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II.Offering and issue of securities
- Overview
The Securities and Exchange Act ("SEA") is enacted for the purpose of promoting national economic development and protecting investments (Securities and Exchange Act §1), in order to safeguard and strengthen the securities market. The Financial Supervisory Commission ("FSC") is the competent SEA authority (Securities and Exchange Act §3), regulating and supervising the public offering, issuing, and trading of securities according to the SEA, Company Act and other relevant acts (Securities and Exchange Act §2). The term "company" as used in the SEA means a company limited by shares organized under the Company Act (Securities and Exchange Act §4). When the company publicly offers and issues securities, it is an issuer or promoter (Securities and Exchange Act §5). Details concerning the offering and issue of securities are as below:
- Definition of securities
The term "securities" as used in the SEA includes government bonds, corporate stocks, corporate bonds, stock warrant certificates, certificates of entitlement to new shares, other FSC-approved securities, and certificates of payment or documents of title to any of the securities above; securities referred to above are still deemed securities even without physical certificates representing the title being printed (Securities and Exchange Act §6).
- Application procedure of offering and issue
- The Securities and Futures Bureau of the FSC has established a Regulations Governing the Offering and Issuance of Securities by Securities Issuers, which govern the issue of securities unless laws and regulations state otherwise. With the exception of government bonds or other FSC-approved securities, the FSC adopts an effective registration system in reviewing the public offering (Securities and Exchange Act §7I), issue (Securities and Exchange Act §8), and offering to the general public, of securities (Securities and Exchange Act §22I and III).
- Approval of a public offering shall not be used for promotional purposes as if that the application materials have been verified or that the value of the securities has been guaranteed (Securities and Exchange Act §40).
- Pursuant to Article 28-1, Paragraph 2 of the SEA, the FSC may require 10% of the new issues (unless a higher percentage is determined by a resolution of the shareholders meeting) to be offered at the market value to the public notwithstanding the provision in Article 267, Paragraph 3 of the Company Act which allows the original shareholders the right to priority subscription to new issues. The value of the shares publicly offered in compliance with paragraphs 1 and 2 and the value of the shares in the same issue reserved for subscription by the employees and original shareholders shall be the same. An issuer may issue stocks from the date of approval for company incorporation or the date the new registration license reflecting the issuance of new shares is delivered to the company (Securities and Exchange Act Enforcement Rules §3). An issuer shall deliver the share certificates or bond certificates to the subscribers against the aforesaid certificates of payment within 30 days from the date such stocks or bonds may be issued , and public announcement shall be made prior to the delivery of such certificates.The transfer of stock or bond certificates of payment shall also be made within the above 30-day period (Securities and Exchange Act §34).
- Stocks and corporate bonds issued by public companies shall be certified pursuant to the FSC Regulations Governing Certification of Corporate Stock and Bond Issues by Public Companies, provided Article 10, Paragraph 4 of the Regulations Governing the Offering and Issuance of Securities by Securities Issuers stipulate that an exchange-listed, OTC-listed, or emerging stock company that issues stocks or corporate bonds shall deliver them by book-entry transfer in scriptless form.
- New issue
- Under a structure of authorized capital, a new issue means a post-incorporation issue of the shares out of the total number of shares stated in the articles that were not issued at the time of incorporation or an additional issue upon a share increase according to an amendment to the articles after all the shares stated in the article are issued, as is evident in Article 266, Paragraph 1 of the Company Act. Such new issue only results in an increase to the company's paid-in capital without affecting the total shares stated in the articles therefore does not amend the articles and merely requires a special board resolution (Company Act §266II and III).
- Types of new issue
There are various types of new issue after a company is incorporated. Generally, a new issue is divided into two types: one to serve funding purpose directly and the other to serve other purposes. The form is called general new issue while the latter special new issue, such as stock distribution (Company Act §240I and VI), employee bonus (Company Act §240IV), capitalization of legal reserve (Company Act §241), conversion of corporate bonds into shares (Company Act §262), restricted stock for employees (Company Act §267VIII), new issue on account of merger with another company etc. In terms of difference, a general new issue, whose purpose is to raise funds, is conditional upon the offeror paying up the stock payment, therefore results in an increase to the physical property of the company, whereas a special new issue does not lead to such increase since the party to which the new shares are to be issued is pre-determined and the stock payment is paid with the company's existing property.
