at which the FTC either (i) seeks public opinion in respect of the proposed transaction or (ii) approves or disapproves the transaction. If public opinion is sought, the FTC will publish the relevant participants’ names and products and services as well as a general description of the transaction on its website. Upon an unconditional approval of a transaction, the FTC will issue a news release containing basic information on the participants, a description of the transaction structure, the relevant market definition used by the FTC, and the FTC’s competition impact assessment. If the FTC’s transaction approval is conditional, the agency will issue a formal decision letter. This letter may contain additional details including portions of the merger control filing.

The FTC’s published transaction approvals usually do not contain transaction participants’ specific business data. If specific participant information needs to be disclosed, the FTC will ask for the relevant participant’s approval prior to making any such disclosure.

A transaction participant may also actively request confidential treatment of particular information in the merger control application materials. The FTC typically respects such requests.

4. If the statutory waiting period expires without a challenge, is there any possibility of a post-closing challenge?

No, there is no possibility of a post-closing challenge, provided that the information in the merger control filing remains accurate and complete and all procedural filing requirements were properly followed.

5. Are there ways to protect a transaction from post-closing challenge?

The best protection against post-closing challenges is the receipt of a formal FTC response letter either approving the proposed transaction or confirming that review is not required, each after submission of a complete merger control filing.

If the participants believe that a proposed transaction does not exceed the market impact thresholds outlined in part 1 of this FAQ, the participants may submit a request for written confirmation from the FTC that a merger control filing need not be made with respect to the transaction. This confirmation request should be accompanied by basic market share and sales revenue figures. Should the FTC concur that no merger control filing is required, it will typically issue the requested confirmation within approximately 30 business days of the submission of the confirmation request. While not legally binding on the FTC, so long as the information on which the confirmation was based was accurate at the time of the consummation of the relevant transaction, such a confirmation would be extremely persuasive evidence that filing was not required.

6. What are the consequences of failing to notify the FTC of a qualifying transaction?

Under the Fair Trade Act 2017, in cases in which the parties involved (a) fail to notify the FTC of a transaction that is in excess of the relevant market impact thresholds or (b) close a transaction without proper notification to the FTC or before the expiry of the applicable waiting period, the FTC may (a) prohibit the transaction, (b) require the enterprises involved to split or for one or more of the enterprises to divest itself partially of the shares or assets of the other or make any other necessary dispositions, or (c) require the enterprises to remove certain persons from their positions. Such violations may also carry administrative penalties of between NT$200,000 and NT$5 million.

In the event that an enterprise violates an order of disposition made by the FTC, the FTC may order dissolution of the enterprise or the suspension or termination of the enterprise’s operations in Taiwan.

For more information on mergers and acquisitions in Taiwan, please contact Gregory A. Buxton at gbuxton@winklerpartners.com.

Options for employers to add more flexibility to work hours

The 2018 amendments to the Labor Standards Act (LSA), while intended to provide more flexibility in favor of employers in Taiwan, have nevertheless raised some questions regarding the distribution of work hours for employees. The new amendments contain provisions allowing for the adjustment of mandatory rest days, meaning that, in certain situations, workers may work a maximum of twelve consecutive days. This ideally gives employers more options for covering shifts in case of an emergency or in cases in which time limits for project-based work require employees to work more than the current limit of six consecutive days. However, it’s not immediately clear from the English language information currently available just how such a flexible schedule may be legally implemented. Below, we outline a few ways in which an employee or multiple employees at a company in Taiwan may be permitted to work more than six consecutive days.

1. The Four Week Work Hour Adjustment System

This method of redistributing work hours may be used by companies belonging to one of 42 different industries designated by the Ministry of Labor (MOL). The criteria for determining whether a company belongs to one of these designated industries are its primary economic activities and output value (e.g. the company’s income). The Four Week Work Hour Adjustment System requires that employees be given at least two mandatory rest days every two weeks, and eight rest days in every four week period. In order for a company to use this system to determine work hours for its shift workers, it must first obtain the approval of the relevant labor union, or if there is no labor union, the approval of a labor-management conference.

