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Taiwanese Forex Regulations: Navigating Trading Standards – After enduring the impact of COVID-19 in 2020, 2021 witnessed a sharp rebound globally in capital markets, private equity, finance and other corporate deals. A rebound is expected – the combination of pressure to deploy large amounts of capital and the distortion of asset values driven by the pandemic presents an attractive value proposition for many stakeholders. The magnitude of the rebound, however, was unexpected.
Exuberance lasted until the beginning of 2021, but when the conflict in Ukraine began in February 2022, it exacerbated the ongoing geopolitical rift and economic decoupling, quickly dampening any optimism for sustained deal-making in 2022. The security of energy, food and other commodities became a key risk theme in 2022.
Taiwanese Forex Regulations: Navigating Trading Standards
However, volatility is not necessarily a bad thing. With careful planning (many steps ahead) on how to manage the current volatility, we believe investors and businesses in Taiwan will be well-positioned to take advantage of Taiwan’s critical role in global trade once normalization resumes.
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Following our Taiwan 2022 webinar series in September and October, we hope this year’s report for Taiwanese businesses and investors provides useful guidance in these volatile times.
We will begin with an overview of the current situation related to global regulatory developments in foreign direct investment (FDI). Various black swan events in 2022 drove, and will continue to drive, geopolitical fractures and global economic decoupling. In addition, the global FDI regulatory regime has rapidly reached a point where it is important for Taiwanese investors and businesses to ensure maximum deal certainty by considering FDI analysis as perhaps the most important task to be handled before starting related cross-border investments. or peripheral to critical infrastructure and technology.
We then summarize recent European Union court decisions that define what constitutes anti-competitive behavior in the context of exclusive rebates. Taiwanese businesses trading in a dominant position in the EU should carefully weigh the impact of these judgments on trading practices.
Next, we give our thoughts on trends and headwinds in M&A and corporate transactions related to Taiwan and the rest of the Asia-Pacific region. We hope that thematic investment developments, changing jurisdictional focus and excess liquidity data points highlighted in the review will help investors and businesses to find high alpha low beta investments.
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To emphasize the progress of thematic investment and value discovery in Taiwan and globally, this year we introduced a webinar session focused on ESG. This is a rapidly developing theme which, due to its importance in capital markets, financing and corporate transactions, has led to an increase in regulatory regimes globally. Due to differences in ESG compliance standards globally, Taiwanese investors and businesses should carefully consider the complexities of structuring ESG-focused transactions that are compliant and bankable.
This year, we are also introducing a webinar session focused on fund formation. In our report, we summarize the concept of continuation funds, fund products that may be of interest in the middle of volatility, and which have been affected by the exit of the fund.
And finally, we summarize the situation on global sanctions. The CHIPS and Science Act, which takes effect in August 2022, is particularly relevant for Taiwanese semiconductor companies. Given Taiwan’s dominant position in the global semiconductor industry, this legislation has a significant impact on the industrial and economic supply chain.
While most FDI regimes encourage foreign investment, the increased number and greater sophistication of the regime may add to transaction uncertainty.
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While most FDI regimes encourage foreign investment, the increased number and greater sophistication of the regime may add to transaction uncertainty.
The Foreign Direct Investment (FDI) regime continues to evolve and mature globally. Given their increased ubiquity and potential impact on deals, parties should prioritize FDI when considering cross-border M&A transactions. Rapidly evolving geopolitical dynamics, technological advances and unexpected externalities (such as the COVID-19 pandemic) can add a layer of transactional uncertainty when dealing with FDI. Due to this climate, Taiwanese businesses and investors should carefully prepare for FDI regulatory scrutiny when considering acquisitions and ensure they build sufficient safeguards into the transaction. It is key to anticipate as soon as possible any issues that FDI authorities may raise and the potential conditions/remedies required to address those issues.
We see continued prioritization and focus on FDI reviews in the US, some key European countries and other countries. In the US, foreign investment remains generally welcome and encouraged, but transactions that may reflect considerations of US national security are now being scrutinized more closely than ever. In Europe, new and updated FDI regimes are being implemented and FDI regimes are being proposed for several countries.