- Ways of new issue
There are two ways of new issue: One is non-public issue and the other is pubic issue. In the former, the new shares are made available to the employees and existing shareholders of the company for subscription fully, with any remaining shares, if the new shares are not fully subscribed as above, to be made available to specific persons for subscription (Company Act §268I, first part), whereas in the latter, the new shares are not fully subscribed by the employees and existing shareholders of the company, and subscription for the remaining shares is solicited from non-specific persons (Company Act §268I, second part). Moreover, to protect the public from damage from subscription in an unfavorable investment condition such as when a company is running poorly or suffering from loss etc., the Company Act prohibits any public issue of new shares under the following circumstances:
- A company may not publicly issue special shares with preference where (Company Act §269):
- its average net profit of the last three years or, in case the company has commenced its business for less than three years, of the years the company is in operation, after tax, is not sufficient to pay dividends on special shares already issued and intended to be issued, the reason being the company's business capability at this time is already poor;
- it has been in default in making regular payment of dividends on special shares already issued.
- A company may not issue new shares publicly where (Company Act §270):
- it has incurred losses in the last two consecutive years, unless the nature of business requires a longer period for preparation or it has a sound business plan under which its profit-making capability will be improved;
- its assets are not sufficient to meet liabilities
In case the assets of the company are insufficient to set off its liabilities, it may petition for reorganization, and the board of directors shall apply to court for pronouncement of its bankruptcy (Company Act §211II). It is not advisable to allow a company on the brink of bankruptcy to issue new shares publicly to absorb idle capital from the public.
- Issue procedure
- Special board resolution
The issue of new shares of a company shall be determined by the board by a resolution adopted by a majority vote at a meeting attended by at least two-thirds of the directors (Company Act §266II). The issue of new shares is subject to the board's exclusive resolution, the legislative purpose being to enable the board to raise working capital required by the company swiftly under favorable conditions based on the company's funding need and the status of the capital market at any time.
- The board shall prepare forms of subscription
When a company issues new shares publicly, the board of directors shall prepare forms of subscription, setting forth therein the following particulars (Company Act §273I):
- Particulars specified in Article 129, Paragraph 1, Subparagraphs 1 to 6, and Article 130, of the Company Act;
- The total number of shares originally authorized or the number of shares already issued out of the total number of authorized shares after increase of capital, and the value thereof;
- Particulars specified in Article 268, Paragraph 1, Subparagraphs 3 to 11 of the Company Act; and
- The time of payment for shares subscribed.
- The board shall give notice and make public announcement to existing shareholders, with a notice of forfeiture of right included in the notice
In issuing new shares, a company shall make public announcement and advise, by notice, its original shareholders to subscribe for, with preemptive right, the new shares except those reserved for employee subscription, in proportion respectively to their original shareholding, and shall state in the notice that if the right of any shareholder who fails to subscribe for new shares within the time limit will be forfeited (Company Act §267III).
- Subscription by employees and existing shareholders
When a company issues new shares publicly, its employees are entitled to subscription according to the Company Act. Capital may be contributed in the form of property necessary to the business of the company where such shares are subscribed for by existing shareholders rather than issued to the public (proviso of Company Act §272). A form of subscription shall state the names of shareholders who contribute property as capital and the kinds, quantities, values or appraisal standards of such property. Where a fractional percentage of the original shares being held by a shareholder is insufficient to subscribe for one new share, the fractional percentages of the original shares being held by several shareholders may be combined for joint subscription of one or more integral new shares or for subscription of new shares in the name of a single shareholder (Company Act §267III).
- Subscription by a third person other than an employee or existing shareholder
New shares issued by a company must be made available to a third party other than an employee and existing shareholder of the company for subscription if not fully subscribed for by the employees and shareholders of the company. In this case, the company may elect to make the new shares available to specific persons for subscription without any new share being open for public issuance or to conduct a public issuance by soliciting subscriptions from the general public.
- Non-public issue
Without limitation on their identity and number, specific persons can be either natural or juristic persons. The purpose of opening subscription to them is to avoid the laborious procedure of a public new issue, allowing a swift completion of the issue. The conditions for subscription are subject to agreement between the company and specific persons, and the price and conditions of issue are not required to be the same as the conditions of subscription by employees and shareholders (Company Act §156V). A specific person subscribing for share shall still complete a form of subscription and may contribute property necessary to the business of the company as capital (proviso of Company Act §272).
