Newsletter
FINANCIAL HOLDING COMPANY LAW SOON TO TAKE EFFECT
On 27 June 2001 the Legislative Yuan gave its third reading to enactment of or amendment to six finance-related laws. They were soon promulgated by the President, and five of which have already come into effect. The six laws are: the newly enacted Financial Holding Company Law (due to take effect on 1 November 2001), the amended Deposit Insurance Law, the amended Insurance Law, the new Statute for the Establishment and Management of the Financial Restructuring Fund; the newly enacted Bills Fi-nance Administration Law, and the amended Business Tax Law, which has been renamed to Value-Added and Non-Value-Added Business Tax Law. Of these six pieces of legislation, the one likely to have the greatest impact on the fi-nancial services industry is the Financial Holding Company Law (Law).
I. Legislative Goals
The goals of the Law are: to bring into play the efficiency and the organizational, managerial and financial flexibility out of integrated opera-tion of financial businesses; to promote the globalization and international competitiveness of Taiwan's financial services industry; to pro-vide an environment conducive to the restruc-turing of financial institutions; to strengthen the regulation and monitoring on cross-sector op-erations; to provide the benefits of consolidated taxation; and to provide mechanisms with a high degree of flexibility.
II. Overview of Provisions
The Law comprises 68 Articles, divided into six chapters: General Provisions, Conversion and Split-Up, Operations and Finance, Regulatory Supervision, Penal Provisions, and Supplemen-tary Provisions. The main content is outlined below:
Chapter1-General Provisions
The establishment of a financial holding com-pany requires approval from regulatory authori-ties. Such establishment can be compulsory or voluntarily applied for.
1.Where a single person or single group of related parties holds a controlling interest in a bank, insurance company or inte-grated securities company, it must apply with the regulatory authority for estab-lishing a financial holding company. "Controlling interest" means a sharehold-ing of a least 25%, or the power to directly or indirectly appoint or cause elected a majority of directors of the relevant bank, insurance company or securities company. "Single person" means a single natural or juristic person. "Related parties" means a person and his or her spouse, relatives within two generations of consanguinity (lineal or collateral), and any business en-tity in which the person or spouse is a legal representative.
The compulsory rules do not apply to the following cases: where the controlling interest is held by government, or as ap-proved by the regulatory authority for the purposes of restructuring an unsound fi-nancial institution; where a single person or group of related parties does not si-multaneously hold shares in financial in-stitutions in two or more of the industries of banks, insurance companies and secu-rities companies; or where the total assets of a bank, insurance company or securities company in which a controlling interest is held does not exceed a certain threshold amount.
2.De-facto financial holding companies ex-isting before the Law takes effect:
A de-facto financial holding company that already holds a controlling interest in a financial institution when the Law comes into effect must report to the regulatory authority within six months after the Law comes into effect, and must apply with the regulatory authority within one year after the Law comes into effect for establishing a financial holding company. Otherwise, it must, within five years, reduce its shareholding in the financial institution to a degree of below 25%, and must not ap-point more than half of the relevant insti-tution's directors. However, a bank may be exempted from application of the Law if before the Law takes effect it has in-vested in and holds a controlling interest in an insurance company or securities com-pany in accordance with Article 74 of the Banking Law and receives permission for such exemption from the regulatory au-thority within six months after the Law takes effect.
An applicant must meet minimum require-ments of paid-in capital and must satisfy "evaluation factors" and other requirements as set by the regulatory authority. The amount of minimum paid-in capital will be decided by the regulatory authorities. Evaluation factors include financial and operational soundness, management and operation capability, capital adequacy, impact on competition in the fi-nancial services industry, and on the en-hancement of public interest.
1.The Law recognizes foreign financial holding companies and defines them as companies that are organized and estab-lished under foreign law and hold a con-trolling interest in a bank, insurance company or securities company.
2.A foreign financial holding company that meets the following conditions need not set up a new financial holding company in Taiwan:
a.It satisfies the evaluation factors of es-tablishing a financial holding company.
b.It is experienced in operation and management as a financial holding company, and has a good reputation;
c.The financial regulatory authorities in its home country consent to its estab-lishing subsidiaries in Taiwan and agree to cooperate and share responsi-bility with the ROC authorities in monitoring and regulating its opera-tions;
d.The financial regulatory authorities in its home country and its head office have the capability to monitor and regulate its subsidiaries in Taiwan; and
e.Its head office must designate repre-sentatives within the ROC to handle its litigatory and non-litigatory matters.
