TREATMENT OF TREASURY STOCK IN SHARE EXCHANGE

01/01/2004

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According to an interpretation issued by the Ministry of Economic Affairs (MOEA) on 30 May 2003, when a company is acquired by an-other company by share exchange under Article 29 of the Corporate Mergers and Acquisitions Act, so that it becomes a 100% subsidiary of the acquiring company, all shares in the acquired company—including treasury stock held for is-suance to employees—must be exchanged for shares in the acquiring company.

In view of this, on 18 June 2003 the Ministry of Finance (MOF) issued an interpretation stating that shares in an acquired company that were previously purchased under Article 28-2 of the Securities and Exchange Act (SEA) (i.e. em-ployees' treasury stock), will also be exchanged for shares in the acquiring company. The trans-fer price determined at the time of buyback should be adjusted according to the share ex-change ratio, and the shares must still be trans-ferred to employees within three years from the original buyback date. Employees' treasury stock not transferred within that period will be deemed unissued, and must be cancelled.

At the time of actual transfer, the acquired company should apply to the Securities and Fu-tures Commission (SFC) for permission to transfer shares to its employees, presenting proof of the transfer and the approval letter issued to the acquired company by the SFC to permit the buyback. If shares are not transferred within the prescribed period, the acquiring company and the acquired company should together apply to the MOEA for their cancellation, presenting proof of the original share transfer and the SFC's original approval letter to the acquired company.

There has also been doubt as to whether a parent company may buy back its own shares held by a subsidiary. Considering that Article 28-2 Para-graph 1 of the SEA restricts buyback of its own shares by a TSE- or OTC-listed company to the following three purposes: (1) for transfer to em-ployees; (2) for equity conversion; and (3) for the purpose to maintain the company's creditwor-thiness and uphold shareholders' interests; and that Article 28-2 Paragraph 6 forbids affiliated enterprises and company insiders from selling their shares in a company during a period when the company is buying back treasury stock, the MOF has stated that a subsidiary that holds shares in its parent company may not sell such shares to the parent company while the parent company is buying back treasury stock.

In a further interpretation on share exchange under the Financial Holding Companies Act, issued on 29 September 2003, the MOF stated that when a financial holding company acquires a financial institution as its subsidiary by a 100% share exchange under Article 26, and the trans-action leads to the holding company acquiring shares in itself, then the situation should be han-dled as follows:

Within three years from the date of the share exchange, the financial holding company should transfer the affected shares to em-ployees, or use them for equity conversion in conjunction with the issuance of bonds with stock warrant, preferred shares with stock warrant, convertible bonds, convertible pre-ferred shares, or stock warrants. The transfer or conversion procedure, price, quantity, time limits, and method of transfer should be stated in notes to the holding company's financial statements. Shares that are not transferred within the above period will be deemed to be unissued, and their cancellation registered.

Such shares may not be made the subject of a pledge, and the financial holding company may not enjoy shareholder's rights in the shares.