- Public issue
A company issuing new shares shall, unless such new shares are fully subscribed by its existing shareholders and employees or by specific persons by agreement without any new share being open for public issuance, file an application with the authority in charge of securities affairs for approval of public issuance (Company Act §268I). Within 30 days of its receipt of the notice of approval from such authority, the company shall insert in the forms of subscription the serial number and date of approval, and publicly announce the particulars specified in said forms together with the serial number and date of approval, and issue the new shares (Company Act §273II).
- Payment demand by the board
- Payment demand and forfeiture of right procedure with respect to cash capital contribution
A company issuing new shares shall press each of the subscribers for payment. Where a subscriber delays payment for shares, the board shall fix a period of not less than one month and call upon the subscriber to pay up, declaring that its right will be forfeited in case of default of payment within the stipulated period. The subscriber will be deprived of its right, and the shares it subscribes for will be otherwise sold, if it still fails to pay after the board makes the aforesaid call, provided compensation for damage, if any, may still be claimed against such defaulting subscriber (Company Act §266III and §142).
- Performance and verification of non-cash capital contribution
An existing shareholder of a company or specific person subscribing for new shares of the company shall make non-cash capital contribution by the due date specified in the form of subscription if it is to contribute capital in the form of property necessary to the business of the company, and shall assist the company with any transfer registration required. After such non-cash capital contribution is made, the board shall request the supervisor for inspection and comment and report to the authority for approval. If the contribution is excessive or false, the competent authority shall request, by notice, that a response be made within a specified time limit, and may proceed with curtailment or order make-up for the deficiency after assigning personnel to conduct inspection (Company Act §274II), in order to prevent excessive appraisal of non-cash capital contribution.
- Withdrawal of subscription by subscribers
Upon expiration of the time limit set forth for payment on new shares, if there are still some not subscribed or some subscribed but withdrawn or not yet paid for, the shareholders who subscribed the new shares and paid for them may set a time limit of over one month to press the company for full subscription and full payment on shares, failing which the shareholders may withdraw their subscriptions and the company shall refund the money paid on shares together with legal interest (Company Act §276I). Directors whose acts are responsible for loss or damage to the company under the aforesaid circumstance shall be jointly liable for compensation (Company Act §276II).
- Effects of new issue
- Time for a new issue to take effect
A new issue takes effect as soon as all stock payment for the new shares is paid up, after which the subscriber thus becomes a shareholder entitled to exercise shareholder rights, unless it withdraws its subscription subsequently.
- Increase of the paid-in capital of the company
A company's paid-in capital increases following each new issue, accordingly, so does its working capital.
- Invitation to subscribe for corporate bonds
A company limited by shares may, by a resolution adopted by a majority of directors at a meeting attended by two-thirds or more of the total number of directors, invite subscription for corporate bonds (Company Act §246). Large-scale enterprises usually require huge sums of working capital, and corporate bonds constitutes a long-term fundraising method, therefore the Company Act allows companies limited by shares to invite subscriptions for corporate bonds.
- Limitation on the total amount of issue
As limitation, the total amount of corporate bonds shall not exceed the net remainder of all assets in hands of the company after deducing all liabilities and intangible assets (Company Act §247I); the total amount of unsecured corporate bonds shall not exceed one-half of the aforesaid net remainder (Company Act §247II). The term "all assets in hands" means all existing tangible and intangible assets of the company. Intangible assets refer to assets without physical existence but with economic value such as goodwill, trademark rights, patent rights etc.
- Ban on issue
- Ban on issue of secured corporate bonds (Company Act §250)
A company may not issue corporate bonds under either of the following circumstances:
- Where the company has done any act in breach of contract, or has been in default of payment of principal and interest, in respect of previously issued corporate bonds or other debts, and such state of thing still exist; or
- Where the company's average annual net profit, after paying tax, last three years or, in case the company has been in operation for less than three years, of the years the company is in operation, does not reach 100% of the total amount of interest payable on corporate bonds intended to be issued, provided, however, that corporate bonds that are issued under bank guarantee shall not be restrained
A ban on issue is advisable in both of the above circumstances, where the company has lost its good credit standing (in the first circumstance) and its profitability is weak (in the second), save where the bonds in questions have been issued under bank guarantee that the creditors' rights and interests will not likely be prejudiced.