3.Foreign financial institutions that already operate in multiple financial services sectors in their home country (such as European universal banks) may also be exempted from setting up a new financial holding company in Taiwan as long as the above factors are met.
Chapter 2-Conversion and Split-Up
Establishment by Conversion
Subject to the permission by the regulatory au-thorities, a financial institution may be converted into a financial holding company by means of business assignment. This requires approval by a resolution adopted by shareholders holding a majority of the outstanding shares with voting rights present at a shareholders' meeting attended by shareholders holding at least two-thirds of the outstanding shares with voting rights in the fi-nancial institution (or if the institution is a public company, two-thirds of outstanding shares with voting rights present at a meeting attended by shareholders holding a majority of outstanding shares with voting rights). Such conversion is achieved by a financial institution's assignment of its businesses (including major assets and li-abilities) to another company in exchange for the newly shares issued by that company. On ac-quiring the newly issued shares the financial in-stitution (that is the assigning company) is con-verted into a financial holding company, and the other company becomes its subsidiary. The relevant regulatory authority will issue to the subsidiary an operating license to operate as a bank, insurance company or securities company, as the case may be, without reviewing the merit of its operation, as is usually required for issuing such license to a financial institution.
Subject to the permission by the regulatory au-thorities, a financial institution may also be converted into a subsidiary of a financial holding company by share swap. This requires approval by a resolution adopted by shareholders holding a majority of the outstanding shares with voting rights present at a shareholders' meeting attended by shareholders holding more than two-thirds of the outstanding shares with voting rights in the financial institution (or if the institution is a public company, two-thirds of outstanding shares with voting rights present at a meeting attended by shareholders holding a majority of outstanding shares with voting rights). Share swap is achieved by the transfer by all the shareholders of all issued shares in the financial institution to another company in exchange for the newly issued shares of that other company and that other company will be converted into a financial holding company holding the financial institution as its subsidiary.
Internal restructuring
Simplified merger applies to the situation where a subsidiary of a financial holding company merges with the other company in which it holds more than 90% of the issued shares. The pro-cedure is for both companies to sign a merger agreement, approved, respectively by both of the companies, by majority resolutions of the direc-tors meeting, attended by more than two-thirds of all directors. Resolutions of shareholders' meetings are exempted.
This applies to the situation where the share-holders of a subsidiary of a financial holding company resolve to assign part of its businesses or assets to another subsidiary of the same fi-nancial holding company. If the assignment involves major businesses or assets, it requires approval by a resolution adopted by shareholders holding a majority of the outstanding shares with voting rights present at a shareholders' meeting attended by shareholders holding at least two-thirds of the company's total outstanding shares with voting rights (or if the financial in-stitution is a public company, two-thirds of out-standing shares with voting rights present at a shareholder's meeting attended by shareholders holding a majority of outstanding shares with voting rights).
Chapter 3-Operations and Finance
Scope of business
The business scope of a financial holding com-pany is limited to investment in and management of its invested enterprises. The types of busi-nesses in which it may invest are: banks, bills finance companies, credit card companies, trust enterprises, insurance companies, securities companies, futures companies, venture capital companies, overseas financial institutions as approved by the regulatory authorities, and other banking or finance related companies as decided by the regulatory authorities
Fire Walls
Business activities or transactions, cross business promotion activities, exchange and use of in-formation, or shared use of operating facilities or premises, between a financial holding company and its subsidiaries, or between subsidiaries, must not be detrimental to the interests of cus-tomers.
Consolidated taxation
Where there are arrangements between a fi-nancial holding company and its subsidiary companies, or between a financial holding company or its subsidiary and other persons, business enterprises whether inside or outside Taiwan, that are not in line with normal trad-ing practices with regard to the attribution of income, costs, expenses or profits and losses, in an attempt to evade or reduce tax liabilities; or that are related to acquisition of shares, transfer of assets or other deceptive arrange-ment in order to improperly evade or reduce tax liability for themselves or others, the tax collection agency may, with permission from the regulatory authorities, make adjustments in accordance with normal business practices so as to correctly calculate the tax liability of the taxpayers concerned. The adjustment does not apply to transactions between a financial holding company and its wholly owned ROC subsidiary.
Chapter 4-Monitoring
III. Advantages and disadvantages of conver-sion to a financial holding company
1. Advantages
2. Disadvantages