Cautious optimism in Taiwan

The panel in question featured three senior regulators and included a discussion on what might trigger an investment review.

The AmCham committee's view was that it "continues to see a disconnect between the government's stated desire to increase foreign investment and the statements from regulators on its role in receiving investment based on subjective criteria such as ‘national security' and ‘investor rights' without any clear definition on those terms."

After first Taiwan's minister of economic affairs had stressed that the government sees private equity as an important contributor to local economic development and then a commissioner with the Financial Supervisory Commission said the territory was very much open to "long-term investors," this was a sobering reminder of how much work remains to be done.

It is in this context that we should consider the recent proposed amendments to Taiwan's Business Mergers and Acquisitions Act.

As part of a broad package of measures, the proposals include raising the level of shareholder support required for a take-private transaction to go through to a two-thirds majority. As it stands, approval is granted if a straight majority of shareholders representing at least two thirds of the outstanding shares vote in favor. The two thirds majority only applies when the extraordinary general meeting is attended by voters representing half the total outstanding shares.

While the amendment is intended to protect minority shareholders' interests and could make it more difficult for a private equity investor - working in partnership with company management - to complete a privatization, industry participants value clarity above all else. Given the choice between a higher threshold and consistent application to a lower threshold and arbitrary rulings on deals, they would opt for the former.

Past experience show that application has been anything but consistent. For example, a KKR-backed management buyout of Yageo in 2011 received more than two thirds support from shareholders but the government still intervened and nixed the transaction for reasons that have never been fully explained.

Subsequent private equity activity in Taiwan - a total of $56.9 million was invested in 2012, putting Asia's seventh-largest economy 16th in the regional PE rankings - shows what happens when an industry loses confidence in the regulatory apparatus intended to guide it.

The AmCham private equity committee has put forward suggestions as to what would improve investor sentiment by creating a more transparent approvals process. These include published guidelines on investment criteria, the release of a list of sectors and companies in which foreign PE investment is unwelcome, and detailed explanations from the regulator as to why particular transactions are being rejected.

The Ministry of Economic Affairs responded by forming a taskforce to coordinate between different government agencies with a view to clarifying the criteria on which transactions are assessed by regulators. But what made the panel at the AVCJ Taiwan Forum frustrating was the absence of clarity with which the regulators present discussed their approach.

A change in policy is therefore only as effective as those tasked with executing it. While it is of course unfair to judge multiple regulatory bodies on the basis of a few remarks at a conference, the private equity industry requires reassurance that its attempts at advocacy and education are getting through.

An indication that the authorities are willing to set down rules and apply them consistently is indeed cause for optimism. But cautious optimism.

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• Topics
• Regulation
• Greater China
• Buyouts
• Taiwan (China)
• regulation
• buyout