When enterprises face challenges brought about by globalization such as changes in industry structure and intensified competition, mergers and acquisitions are a common strategic response. For example, acquiring the majority of another company’s shares to gain management control may help achieve diversification and reduce operating costs. Among the various acquisition methods, the most direct is to purchase the shares of the target company on the open market. For a publicly traded company, this means it is exposed to the risk of a potential shift in control at any time. As a result, lawmakers established the “substantial shareholding disclosure system” to ensure that the Financial Supervisory Commission, the company’s management, and its shareholders are clearly informed about changes in shareholding, enabling them to respond to potential future changes in corporate control or stock prices. Accordingly, Article 27, Paragraphs 14 and 15 of the Business Mergers and Acquisitions Act (the “Provisions”) provide that, for the purpose of a merger/consolidation and acquisition to acquire the shares of a company whose shares have been publicly issued, in case more than ten percent of the total shares that the company had issued are acquired, the acquirers shall report to the competent securities authority the purpose of the merger/consolidation and acquisition and other particulars required for reporting by the competent securities authority within ten days of the acquisition of the shares; if the particulars required for reporting were adjusted, they shall be updated immediately; in case of the acquisition of the voting shares already issued by the company whose shares have been publicly issued without complying with the requirements under the preceding paragraph, the excess shares shall not have voting rights.

In a recent civil judgment, Taiwan Supreme Court 113-Tai-Shang-Zi No. 1851, the court provided the interpretation of a “purpose of the merger/consolidation and acquisition” (“M&A”). The court first referenced the legislative intent of Article 10 of the Business Mergers and Acquisitions Act (the “Act”), noting that “one of the purposes of conducting an M&A is to gain control over a company’s management.” It further explained that when a corporate shareholder acquires shares of a company with the intent to replace the company’s management team, because it “intends to gain control of the company’s management, it appears to fall under the M&A situations governed by the Act,” suggesting that the shareholder has an M&A purpose and that the Provisions would apply.

However, the lower court in this case (Note 1) opined that if a party acquires shares in order to replace the management team due to poor communication with current management, even if control is later obtained, it is difficult to determine that the acquisition was subjectively made for M&A purposes. Moreover, M&As are generally aimed at “restructuring organizations to reduce transaction costs and improve business efficiency.” If there is a large difference in business scope, the existence of an M&A motive becomes questionable. Past judgments have also stated that “gaining control of management does not necessarily mean the acquisition was made for M&A purposes—it may simply be for investment” (Note 2), and that “a contest for corporate control is not the same as a corporate M&A; merely seeking board seats does not necessarily indicate an M&A purpose” (Note 3).

In summary, past judgements have held that acquiring shares to obtain control of a company’s management does not necessarily indicate an M&A purpose. The acquisition could be made for investment reasons or by a corporate shareholder aiming to resolve communication issues with the existing management team and protect shareholder interests by acquiring a majority stake. However, the Supreme Court now appears to interpret acquisition of shares to gain management control as meeting the definition of M&A purpose under the law. This signals a possible shift from previous interpretations and is worthy of close attention.

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References

Note 1: Intellectual Property and Commercial Court 112-Shang-Su-Zi No. 37 Civil Judgment

Note 2: Taiwan High Court 110-Shang-Zi No. 309 Civil Judgment

Note 3: Taiwan Taipei District Court 109-Su-Zi No.4498 Civil Judgment

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