2. Adjustment of the employee’s mandatory rest day

Whereas the other three options in this list are existing means of adjusting work hours, the following method is a new amendment to the LSA.

According to Article 36 Paragraph 4 of the LSA, an employer may adjust an employee’s mandatory rest day in a seven day period. Such an adjustment may only be carried out by certain businesses/industries designated by the MOL and must also meet the conditions for adjustment of mandatory rest days, based on each designated industry’s needs. These include extenuating circumstances related to time (e.g. seasonal hours, national holiday hours, etc.), location (e. g. work on the ocean or in the mountains), the nature of the work (e.g. work conducted overseas, in response to weather conditions, etc.), and special situations (e.g. holding extraordinary meetings or events). Of course, approval of the labor union or labor-management conference must be obtained before such changes can be made. Companies with more than 30 employees that adjust their employees’ mandatory rest day must report this to the local labor authority.

3. Categories of workers exempt from work hour restrictions

Article 84-1 of the LSA provides that specific types of workers that meet certain criteria may negotiate with their employers to set their own working hours, rest days, national holidays, and (if female) night shift hours. The agreement between such workers and their employers shall be submitted to the local labor authority for its approval.

4. Force Majeure

According to Article 40 of the LSA, “an employer may require workers to suspend all leaves of absence” if “an act of God, an accident, or an unexpected event requires the continuation of work.” The interpretation of the last two factors is quite narrow, with “accident” intended to mean any human-caused incident, such as war or a financial crisis, and “unexpected event” read to be any event that is unpredictable, not routine, and whose degree of seriousness is extremely severe.

If none of the above applies, employers are still able to adjust mandatory rest days to help cover shifts as long as the employee still receives one day off in seven.

As evidenced above, some flexibility in work hour adjustment is possible; however, the government has stressed that the methods we describe above to allow employees to work more than the current limit of six consecutive days are exceptions rather than the rule and are therefore subject to increased scrutiny by the authorities. Any employer wishing to make such changes should consult with their local labor authority before implementing such a plan.

For more information on Taiwan employment matters, please contact Christine Chen at cchen@winklerpartners.com or on +886 (0) 2 2311 8307.

Contratos con empresas en Taiwán – consideraciones importantes

This is a Spanish translation of our English article “Tips on entering into manufacturing supply agreements with Taiwanese companies”, which you can find here. Esta es la traducción al español de nuestro artículo en inglés “Tips on entering into manufacturing supply agreements with Taiwanese companies”, el cuál se encuentra disponible aquí.

Como dueño de una marca internacional o empresa importadora de diversos productos, tienes un proveedor en Taiwán? Muchas empresas lo tienen, dado que Taiwán tiene trayectoria de ser líder en servicios de manufactura y productos para marcas y empresas alrededor del mundo en diferentes industrias, desde artefactos y componentes tecnológicos a prendas y accesorios deportivos.

Para la negociación de contratos de suministro de productos o servicios de manufactura, muchas marcas y empresas internacionales (“Contratante”) prefieren utilizar un contrato estándar con el deseo de que dicho contrato pueda cubrir todos los aspectos de la relación contractual con sus proveedores a nivel mundial.  En base a nuestra experiencia, el uso de un contrato estándar es un muy buen comienzo, sin embargo, éste debe ser adecuado para su uso en Taiwán para garantizar su cumplimiento con las leyes y normativas aplicables, y así, maximizar la protección de los derechos del Contratante. Debajo proporcionamos algunos consejos a tomar en cuenta para la negociación de contratos con empresas taiwanesas.

1. Detalles que no pueden pasar desapercibidos

Sin importar si el Contratante modifica un contrato estándar o decide preparar un contrato completamente nuevo, los siguientes detalles deben ser considerados con sumo cuidado: (i) protección y título de propiedad intelectual, especialmente en los casos de contratos con fabricantes de equipos originales (OEM por sus siglas en inglés) o fabricantes de diseño original (ODM por sus siglas en inglés); (ii) confidencialidad; (iii) protección de datos; (iv) ley aplicable; (v) foro de resolución de controversias; y (vi) requisitos de formalidad del contrato.

