The Role of Competent Authority's Approval in M&A ─ a Study of the Share Swap Case between IBF Financial Holdings Co., Ltd. and EnTie Commercial Bank

Consolidation of financial institutions has been a solution to the problem of too many banks in Taiwan resulting in excessive competition and unfavorable development. The share swap between IBF Financial Holdings Co., Ltd. (“IBF”) and EnTie Commercial Bank (“EnTie Bank”) (“Merger” or “Share Swap Case”) is one of the leading cases.  

As the only financial holding company in Taiwan without a physical bank, IBF has been looking for a suitable M&A partner for many years. EnTie Bank is a traditional bank mainly engaging in commercial banking business. If the Merger is successful, IBF will be able to own both online and physical bank as it wishes.

The Merger is expected to proceed through share swap, whereby IBF will pay cash plus the newly issued Class A Preferred Shares with the right to convert to common shares to all shareholders of EnTie Bank in exchange for all of the outstanding shares of EnTie Bank. After the Merger, EnTie Bank will become a wholly-owned subsidiary of IBF. Shareholders of EnTie Bank, besides receiving cash, will also become IBF's preferred shareholders. The transaction price is equivalent to NTD 17.212231 for each share of EnTie Bank, which is comprised of NTD 9.466730 in cash and 0.493344 share of IBF's Class A Preferred Shares. The total transaction value is NTD 33.7 billion.

On October 14, 2021, both IBF and EnTie Bank held board meetings to approve the Share Swap Case and signed the share swap agreement. However, there was an internal disagreement among IBF and the IBF's board approved the Merger by a majority of the directors, with 7 directors agreeing and 6 directors opposing to the Merger. On the same day, IBF filed an application with the Financial Supervisory Commission ("FSC"). On December 2, 2021, both IBF and EnTie Bank held a special shareholders' meeting to review the Share Swap Case. The IBF's shareholders' meeting approved the Share Swap Case with 73.54% of shareholders present agreeing to the Merger.

Unexpectedly, on December 29, 2021, IBF received notice from the court that a shareholder, Taiwan Miaonong Dairy Development Co., Ltd. ("Taiwan Miaonong"), had filed a lawsuit in the Intellectual Property and Commercial Court ("IPCC") requesting the court to confirm that the IBF’s board resolution on October 14, 2021 approving the Share Swap Case was null and void.

Subsequently, on January 11, 2022, IBF announced that it had received a notice from the court that its shareholders, Guozheng Investment and Development Co., Ltd. and Zitong International Development Co., Ltd. (collectively, "Suing Shareholders"), had filed a lawsuit in the IPCC, requesting the court to revoke IBF's shareholders' resolution on December 2, 2021 approving the Share Swap Case.

About two weeks after the above announcements, on January 27, 2022, IBF announced again that it had received a letter from the Banking Bureau informing IBF that the Banking Bureau had concerns about the acquisition of 100% of the shares of EnTie Bank through share swap, and that the review of the Merger should be deferred. The Banking Bureau had four reasons:

The first reason is about financial soundness. Both EnTie Bank and Rakuten Bank are banks that require a high degree of capital support. It is doubtful whether they can complete the capital increase and maintain the financial soundness of the parent and subsidiary companies.

The second reason focuses on the source of capital. The Banking Bureau is of the opinion that common stock is the most important component of a company's capital, and the fundraising activities will affect the shareholding structure. It is highly possible that the IBF’s cash capital increase will require the subscription of specific individuals.  However, according to IBF, if the existing shareholders do not participate in the capital increase, the percentage of subscription by specific individuals may be as high as 26%. The uncertainty of the source of capital may affect the stability of the shareholding structure.

The third reason is about the synergy. The board did not support the Merger by unanimous vote and there were lawsuits, which cast doubt on whether the Merger could generate synergy.

The fourth reason is about the employee relocation program. IBF's has neither explained in detail nor proposed any countermeasures on whether IBF and its employees have reached a consensus on the employee relocation program and whether the program can be adequately supported in the future.

Summarizing the above four reasons, the Banking Bureau decided to defer the review of the Merger because it believed that, in the process of IBF incorporating EnTie Bank as a subsidiary, the shareholders did not have sufficient support, there were litigations, there were doubts about the financial soundness of EnTie Bank and the Merger's synergy, and the employee relocation program had not been negotiated appropriately.

On October 12, 2022, the IPCC made an interlocutory judgment on the above lawsuit requesting confirmation of the invalidity of IBF's board resolution, holding that such board resolution did not violate Article 45 of the Financial Holding Company Act. On the same day, the IPCC dismissed the lawsuit by the Suing Shareholders requesting the revocation of IBF's shareholders' resolution. In other words, the IPCC considered that both IBF's board and shareholders' resolutions were valid without any defects. IBF has achieved a preliminary victory.

The share swap agreement between the parties stipulates that October 13, 2022 or any later date as the parties may otherwise agree in writing was the " long-stop date." The share swap agreement also expressly provides that the share swap agreement shall "automatically terminate" if the Share Swap Case is not completed on or before the long-stop date. Although the IPCC expressed its opinions with an interlocutory judgment one day prior to the long-stop date, the Banking Bureau did not review or grant the necessary approvals before the long-stop date (i.e., October 13, 2022). Since the parties did not stipulate a later date in writing, the share swap agreement entered into by IBF and EnTie Bank was automatically terminated on October 13, 2022.

In this case, we can see that the position of the competent authority may decide the success or failure of an M&A transaction. Here, both parties agreed to the Merger, an agreement was formally entered into, and even the votes agreeing to the Merger in IBF’s shareholders' meeting were overwhelming. However, even if both parties were willing to proceed with the transaction, if one of the parties did not secure a unanimous opinion internally, it may be difficult to obtain the competent authority’s support and the M&A transaction may fail.

It can also be seen that in some controversial cases, the way the competent authority expresses its opinion is not to formally reject the case with an administrative decision, but by means of “late/defer review.” When the reviewing period exceeds the long-stop date agreed by the parties, the transaction was in essence rejected by the competent authority.

In 2023, both IBF's and EnTie's general shareholders meetings have approved to resume the Merger. But as of the end of February, 2024, there was no news that the boards of the two companies had approved the transaction. How the Merger would be resumed and what the price and terms of the transaction would be are all worth noticing.

(The article is originally in Chinese which can be found here.)

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The Role of Competent Authority's Approval in M&A ─ a Study of the Share Swap Case between IBF Financial Holdings Co., Ltd. and EnTie Commercial Bank