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Five important issues to consider when investing in or partnering with Taiwanese companies

by Gregory Buxton and Renee Hsu

Whether forming a joint venture company with a Taiwan partner or making an investment in an existing Taiwan company, we strongly recommend clients give careful consideration to the terms and conditions in the operative agreement, be it a joint venture agreement or a shareholders’ agreement. We are routinely asked to review, negotiate, and draft such agreements. In working with these agreements, we invariably identify issues that foreign counter-parties have neglected, the omission of which could have a significant adverse effect on the success of their Taiwan venture. Set out below are important, but often neglected, issues which foreign counter-parties should consider when making an investment or forming a joint venture in Taiwan.

1. Corporate governance procedural defaults

The recent amendment of Taiwan’s Company Act (the “Act”) did a great deal to bring Taiwan’s corporate governance procedures more in line with those in other developed countries. That being said, there are a number of corporate governance procedures which are now allowable pursuant to the Act, but which are not the statutory default. For instance, under the current Act the board of directors may act by written resolution. However, this ability to act by written resolution in lieu of convening a meeting must be explicitly granted in the relevant company’s Articles of Incorporation.The Act requires other corporate governance mechanisms, which foreign counter-parties often take for granted, to be specifically set out in the Articles of Incorporation. In light of this situation, we recommend a thorough review of how the parties plan to govern and operate the Taiwan venture so that we can recommend appropriate amendments to the Taiwan vehicle’s Articles of Incorporation.

2. Statutory preemptive rights

Very often, parties involved in a Taiwan venture wish to restrict share ownership and preserve their initial ownership percentages. The Act grants preemptive rights to each existing shareholder, subject to a requirement that ten (10) to fifteen (15) percent of new equity issuances by a corporation be reserved for purchase by employees (except under very limited circumstances). If the preservation of precise ownership percentages is of paramount importance to the parties, business forms other than a standard corporation could be employed. Alternative business forms each come with their attendant advantages and disadvantages so each would need to be evaluated to determine whether new, more serious, issues were not introduced while attempting to solve the employee preemptive rights issue.

3. Use and control of chops

In Taiwan companies and individuals often use chops instead of signatures. A chop is a stamp or seal that has the same legal effect as a signature. A Taiwan company will have at least one set of chops consisting of the registered chops of the company and its responsible person. These chops can be used to legally bind the Taiwan company, and therefore, their use and control are of great importance. We recommend that at the very least the operative agreement contain basic provisions addressing the custody and permitted use of the company’s and its responsible person’s chops. For larger enterprises with multiple sets of special-purpose chops, we recommend drafting more complete chop control procedures which can be included in the operative agreement as an exhibit.

4. Protection of intellectual property

Often the foreign counterparty is contributing some form of intellectual property right(s) to the Taiwan venture. In such cases, we recommend that the effectiveness of the operative agreement should be made contingent upon the signing of an appropriate intellectual property license agreement which includes, at a minimum, standard confidentiality, non-compete, and non-solicitation clauses. If the foreign counterparty’s intellectual property is of particular value, we often recommend (i) placing an additional affirmative duty on the local Taiwan party(ies) to take reasonable measures to police the local market for infringement of the foreign counterparty’s and/or the Taiwan venture’s intellectual property rights and (ii) making the local Taiwan party(ies) liable for any such infringement of which they were, or should have been, aware but failed to report in a timely fashion.

5. Specification of legal damages

In Taiwan, like many other jurisdictions, liquidated damages are legally permissible. Unlike many other jurisdictions, contractual punitive damages are also permissible in Taiwan. This creates interesting possibilities to erect significant disincentives to potential future bad behavior. While acknowledging that overly liberal use of punitive damage provisions has the potential to sour the relationship between joint venture partners even before the operative agreement is signed, we often recommend strategic use of such provisions particularly in conjunction with the protection of intellectual property rights of a foreign counterparty.

The list set out above represents issues that we see on a routine basis. However, this list is by no means exhaustive. We highly recommend having a lawyer review all agreements to be signed in connection with a foreign joint venture or other form of joint equity investment in Taiwan.

For more information, please contact Greg Buxton at gbuxton@winklerpartners.com.

 

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