A modo de ejemplo, los contratos estándares usualmente citan a los diversos convenios internacionales como ley aplicable para la protección de la propiedad intelectual. Sin embargo, es importante dar a conocer que Taiwán no es miembro de muchas convenciones internacionales. Pese a que las leyes de Taiwán proporcionan protecciones similares a las de los convenios internacionales, los contratos deben ser modificados para reflejar la terminología y contenido propicio de acuerdo a las leyes y regulaciones taiwanesas.

Otro ejemplo es que las partes de un contrato de suministro (especialmente los de suministro de productos o servicios de manufactura) frecuentemente eligen el arbitraje como el mecanismo de resolución de controversias y la sede del arbitraje la disponen en una jurisdicción neutral. Dado que Taiwán no es miembro del Convenio sobre el Reconocimiento y la Ejecución de las Sentencias Arbitrales Extranjeras (Convención de Nueva York), tratar de ejecutar una sentencia arbitral extranjera en Taiwán resulta ser significativamente más complicado que en otras jurisdicciones. Es por esto que en el caso de no existir circunstancias especiales, es siempre recomendable disponer la sede arbitral en Taiwán.

2. Cubrir todas las bases

Por razón de las tendencias actuales en la operación de negocios, muchas empresas taiwanesas operan fábricas o trabajan con subcontratistas en otras jurisdicciones, particularmente en China y cada vez más, en países del Sudeste Asiático, como ser Vietnam. Por tanto, se recomienda que cualquier contrato que se suscriba con un proveedor taiwanés también tenga alcance a todas aquellas entidades relacionadas al proveedor.

3. El sello de aprobación

Muchos países tienen su propia forma de operar negocios y Taiwán no es la excepción. Por ejemplo, las empresas extranjeras generalmente pasan por alto algunas formalidades que se tienen que llevar a cabo para que un contrato obtenga plena validez en Taiwán.  En la mayoría de los países, la sola la firma de los representantes autorizados de cada parte es suficiente para que un contrato tenga efecto legal. En Taiwán, para evitar circunstancias en las que la parte taiwanesa niegue o ponga en duda la eficacia del contrato, el sello de la empresa y del representante legal tienen que ser puestos en el contrato al momento de la firma. Taiwán exige a todas las empresas que registren estos dos sellos en la base de datos de la autoridad competente como los sellos autorizados de la empresa. Este procedimiento puede parecer trivial a muchos, pero proporciona una capa adicional de protección al Contratante.

Pese a que un contrato estándar probablemente pueda ser suficiente en muchos casos, un contrato propiamente adecuado puede maximizar la protección al Contratante. En general, las leyes taiwanesas se encuentran alineadas con la mayoría de los estándares internacionales; sin embargo, resulta siempre mejor el contratar a un abogado local para la revisión de cualquier contrato a ser suscrito con partes taiwanesas. Un abogado local podrá confirmar si el contrato como tal cumple con las leyes de Taiwán, y a su vez, plantear la mejor forma para modificar el contrato.

Para más información sobre temas de contractuales en Taiwán, por favor contáctese con Roxana Cheng rcheng@winkerpertners.com.

Tips on entering into manufacturing supply agreements with Taiwanese companies

As an international brand owner, do you have a supplier located in Taiwan? Most brand owners do, as Taiwan has long been known as a leading provider of manufacturing services to companies worldwide operating in a variety of industries, from tech gadgets and components to sporting goods and garments.

In negotiating supply agreements, most international brand owners would prefer to use a standard agreement hoping that such an agreement will cover all aspects of their relationship with their suppliers worldwide. Based on our experience, while this is often an appropriate starting point, the standard supply agreement should still be tailored for its use in Taiwan in order to comply with the applicable laws and regulations and maximize the protection to a brand owner’s rights. Here, we outline a few tips to pay close attention to when negotiating a supply agreement and in dealing with a Taiwanese supplier in general.

1. The devil is in the details

Regardless of whether you alter your standard agreement or decide to draft a completely new document, you should pay particular attention to (i) intellectual property protection and ownership (especially in the case of original design manufacturer (ODM) and original equipment manufacturer (OEM) arrangements); (ii) confidentiality; (iii) data protection; (iv) governing law; (v) dispute resolution forum; and (vi) contract formality requirements.