- Ban on issue of unsecured corporate bonds (Company Act §249)
A company may not issue corporate bonds under either of the following circumstances:
- Within 3 years from the date of settlement, where the company has done any act in breach of contract, or has been in default of payment of principal and interest, in respect of previously issued corporate bonds or other debts, although the debt is now settled; or
- Where the company's average annual net profit, after paying tax, of the last three years or, in case the company has been in operation for less than three years, of the years the company is in operation, does not reach 150% of the total amount of interest payable on corporate bonds intended to be issued.
As far as the first scenario is concerned, the company has experienced a wavering credit standing, hence discretion is advisable. In the second scenario, in order to protect the public, invitation of subscriptions for the corporate bonds is not advised when the company may delay paying principals and interests while the corporate bonds are not secured and the company's debt service depends on its profitability entirely.
- Methods of inviting subscriptions for corporate bonds
Pursuant to the Company Act, invitations are divided into direct invitations and indirect invitations, as elaborated below
- Direct invitation
Direct invitation means direct invitation by a company issuing corporate bonds to the public of subscriptions for the bonds. This method is rarely used in practice due to the likelihood that the corporate bonds are not established.
- Indirect invitation
Indirect invitation means indirect invitation, through others, to the public of subscriptions for the corporate bonds, and is divided into firm commitment underwriting / offering and best efforts underwriting / offering, as below:
- Firm commitment underwriting / offering:
In a firm commitment underwriting / offering, the issuer and the securities underwriter agree the latter will undertake the sale of the total amount of corporate bonds. The underwriter receives compensation from the company for such sale, but is to subscribe for the outstanding portion of the issue, if any, after the agreed term of underwriting expires.
- Best efforts underwriting / offering
In a best efforts underwriting / offering, the issuer commissions the securities underwriter to sell on the issuer's behalf corporate bonds issued by the issuer. The underwriter may charge a considerable service fee for such sale according to the contract of mandate, and may return any outstanding portion of the issue to the issuer after the agreed period of best efforts underwriting / offering expires.
- Procedure of inviting subscriptions for corporate bonds
- Special board resolution.
A company may, by a resolution adopted by the board directors, invite subscription for corporate bonds (Company Act §246). In its resolution, the board shall determine the contents of the corporate bonds and particulars of the invitation. The board shall also report the reasons for the invitation as well as other relevant matters to the meeting of shareholders to keep the shareholders' meeting informed.
- Deed of trust
To protect creditors of corporate bonds, the Company Act draws reference from instances of legislation in the U.S. and Japan and adopts the trustee system. As such, the board shall apply to the authority in charge of securities affairs for approval of the name of the trustees of all holders of the corporate bonds and the covenants made in the mandates (Company Act §248I), and the trustees are limited to banking and trust enterprises (Company Act §248VI).
- Application to the authority in charge of securities for approval
A company inviting subscriptions for corporate bonds shall submit the particulars listed in Article 248, Paragraph 1 of the Company Act to the authority in charge of securities to apply for approval. Upon receipt of the application, said authority shall review the contents of the particulars and base its decision to approve or reject on whether the total amount of corporate bonds exceeds the statutory limit and any of the circumstances under which no such invitation is allowed applies to the company.
- Preparation of forms of subscription and public announcement of invitation of subscriptions
The company shall, within 30 days of its receipt of the notice of approval, prepare forms of subscription, setting forth therein the reference number of the approval letter of the authority in charge of securities, to made available to subscribers for subscription purposes, and shall make a public announcement of the invitation (Company Act §252I).
- The board shall furnish a list of all subscribers to the trustees of corporate bondholders
Before requesting payments for subscriptions made by subscribers for the corporate bonds, the board shall prepare a complete list, setting forth therein the names, domiciles or residences etc. of all subscribers of registered corporate bonds, and deliver the list to trustees of the corporate bondholders (Company Act §255I).
- Payment requests
The board shall, after subscriptions are made by subscribers, request such subscribers to pay in full the amounts they have subscribed (Company Act §254).
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