Appleby's Frances Woo, Li Lee Tan and Vincent Chan explain why a number of Taiwan's tech companies are choosing to list on the local exchange using Cayman Islands listing vehicles

Taiwan's most innovative tech businesses prefer to use Cayman Islands companies as their listing vehicle on the Taiwan Stock Exchange (TWSE). This trend reflects confidence generally in Taiwan's securities markets backed by Taiwan's growing economic ties with China.

Cayman Islands companies have long been used as listing vehicles on the major stock exchanges, including the Hong Kong Stock Exchange (SEHK) and the Singapore Stock Exchange (SGX) in Asia, as well as in the US and UK. A Cayman listing vehicle has many advantages, including familiarity to the market, speedy incorporation procedures and cost-effective pricing, not to mention the Cayman Islands' stable and business-orientated legal and political systems.

In recent years Taiwan's securities markets have developed significantly, with Cayman companies representing a vast majority of foreign companies listed in Taiwan on the TWSE and the GreTai Securities Market (GTSM). According to the TWSE website, as of 28 September 2011 there were more than 10 foreign companies primary listed on the TWSE, all of which are incorporated in the Cayman Islands.


Why list in Taiwan?

The TWSE has put in much effort to liberalise Taiwan's capital markets and has grown in popularity for international businesses. Its regulations governing the listing of foreign enterprises were amended in 2008 to allow securities of non-Taiwanese companies to be listed on the stock markets of Taiwan. Regular investment conferences and forums are also being held by the TWSE, both at home and abroad. These efforts are beginning to bear fruit.

twseAccording to the TWSE website, foreign capital inward remittance to Taiwan has grown from about $125bn (£80bn) in 2008 to about $166bn (£106bn) in 2010, an increase of 33%. Moreover, the market capitalisation of the TWSE has almost doubled from about NT$14.4trn (£301bn) in September 2005 to about NT$20.8trn (£436bn) in September 2011.

In addition to the liberalisation of Taiwan's capital markets, factors such as the high jurisdiction rating of Taiwan by Fitch Ratings based on Taiwan's monetary policy, control of inflation and growth of external demand, the strengthening of economic ties between Taiwan and mainland China, and the signing of the Economic Co-operation Framework Agreement (ECFA) have contributed to Taiwan's continued success.

According to Fitch Ratings, "[e]merging market sovereign credit-worthiness is strengthening, narrowing the gap with so-called advanced economies, as the developed world struggles through the aftermath of the global financial crisis". Although Taiwan may be regarded as an emerging stock market, its financial strength outstrips other sovereign economies at the same A-rating level and its outlook rating is expected to remain stable in the next two years.

As reported by the China Economic News Service (CENS), Taiwan's business environment scores 90.2 points, much higher than the average 80.3 points of the sovereign economies with A-rating. Taiwan's economic growth is predicted to reach 5.1% this year, 5.4% for 2012 and 5.6% for 2013.

Taiwan is well known as a global market leader of high-tech industries in many products, as well as a major technological innovation centre. To take advantage of such strength, the TWSE has relaxed requirements for tech companies intending to apply for primary listing on the TWSE. As a result, the number of tech companies amounted to 366 as at the end of July 2011, accounting for about 47.84% of the total companies listed on Taiwan stock exchanges according to CENS and, in terms of market value, the tech companies accounted for 47.86% of the overall market value of the TWSE as at the end of July 2011.

The first few tech companies include Integrated Memory Logic, a US-based fabless semi-conductor company – which develops and markets application-specific analogue, power management, and mixed-signal integrated circuits – and Airtac International Group, a Chinese automation control equipment maker which manufactures and distributes pneumatic equipment in China and internationally.

With the present volatile US and European stock markets, many Taiwan tech companies are returning to Taiwan for fundraising. Listing on the Taiwan stock markets is clearly an attractive option. In addition to attracting Taiwan's advanced technology businesses, TWSE has also succeeded in attracting companies from a variety of other industries and jurisdictions. For example, Wisdom Marine Lines, one of the largest bulk ship owners in Taiwan, chose to list on the Main Board of the TWSE, being the first Cayman-incorporated issuer with a shipping business listed on the TWSE. The Taiwan stock markets also attract businesses from other jurisdictions, for example, Ma Kuang Healthcare Holding Limited, a Cayman-incorporated foreign biotechnology company with business in Singapore, and Lemtech Holdings Co, a Cayman-incorporated manufacturing company with operations in Kunshan of the PRC, both of which are listed on the over-the-counter (OTC) market operated by the GTSM.

Appleby acted as Cayman issuers' or underwriters' counsel in these listings, together with leading Taiwan initial public offering firms, Tsar & Tsai Law Firm, Chien Yeh Law Offices and Lee and Li as Taiwan counsel.

Taiwan stock markets are also attractive to mid-cap companies which may not meet the threshold requirements of other regional stock exchanges. While capitalisation of these companies may appear low at the time of listing, additional fundraising by new issues of shares can be completed speedily. The attractions of higher price-to-earnings ratio, higher turnover ratio (trading value/market capitalisation) and lower listing-related fees compared to other exchanges in the region are factors for choosing to list on the Taiwan stock markets.


Types of listing in Taiwan

Under Taiwan's current regulations, a foreign company that has not listed its shares on any other stock exchange may apply for listing on the TWSE or the OTC operated by the GTSM depending on a number of factors including the duration of corporate existence, company size, profitability, etc of the company.

A foreign company can, subject to certain exemptions, file an application for listing on the TWSE if, among other requirements, it has signed a consultancy contract with the underwriters and received counsel from the underwriters in preparation for the listing application for no less than six months, or it has registered for trading as emerging stock on the emerging stock market (the ESM), operated by the GTSM, for no less than six months.

Alternatively, a foreign company can, subject to certain exemptions, file an application for listing on the OTC if, among other requirements, at least two securities firms have submitted written recommendations in favour of such application, and it has registered for trading as emerging stock on the ESM for no less than six months.

A foreign company with registered shares being traded on one of the foreign stock exchanges (such as the SEHK and the SGX) approved by the Competent Authority in Taiwan may issue Taiwan depository receipts (TDRs) for listing on the TWSE or the OTC, and offer them for subscription by public investors. The trading of TDRs is similar to trading of shares on these stock exchanges.


frances-wooWhy the Cayman Islands?

Over the years, the Cayman Islands has gained worldwide recognition as a jurisdiction of the highest quality and continues to preserve this position. Of the main offshore listing jurisdictions, Cayman is favoured due to a number of factors, including the flexibility of structures offered, speedy incorporation procedures, a flexible and reliable legal system and significant tax advantages.

The Cayman Islands has no capital gains, income, profits, corporation or withholding taxes. A Cayman Islands-exempted company may obtain an undertaking from the Cayman Islands Government that it will remain tax-free for a 20-year period. In addition, there are no exchange control regulations and therefore money and securities in any currency may be freely transferred to and from the Cayman Islands.

Furthermore, Cayman Islands law is derived from English common law and supplemented by local legislation. This ensures that Cayman companies are structured as internationally accepted vehicles. Finally, financial assistance is not prohibited and accordingly may be provided for the acquisition of shares in Cayman companies.

We expect to see Cayman's continued success as a leading jurisdiction for companies abroad wishing to list in Taiwan given the ease of setting up a company, the robust legal and regulatory regime and the tax efficient environment offered.

Frances Woo (pictured) is managing partner of the Hong Kong office, Li Lee Tan is counsel and Vincent Chan an associate at Appleby.