REGISTRATION OF CONVERTI-BLE BONDS AND STOCK WAR-RANTS

09/01/2001

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In an interpretation dated 11 June 2001, the Ministry of Economic Affairs (MOEA) stated the following with regard to the registration of convertible bonds and stock warrants:

The MOEA's announcement dated 8 Decem-ber 1995 states: "Pursuant to Article 130 Paragraph 1 Item 6 of the Company Law, where the company's articles of incorporation specify the number of shares issuable in con-version of corporate bonds, application may be filed immediately to register the above content of the articles." Therefore, if a com-pany specifies the number of shares that may be issued in conversion of convertible bonds in its articles of incorporation, and the ar-rangements comply with the statutory proce-dures and requirements, the company may apply to register the details immediately, and does not need to wait until it actually offers and issues such bonds before applying to reg-ister the quantity.

Before offering corporate bonds, a company must apply with the Securities and Futures Commission (SFC) for approval. Article 28 of the SFC's Guidelines for Handling the Offer-ing and Issuance of Securities by Issuers pro-vides that convertible bonds may only be is-sued by companies whose shares are listed on the Taiwan Stock Exchange (TSE) or traded in the over-the-counter market (except Category II shares and OTC-managed shares). If a company is not so qualified, then even if it amends its articles of incorporation to specify a number of shares issuable against converti-ble bonds, it will still not be able to lawfully issue such bonds.

Article 28-3 of the Securities and Exchange Law (SEL) provides that before a pub-lic-issuing company offers or issues stock warrants or other convertible securities, its ar-ticles of incorporation must specify the num-ber of shares issuable in conversion of such securities, and the restrictions of Article 278 Paragraphs 1 and 2 of the Company Law do not apply. However, the SFC guidelines mentioned above provide that only a TSE-listed or OTC-traded company may issue stock warrants (stock option certificates) to employees, or (except if its shares are Cate-gory II or OTC managed) issue bonds with warrants or preference shares with warrants. Therefore, to confirm companies' actual au-thorized capital the current law does not allow a company that does not meet the above cri-teria to amend its articles of incorporation to specify a number of shares available for con-version of stock warrants, etc.

Because securities such as stock warrants are similar in nature to convertible bonds, in that they can also be converted into shares, regis-tration is treated in the same way as for con-vertible bonds: after amending its articles of incorporation to specify the number of shares allocated for conversion, a company may immediately apply to register the relevant in-formation.

When a company issues convertible bonds or stock warrants, its articles of incorporation should specify separately the number of shares allocated for the conversion of corporate bonds, and the number of shares available to honor stock warrants, preferred shares with warrants, and bonds with warrants. The numbers of shares for these two purposes cannot be combined.

Under Article 278 Paragraphs 2 and 3 of the Company Law, when a company amends its articles of incorporation to increase its capital and its number of issuable stock warrants and convertible bonds, the minimum number of shares to be issued in the first issuance after the increase of capital must represent one quarter of the following amount: the new total capital less the number of shares stated in the articles of incorporation to be set aside for the conversion of stock warrants, preferred shares with warrants, and bonds with warrants, the number of shares specified in the articles of incorporation to be set aside for the conversion of corporate bonds, the previously registered total capital, and any previously registered number of shares for the conversion of stock warrants and convertible bonds.