Request by the Taipei District Prosecutor's Office for opinion on applicability of Fair Trade Law provisions relating to merger in the matter of equity holdings by International Bills Finance Company, International Commercial Bank of China, United World Chinese Commercial Bank, and The Shanghai Commercial & Savings Bank in Hung Fu Bills and Securities
Case:
Request by the Taipei District Prosecutor's Office for opinion on applicability of Fair Trade Law provisions relating to merger in the matter of equity holdings by International Bills Finance Company, International Commercial Bank of China, United World Chinese Commercial Bank, and The Shanghai Commercial & Savings Bank in Hung Fu Bills and Securities
Key Words:
simultaneous equity holdings, merger
Reference:
Fair Trade Commission Decision of April 12, 2000 (the 440th Commissioners' Meeting)
Industry:
Securities and finance (6591)
Relevant Laws:
Summary:
1. The Taipei District Prosecutor's Office requested that the Fair Trade Commission (the Commission) issue an opinion on whether the holding of more than one-third of the equity in Hung Fu Bills and Securities (Hung Fu) by International Bills Finance Company (International Bills) and three other financial institutions constituted a merger under the Fair Trade Law (the Law). 2. The Commission's determination was: (1) The Commission investigated and found that due to a run on the former Hung Fu, The Shanghai Commercial & Savings Bank (Shanghai Bank), International Bills, International Commercial Bank of China (ICBC), and United World Chinese Commercial Bank (United World) each took 12.77 percent equity stakes in Hung Fu on 28 December 1988 (settlement date). Then Hung Fu first decreased and later increased its capitalization such that Shanghai Bank's stake fell to 11.51 percent, International Bills's stake rose to 24.55 percent, and United World and ICBC's stakes both rose to 24.57 percent. (2) The Commission also found that after investing in the former Hong Fu, International Bills' statutory representative on the Board of Directors, Liu Pang-yi, was named General Manager of Hung Fu by Hung Fu's Board of Directors. Thereafter, Liu made a number of key personnel changes, naming employees of the four financial institutions in question to executive positions at Hong Fu including Assistant Manager, Sales Manager, Manager of the Trading Department, Manager of the Administration Department, Director of the Credit Division, and Assistant Manager of Operations. (3) At this juncture, International Bills directly or indirectly controlled Hong Fu's business operation and the employment and termination of Hong Fu's personnel. This constitutes an act of merger under Article 6(1)(v) of the Law. Nonetheless, the combined market share of International Bills and Hong Fu did not reach one-third, nor did either firm have one-fourth market share or revenue of over NT$5 billion after their merger-the conditions that would require these firms to apply for a merger under Article 11 of the Law. In 1997 and 1998, International Bills had sales of NT$3.4 billion and NT$4.3 billion or market share of 19.08 percent and 15.61 percent respectively (Hong Fu's 1997 and1998 market share was 3.18 percent and 4.03 percent respectively). 3. The Commission's Findings and Decision (1) With respect to the issue of whether the circumstances of this matter accorded with Article 6(1)(ii) of the Law "holds or acquires one-third or more of the voting rights or total capital represented by the shares or capital contribution of another enterprise" and thereby constituted a merger, the Commission rules that in the calculation of shares or capital contribution, Article 6(2) provides that only shares or capital contributions held or acquired by enterprises controlled or subordinated to the enterprises be calculated. The Commission further rules that the determination of "enterprises that have a relationship of control or subordination with the subject enterprise" shall be made on the basis of a close relationship between the enterprises as defined in clauses 6(1)(ii) through 6(1)(v) of the Law. The Commission therefore deems that the Shanghai Bank and the three other financial institutions did not have a "controlling or subordinate relationship" since none of these institutions ever held a stake of more than one-third of the equity of Hong Fu or Taiwan Securities nor did the circumstances defined in Article 6(1)(ii) to 6(1)(v) of the Law apply to any of these enterprises. Thus the holdings of these enterprises shall not be calculated [for the purposes of determining whether an application to merge is required] and the circumstances of this matter do not constitute merger under Article 6(1)(iii) of the Law. (2) With respect to the issue of whether the circumstances of this matter accorded with Article 6(1)(iv) of the Law "frequently conducts business operations jointly with another enterprise or is entrusted with the operation of another enterprise" and thus constituted merger, the Commission deems that the phrase "frequently conducts business operations jointly with another enterprise" refers to the conclusion of a contract to share all profits and losses between several companies. Companies that enter into this type of contract must subject themselves to unified management. "Entrusted with the operation of another enterprise" refers to the entrusting of all or the primary portion of the business operations of an enterprise to another enterprise. The enterprise so entrusted must operate the entrusted enterprise under the name of the entrusted enterprise and all profits and losses must be assigned to the entrusted enterprise such that the entrusted enterprise has final authority and can oversee business operations conducted by the entrusted enterprise. Moreover, the entrusted enterprise is obliged to remunerate at a certain rate the enterprise to which its operations are entrusted. The Commission found that the Shanghai Bank and the three other financial institutions invested in Hong Fu Securities directly. Hong Fu Securities was not jointly operated by or entrusted to these financial institutions. The standards for merger under Article 6(1)(iv) thus were not met. (3) With respect finally to the issue of whether the circumstances of this matter accorded with Article 6(1)(v) of the Law "directly or indirectly controls another enterprise's business operation or employment and termination of another enterprise's personnel," the Commission found that the four financial institutions in question, Chen Cheng-chung, and Hong Fu Securities had concluded an agreement providing that if the four financial institutions acquired more than 51% of of Hong Fu's equity, they would also acquire the right to conduct Hong Fu's business operations with a view towards improving Hong Fu's corporate health, bringing in new talent, and winning back the confidence of former clients and the general public. The Commission also found that in accordance with this agreement, Hong Fu convened the second provisional meeting of its second Board of Directors on 1 December 1998. At this meeting, five duly authorized corporate representatives (including ICBC's designee Huang Hai-nan) designated by the financial institutions were appointed to the Board of Directors. As a result, the four financial institutions held more than two-thirds of the seats on Hung Fu's Board of Directors and at the next meeting of the Board of Directors, Director Huang Hai-nan, (the former Chairman of the Board of Directors, Hong Fu) recommended Liu Pang-Yi, International Bills's statutory representative, as the new General Manager of Hong Fu Securities. After Liu took up his duties as General Manager, he appointed Kuo Chin-lung and four other employees of International Bills, United World, and Shanghai Bank to key positions. The International Bills and the three other financial institutions thus directly or indirectly controlled Hong Fu' s business operations and employment and termination of Hung Fu's personnel through International Bills, a firm with expertise in the securities industry and experience in corporate restructuring. These circumstances meet the criteria for mergers under Article 6(1)(v) of the Law in the case of Hong Fu Bills. The other three financial institutions, however, did not meet these criteria for mergers when they invested in, supplied personnel support to, and sat on the Hung Fu Securities Board of Directors. 4. With a view toward changes in the domestic economy and industry scale as well as the trend toward domestic deregulation, the Commission has publicly announced that the minimum sales volume that would require an application for merger has been raised from "NT$2 billion in the preceding fiscal year" to "NT$5 billion in the preceding fiscal year" effective 1 February 1999. On the basis of the principle of retroactivity prescribed by Article 18 of the National Standards Law, the Commission finds that the combining enterprises in this matter did not violate Article 11 of the Law with respect to market share, post-merger market share or 1998 total sales volume. The Commission also finds that there is no need for these enterprises to file an application for merger. Appendix: International Bills Finance Company's Uniform Invoice Number: 12100285 Summarized by Ts'ai Yi-ch'un; Supervised by Lin Chin-lang