According to Article 27 (14) of Business Mergers and Acquisitions Act (“M&A Act”), a person who acquires more than 10% of the total issued shares of a public company for the purpose of M&A shall report to the competent securities authority within 10 days after the acquisition.  In case of failure to report, as stated in Article 15 of the M&A Act, the portion of shares exceeding 10% shall have no voting rights.

The above provision were added by the amendment to the M&A Act in 2015.  The controversies arose in the Tatung case where the encumbering party argued that the acquiring party had violated such provision and excluded the voting rights in the portion of shares exceeding 10% by the acquiring party.

The first question is whether the acquisition of shares in Article 27 (14) of the M&A Act includes the purchase of shares from the open market.  In the Tatung case, the High Court considered that the M&A Act was enacted to facilitate the organizational restructuring of enterprises via M&A so as to maximize the efficiency of business operation, and thus held that the “acquisition” in the M&A Act should be construed narrowly.  With reference to the acquisition of shares in the Securities and Exchange Act, the High Court further held that the “acquisition” should be interpreted as public offering.^[1] However, the Commercial Court held differently in the Taisun case.  The Commercial Court, citing relevant legislative documents, held that Article 27 (14) of the M&A Act, in addition to asset acquisition and share swap, also includes share acquisition.  Therefore, even if the person does not acquire shares through asset acquisition or share acquisition as stipulated in the M&A Act, or through public offering as stipulated in the Securities and Exchange Act, but purchase shares in the open market, such acquisition should still falls within the scope of acquisition under Article 27 (14) of the M&A Act, if more than 10% of the total issued shares were to be acquired.^[2]

In addition, even if purchasing more than 10% of the shares in the open market objectively falls under Article 27 (14) of the M&A Act, the duty to report and the portion of shares exceeding 10% shall have no voting rights should only apply when the subjective purpose of the acquisition is for M&A purpose.  In the Tatung and Taisun cases, the reason for the acquiring party to purchase the shares is to get majority seats in the board election and obtain corporate control, but not to proceed any M&A transactions.  Thus, although different courts have held different views on how the objective elements of Article 27 (14) of the M&A Act should be interpreted, they have concluded that the acquiring party in these two cases did not acquire the shares for the purpose of M&A and did not have a duty to report.  However, the Supreme Court in the Taisun case indicates that acquisition of shares in order to replace the management team is to control the target company, so the High Court should further consider whether it satisfies the “for M&A purpose” element and thus reverse the High Court ruling.^[3] Given such, the controversies over the application of Article 27 (14) of the M&A Act to the contest over corporate control remains unsettled.

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