The business activities of many Taiwanese companies now often fall squarely within the scope of the area of interest for the FDI regime. Sensitive sectors are no longer limited to traditional areas associated with high-level national security, such as defense, energy and telecommunications. In contrast, FDI regulatory scrutiny includes, for example, biotechnology, various critical and emerging technologies, and data-related activities.
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Moreover, the COVID-19 pandemic made FDI a clearer focus and accelerated the movement at the national level in Europe and elsewhere around the world. Governments are worried about the potential for foreign investors to take opportunistic advantage of distressed companies, and more generally about the resilience of supply chains that, almost three years after the start of the pandemic, continue to be a concern.
In certain countries, it is also possible that Taiwanese investors will be scrutinized for ties or influence by China, if not considered directly Chinese, depending on local policies.
While deals related to China can certainly be successful, regulators can remain skeptical of these investments, especially if they occur in sensitive sectors, so, when relevant, such considerations must be carefully assessed as part of the deal plan.
In the US, the Committee on Foreign Investment in the United States (CFIUS) review process remains a key consideration for the deal. In 2021, transactions filed with CFIUS increased nearly 40 percent from 2020, underscoring the growing impact of CFIUS on deals. This is the first year that the Foreign Risk Review Modernization Act of 2018 (FIRRMA) has been fully implemented. Although CFIUS filings reached an all-time high, CFIUS has largely maintained efficiency in reviewing and clearing transactions—and most transactions continue to be approved without mitigation. That said, where mitigation is needed, it can substantially impact the transaction and produce unexpected challenges, up to and including costs. Accordingly, careful diligence and planning remain critical.
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Although CFIUS generally maintains efficiency and clears most cases, it is evident that the investigation of FDI to the US remains a priority for the US government. In September 2022, President Biden issued the first Presidential Directive specifying national security factors for CFIUS to consider in evaluating transactions. While the executive order (EO) does not affect CFIUS’ legal process or jurisdiction, it demonstrates the administration’s focus on identifying national security risks arising from foreign investment and highlighting specific areas of national security interest. Specifically, the EO directed CFIUS to consider issues related to supply chain resilience, impact on US technological leadership, assessment of aggregate investment trends in the industry, cybersecurity risks and sensitive data.
In particular, the EO directed CFIUS to consider industry investment trends over time in reviewing the impact of our transactions on national security, instead of narrowly focusing on specific transactions before that. The EO also provides guidance on standards for “sensitive data” that are broader than what is defined as “sensitive personal data” in the CFIUS regulations for TID (technology, critical infrastructure and personal data) US businesses, to be sure. The types of businesses subject to CFIUS authority are expanded under FIRRMA.
CFIUS is also increasing its focus on monitoring and enforcement. In October 2022, CFIUS issued its first enforcement and penalty guidelines. Although CFIUS has only previously announced two penalties, these guidelines, combined with consistent messaging from CFIUS officials over the past few years regarding an increased effort on monitoring and enforcement, indicate that CFIUS likely intends to use its enforcement authority more advanced. This emphasizes the importance of understanding and satisfying the mandatory filing requirements as well as meeting all the mitigation requirements required by CFIUS.
The EO, enforcement and penalty guidelines, and CFIUS’s general aggressiveness under FIRRMA demonstrate the US government’s commitment to using CFIUS as a tool to protect US national security.
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The FDI regime continues to improve in Europe. In 2021, three member states of the European Union adopted a new FDI screening mechanism, six (including Germany, France and Italy) extended the existing regime and seven initiated a consultative or legislative process to introduce a new regime. The other seven member states of the European Union with an established FDI regime will not change in 2021. The European Commission (EC) expects all 27 member states to have an FDI regime in the future.
As an example of progress, Sweden and Belgium have both introduced new legislation that, if enacted, will apply on January 1, 2023. The new Swedish regime is expected to expand the current limited set of regulations by widening the scope of activities that will be subject to mandatory notification (for example, essential services, security/ military, critical raw materials, data, new technology). On June 1, 2022, the Belgian government and the states of the federation made an agreement to implement the FDI law that will accept the acquisition of 25 percent or more voting rights in Belgian companies operating.
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