Tue, Sep 12, 2006 - Page 12 News List

Analysis: Pundits support tighter M&A rules

By Amber Chung  /  STAFF REPORTER

Pundits yesterday applauded the financial regulator's announcement last week that it would tighten approval of financial holding companies' takeover investment bids, saying that the move could promote prudent and efficient merger and acquisition (M&A) activities.

"It is the right thing to do and we should applaud the regulator's decision," said Charles Yeh (葉銀華), director of Fu Jen Catholic University's Graduate Institute of Finance.

Those changes were made in compliance with the Financial Holding Company Act (金融控股公司法) to strengthen information transparency and minimize uncertainties to protect the interest of shareholders, Yeh said.

The Financial Supervisory Commission unveiled last Thursday a slew of regulatory changes to strengthen its review process of financial holding firms' M&A applications.

The tightening was made in line with a consensus reached in a national economic conference in July, which formed part of the government's efforts to facilitate consolidation of the nation's fragmented banking sector.

Financial holding firms that apply to invest in their rivals need to file a backup plan to support their planned purchase of up to a 25 percent controlling stake within a reasonable period, detailing things like the sources of funds and means of share purchase.

Companies will also be required to elaborate on how they plan to offload the shareholdings if their investment plans do not work out. Those that fail to follow their proposed exit schemes without providing a good reason will face difficulty in obtaining approval for future expansion plans.

Also, financial groups will have to formulate a "response" plan that can be implemented in the event that the target companies resist a hostile takeover bid. Industry insiders viewed this measure as the regulator's attempt to reduce the likelihood of hostile acquisition activities that could easily erupt into controversy.

Other regulatory changes included measures prohibiting financial holding firms from assigning insiders -- such as major shareholders, board directors or their family members -- to serve as board directors or supervisors in an invested rival company, unless the financial holding company holds more than a 25 percent stake or enjoys a majority stake on the board of the said firms.

Financial holding firms whose major shareholders or board directors mortgage over 50 percent of their shareholdings will face a harsh review process if they apply for approval of the takeover investment.

The regulator also scrapped an automatic approval mechanism designed to promote financial consolidation. From now on, all M&A plans will go through a 15-day screening as stipulated in the Financial Holding Company Act.

"The revamped rules are expected to enhance corporate governance and facilitate healthy takeover activities through measures like stricter examination of shareholding mortgage ratios," Yeh said.

Yeh added that these changes mended the flaws in the system, which he termed too lax and deviated from the spirit of the law.

Yeh blamed the lax system on the government's push to promote its planned second-stage financial reform.

In a bid to consolidate the country's overcrowded banking sector, the government vowed in 2004 to halve the number of financial holding firms to seven by the end of this year.

The financial watchdog made a series of regulatory changes to facilitate the consolidation, including lowering the acquisition threshold from a regulatory 25 percent stake to a minimum of 5 percent.

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