By way of example, standard agreements usually cite international conventions as a basis for the protection of their intellectual property. However, Taiwan is not a member to most international conventions, and although Taiwanese laws do provide similar protections as those provided by international conventions, supply agreements must be tailored to reflect the terminology and content in accordance with Taiwan laws and regulations.

Another example would be that parties to supply agreements often choose arbitration as the dispute resolution mechanism and set the seat of arbitration at a neutral location. Because Taiwan is not a member to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), trying to enforce a foreign arbitral award in Taiwan proves to be much more cumbersome and time consuming than in other jurisdictions. This is why absent any special circumstances; it is always advisable to set the arbitration forum in Taiwan.

2. Cover all the bases

In light of current business operation trends, many Taiwanese suppliers maintain factories or work with subcontractors in other jurisdictions, particularly in China and increasingly, South East Asian countries such as Vietnam. Hence, it is advisable that any agreement entered into with a Taiwanese supplier must also cover any such entities.

3. A stamp of approval

Most countries have unique approaches to conducting business and Taiwan is no different. By way of illustration, foreign companies often overlook certain formalities in order for an agreement to have full force and effect in Taiwan, since in many countries, only the signature of the authorized representative of each party is needed for an agreement to take effect. In Taiwan, in order to avoid any circumstance whereby the Taiwanese supplier might challenge the contract, the company chop of the supplier and the seal of its chairman must be affixed on the agreement at the time of execution. The authorities in Taiwan require all companies to record these two chops in a database as the registered and authorized chops of the company. While it may seem archaic to some, this small step provides an additional layer of protection.

Although a standard supply agreement would probably be sufficient in most cases, a properly localized agreement can maximize the protection afforded to a brand owner. In general, Taiwanese laws are in line with most international standards; however, it is still best to retain local counsel to review any supply agreements to be executed with Taiwanese parties. They will be able to confirm whether the agreement as-is complies with Taiwan law, and at the same time, raise any issues or concerns and provide advice on how best the agreement can be altered. As supply agreements are, particularly those related to manufacturing, one of the most common types of commercial agreements seen in Taiwan, experienced counsel will be well versed in the specifics of contract and intellectual property law in the country.

For more information on contract matters in Taiwan, please contact Ling-ying Hsu at lhsu@winklerpartners.com, Roxana Cheng at rcheng@winkerpertners.com, or Peter Dernbach at pdernbach@winklerpartners.com.

Merger control FAQ (part 3 – procedural issues)

This article is the third in our series on merger control in Taiwan. This installment focuses on procedural questions related to merger control filings, including timing and content of the filings. For the first article on basic questions related to covered transactions and market share filing thresholds, click here. For the second article on relevant market definition, click here. The fourth and final installment in the series wraps up with some thoughts on the reviewing agency and other insights into the application and approval process, here.

1. Is there an expedited filing procedure for merger control filings in Taiwan?  If so, what are the relevant qualifications?

Yes. Regulated transaction participants may apply to the Fair Trade Commission (the “FTC”) for expedited review of their transaction provided the following conditions are met in respect of the specified type of transaction:

  • horizontal mergers – (i) the combined market share of the participants is less than 20% or (ii) the combined market share of the participants is less than 25% and the market share of one of the participants is less than 5%; provided that, such rules do not apply or are modified under certain circumstances related to high levels of market concentration;
  • vertical mergers – the aggregate market share of the participants in each relevant market is less than 25%;
  • conglomerate mergers – there is no significant potential competition between the participants; or
  • related party mergers/acquisitions – one of the participants directly owns at least 1/3, but less than 1/2, of the voting rights or equity capital of the other participant.

It is important to note that expedited review is not available for transactions involving a financial holding company. The FTC may also decide not to grant expedited review if it determines that: (i) a transaction involves significant public interest, (ii) the relevant market is difficult to identify, (iii) the participants’ market shares are difficult to assess, or (iv) there are other significant concerns related to possible competition-limiting effects such as high market concentration or market entry barriers.

If the FTC rejects an application for expedited review, the transaction participants must resubmit a full, general review application.

2. What information is required in a merger control filing, and how long does it typically take to compile such information?

Transaction participants should expect to spend at least three to four weeks preparing a merger control application due to the volume of information required by the FTC and the fact that all information provided must be in Chinese.

An expedited review application requires financial information for the last two fiscal years and information regarding each participant’s three main products or services and its three primary competitors. A general review application requires financial information for the last three fiscal years and information regarding each participant’s five main products or services and its five primary competitors. Each of the expedited and general review filings, require among other things:  (i) information on the type of merger (horizontal, vertical, or conglomerate) and whether it is extraterritorial, (ii) a description of the business of each participant, (iii) an overview of the relevant market(s), (iv) a description of market entry barriers, and (v) an explanation of the overall positive and negative economic impacts of the proposed transaction.

3. When is the earliest time a filing may be made?

A filing may be made before there is a binding transaction. However, the application must establish that there is a high likelihood that the transaction will proceed. Otherwise, there is a risk that the FTC may not commence its review.

4. How long does it typically take to “clear” a transaction?

The FTC’s default review period under the general application process is 30 business days. Transaction participants may not close the relevant transaction during this review period.

The review period commences only upon receipt of written notification from the FTC that the relevant application is complete (i.e., no further requests for information will be made by the FTC). It typically takes a minimum of four to six weeks from the time of initial submission of an application to get the application in form acceptable to the FTC such that the review period can commence.

The FTC may adjust the duration of the review period as it deems necessary provided that the total review period does not extend longer than 90 business days. Should the FTC alter the duration of the default 30 business day review period, it will notify the transaction participants in writing. Larger, more complex transactions typically have review periods of 60 business days or more.

5. Who makes the filing?

As a general rule, each transaction participant must be party to the filing. In certain related party transactions, the ultimate controlling entities are required to file. A financial holding company must also file if it or any of its subsidiaries participate in the transaction.

6. Are there fees with respect to merger control filings?

No.

For more information on mergers and acquisitions in Taiwan, please contact Gregory A. Buxton at gbuxton@winklerpartners.com.

A look at likely changes to divisional invention applications

Taiwan’s Intellectual Property Office (TIPO) has proposed further changes to the Patent Act that if passed would benefit patent applicants, and bring Taiwan’s patent regime further in line with the international community. In this article, we will outline one of the possible changes, divisional applications.

The Status Quo

Under Taiwan’s patent laws, invention patent applications that involve two or more inventions may be divided into separate divisional applications, at the request of either the TIPO or the applicant. The applicant may file a divisional application in either of the following circumstances:

1. Within 30 days of receiving the notice of allowance of the original application.

2. During the re-examination stage: Any time before a re-examination decision on the original application is rendered, regardless of whether it is a decision of allowance or refusal.

Divisional applications are accorded the filing date and other priority rights claimed in the original application. Given the 30-day period indicated in the first circumstance, if the applicant is unable to submit the claims intended for the divisional application before the deadline, the applicant may file amendments to the claims any time before the first office action is issued.

Requests for a substantive examination of a divisional application must be filed either within 3 years from the filing date of the original application or within 30 days from the filing date of the divisional application, whichever is later. The divisional application will be published within 18 months of the filing date of the original application.

Further divisional applications may be filed within 30 days on receiving the notice of allowance for the preceding divisional application, and the foregoing rules apply to any further divisional applications.

Amendments Contemplated by the TIPO

The TIPO is contemplating introducing the following amendments:

1. Allowing applicants to file divisional applications following receipt of notice of allowance of the original application in the re-examination stage.

2. Extending the statutory time limit for filing of divisional applications from 1 month to 3 months.

The proposed changes would therefore benefit IP holders and patent applicants because the timeframe for filing divisional applications would be lengthened. This would also bring Taiwan’s rules further in line with international norms. As these changes move through the legislative process, we will be monitoring their implementation.

For more information on patent matters in Taiwan, please contact Peter Dernbach at pdernbach@winklerpartners.com or Betty Chen at betty@winklerpartners.com.

 

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